DEVELOPMENT OF LAND FALLOWING- WATER LEASING IN THE LOWER ARKANSAS VALLEY (2002 through mid-2011) Sugar City (2011) JUNE 30, 2011 La Junta (2011) REPORT FOR THE COLORADO WATER CONSERVATION BOARD Formerly irrigated land below Colorado Canal (2011) Peter D. Nichols 1120 Lincoln Street • Suite 1600 Denver, Colorado 80203-2141 303-861-1963 [email protected] Currently irrigated land on the Ft. Lyon Canal ACKNOWLEDGEMENTS Many people contributed to the formation of the Lower Arkansas Valley Water Conservancy District, and subsequent incorporation of the Lower Arkansas Valley Super Ditch Company, Inc. These included Leroy Mauch (Prowers County Commissioner), Lynden Gill (Bent County Commissioner), John Singletary, Loretta Kennedy (Pueblo County Commissioner), Ollie Ridley, Bill Long (Bent County Commissioner), Bob Bauserman, Kevin Karney and Jake Klein (Otero County Commissioners), John Rose, and H. Barton Mendenhall, as well as current and former board members and staff of the District Pete Moore (current Chair), Melissa Esquibel (Secretary), Wayne Whittaker (Treasurer), Anthony Nunez (Director), Reeves Brown (Director), and Jay Winner (General Manager) and current and former Board members of the Company, John Schweizer (President), Dale Mauch (Vice‐ President), Burt Heckman (Secretary), Frank Melinski (Treasurer), Mike Barolo, Donny Hansen, Joel Lundquist, Lee Schweizer and Ray Smith. Many also contributed to the preparation of this report. Veronique Van Gheem, Esq., initially drafted Parts 2, 3 and 4 while a law student at CU, and graciously assisted in revisions after graduation. Anthony van Westrum, Esq., Anthony van Westrum, LLC; Denis Clanahan, Esq., Clanahan, Beck & Bean; and, Tom McMahon, Esq., Jones & Keller drafted the sections on the corporate organization, taxation, and antitrust issues respectively. Others also contributed to the preparation of this report, particularly George Oamek, PhD., Honey Creek Resources; Steve Price, P.E., AECOM; Gregg Ten Eyck, P.E., of Leonard Rice Engineers; and Lisa Thompson, Trout, Raley, Montaño, Witwer & Freeman, P.C.; Mohitindervir Singh Sandhu, a CU Law student, also helped by conducting numerous telephone interviews. Bill Hancock, Conservation Program Specialist, and Bart Mendenhall, General Counsel, of the District as well as Tony van Westrum reviewed and commented on drafts to ensure the report’s accuracy, completeness, and understandability. Thanks to all for their generous time and valuable assistance. for TROUT, RALEY, MONTAÑO, WITWER & FREEMAN, PC i TABLE OF CONTENTS 1. INTRODUCTION ............................................................................................................ 1 2. THE ARKANSAS RIVER BASIN................................................................................... 1 2.1 BASIN OVERVIEW............................................................................................................. 1 2.1.1 Water Development Before 1950 .......................................................................... 3 2.1.1.1 Native Water........................................................................................................ 3 2.1.1.2 Trans‐Basin Diversions....................................................................................... 5 2.1.1.3 John Martin Reservoir ......................................................................................... 6 2.1.2 Water Development 1950 to 2010 ......................................................................... 6 2.1.2.1 The Fryingpan‐Arkansas Project......................................................................... 6 2.1.2.1.1 The Southeastern Colorado Water Conservancy District .......................... 8 2.1.2.2 The Winter Water Storage Program.................................................................... 9 2.1.2.3 The Homestake System ...................................................................................... 10 2.1.3 Ground Water Development............................................................................... 11 2.1.4 Recreational and Environmental Flows............................................................. 12 2.2 ECONOMIC PROFILE OF THE ARKANSAS RIVER BASIN ................................................. 13 2.2.1 The Central Role of Agriculture.......................................................................... 14 2.2.2 Historical Agricultural Water Transfers............................................................ 15 2.3 CURRENT AND FUTURE WATER DEMAND.................................................................... 18 2.4 WATER DEVELOPMENT AND MANAGEMENT............................................................... 21 2.4.1 Projects 2010 to 2030 ............................................................................................. 21 2.4.1.1 Colorado Springs’ Southern Delivery System................................................... 21 2.4.1.2 Arkansas Valley Conduit................................................................................... 22 2.5 CURRENT WATER MANAGEMENT ISSUES..................................................................... 23 3. CREATION OF THE LOWER ARKANSAS VALLEY WATER CONSERVANCY DISTRICT ........................................................................................................................23 3.1 2002 ELECTION.............................................................................................................. 25 3.2 THE LOWER ARK DISTRICT ........................................................................................... 26 3.3 PSOP (PREFERRED STORAGE OPERATIONS PLAN) ...................................................... 27 4. THE EMERGENCE OF THE SUPER DITCH COMPANY ...................................... 29 4.1 INVESTIGATION AND EDUCATION ................................................................................ 30 4.2 ORGANIZING THE SUPER DITCH ................................................................................... 32 4.2.1 Organizational Challenges .................................................................................. 36 4.2.2 Economic Issues .................................................................................................... 38 4.2.2.1 On‐farm Economics........................................................................................... 38 4.2.2.2 Ditch Cooperation.............................................................................................. 41 5. FORMATION AND ORGANIZATION OF THE SUPER DITCH.......................... 42 5.1 LEGAL FORM OF SUPER DITCH...................................................................................... 43 5.2 INCORPORATION............................................................................................................ 44 i 5.3 TAX CONSIDERATIONS .................................................................................................. 48 5.4 ANTICIPATED OPERATION OF THE SUPER DITCH......................................................... 50 6. EXTERNAL CHALLENGES ........................................................................................ 52 6.1 MUNICIPALITIES ............................................................................................................ 52 6.1.1 Market for Water Leases ...................................................................................... 52 6.1.1.1 Basin Roundtable Water Supply Gap................................................................ 54 6.1.1.2 Arkansas River Basin Demand Over Time ....................................................... 56 6.1.1.3 Regional Drought Recovery and Short Notice Demand ................................... 56 6.1.1.4 Potential Fallowing‐Leasing Revenues ............................................................. 57 6.1.2 Antitrust ................................................................................................................. 59 6.1.3 Municipal Participation in Super Ditch............................................................. 63 6.1.4 Avoided Cost......................................................................................................... 65 6.1.4.1 Pikes Peak Regional Water Authority ............................................................... 65 6.1.4.2 Aurora................................................................................................................ 67 6.1.4.3 Avoided Costs Conclusions ............................................................................... 67 6.1.5 Price Escalators...................................................................................................... 68 6.1.5.1 Price Escalators Currently Used in Water Transfers........................................ 69 6.1.6 Super Ditch–Municipal Lease Agreements....................................................... 71 6.1.6.1 Terms Sheets ...................................................................................................... 74 6.1.6.1.1 Pikes Peak Regional Water Authority ...................................................... 74 6.1.6.1.2 Aurora....................................................................................................... 75 6.1.6.2 Pilot Programs................................................................................................... 76 6.1.6.2.1 Fountain Creek Entities............................................................................ 76 6.1.6.2.2 Colorado Springs .....................................................................................