This year the Utah Legislature took action on two water law issues that it has struggled with for several years—the authority of the State Engineer to consider forfeiture during review of change applications and the rights of nonowners to file change applications. These are familiar issues in Utah water law, but they arose this year because of two 2011 Utah Supreme Court decisions.

In 2011, the Utah Supreme Court decided Jensen v. Jones, 2011 UT 67, and Salt Lake City Corporation v. Big Ditch Irrigation Company, 2011 UT 33. In Jensen, the Court held that the State Engineer lacked authority to adjudicate water rights and, as a result, could not consider unadjudicated forfeiture when reviewing change applications. In Big Ditch, the Big Ditch Irrigation Company did not own water rights, but it had a perpetual contract to receive water from Salt Lake City. The Court held that the irrigation company’s contract qualified it as a “person entitled to the use of water” that could file a change application.

Each year since 2011, the Legislature has tried unsuccessfully to pass bills to address perceived problems with Jensen and Big Ditch. This year it took action on both cases, granting the State Engineer limited authority to consider forfeiture and enumerating which parties may file a change application. The Legislature passed several other water related bills, including one amending the procedure for water company shareholders to file a change application.

State Engineer Authority to Consider Forfeiture

H.B. 25 made general amendments to change application procedures and specific amendments to address the limits Jensen placed on the State Engineer’s authority. Generally, H.B. 25 introduces the concept of “quantity impairment” to change application review. The new term means “any reduction in the amount of water a person is able to receive in order to satisfy an existing right to the use of water that would result from an action proposed in a change application.” To obtain approval, an applicant must submit evidence to support a reasonable belief that the proposed change satisfies statutory requirements, including that it will not cause quantity impairment to existing water rights.

Jensen barred the State Engineer from considering unadjudicated forfeiture during review of a change application. H.B. 25 relaxes this bar and allows the State Engineer to consider forfeiture after meeting certain conditions. It allows for a rebuttable presumption of quantity impairment if a water right is subject to forfeiture (i.e. it has an unexcused period of nonuse of at least seven years). The presumption only arises, and the State Engineer may only consider this specific type of quantity impairment, if he provides written notice to the applicant alleging quantity impairment, or if a timely protest alleges quantity impairment. If the applicant cannot defeat the presumption of quantity impairment, the State Engineer may approve a portion of the change or reject the application altogether.

H.B. 25 creates several additional issues of which change applicants should be aware. First, if the State Engineer, or a protestant, raises the issue of forfeiture, the time and resources required to prosecute the application to approval will increase significantly. H.B. 25 does not specify who makes the determination that a water right is subject to forfeiture. Presumably the responsibility lies with the State Engineer. Regardless, the determination that a water right is subject to forfeiture is highly fact specific and will often be disputed. Applicants may have to expend significant time and resources trying to demonstrate that their right is not subject to forfeiture. Second, while H.B. 25 allows the State Engineer to consider forfeiture while reviewing a change application, it does not allow him to adjudicate a water right as forfeit. As a matter of law, if the State Engineer denies a change application based on forfeiture, the base water right remains unaffected. But, as a practical matter, the State Engineer’s decision substantially clouds the validity of the water right and indicates that future change applications will likewise be denied. It also exposes the water right to judicial forfeiture claims.

Water rights owners can act to avoid the pitfalls of H.B. 25. Before filing a change application, an owner should ensure that it is beneficially using its entire water right. Alternatively, the owner may protect the water right by obtaining an approved nonuse application or qualifying for a statutory exemption from forfeiture. Doing so will protect the owner from allegations of forfeiture and the rebuttable presumption of quantity impairment. Buyers need to make sure that their purchase contracts take into account the increased time that may be required to process an application under H.B. 25, as well as the possibility that part or all of the change may be rejected and that the value of the water right may be significantly impaired as a result.

Parties Entitled to File Change Applications

With H.B. 58, the Legislature limited the holding in Big Ditch. To file a change application, one must qualify as “a person entitled to the use of water.” Big Ditch interpreted this phrase to allow a nonowner to file a change application based on a contractual right to water. H.B. 58 defined “a person entitled to the use of water” to include the following parties: the holder of an approved, but unperfected application to appropriate; the record owner of a perfected water right; someone with written authorization from one of the previous two parties; or a shareholder who has complied with statutory requirements (described below). These categories stop short of Big Ditch. They only allow a contract holder to file a change application if it has obtained written authorization.

Shareholder Change Application Procedures

The Legislature also amended the procedure for shareholders in a water company to file a change application. H.B. 43 requires a shareholder to prepare a change application and submit it to the water company for review before filing the application with the State Engineer. The water company has 120 days to issue a written decision that consents to the change application, consents to it with conditions or denies it. Failure to issue a timely written decision is deemed to be consent.

If the water company declines to consent, or imposes conditions, the shareholder may seek district court review of the decision. If suit is filed, H.B. 43 directs the court to refer the parties to mediation. While a party may decline mediation, if it does so and receives an adverse judgment, the prevailing party may recover attorney’s fees and costs.

If the water company consents to the change application, or consents with conditions, the shareholder may submit the application to the State Engineer for review. The shareholder may do so without forfeiting his right to request district court review of the conditions imposed by the water company.

Generally, the shareholder remains responsible for all water company assessments. Although, the shareholder may claim credit for cost savings that result from the change. Additionally, if the shares rely on a different diversion and delivery system after the change, the shareholder may negotiate a buyout of the shares from the water company.

Additional 2015 Water Rights Legislation

The Legislature passed several other water related bills during this year’s General Session.

• In addition to modifying shareholder change application procedures, H.B. 43 made a noteworthy addition to the criteria upon which the State Engineer may grant a nonuse application. The added language allows the State Engineer to grant a nonuse application based on physical causes or changes beyond the reasonable control of the water right owner if the owner acts with reasonable diligence to resume or restore his use.
• S.B. 281 created the Water Infrastructure Restricted Account. The Division of Water Resources and Board of Water Resources manage the fund. S.B. 281 specifies that the fund is to be used to make loans for the following purposes: development of Utah’s undeveloped share of the Bear and Colorado Rivers and for repair, replacement or improvement of federal water projects when federal funds are not available. The Legislature made a one time, $5 million appropriation to the fund.
• S.B. 15 added language to Section 73-3-3 to clarify that a period of nonuse is not counted for purposes of forfeiture if a water right is subject to an approved change application and the applicant is diligently pursuing certification.
• S.B. 40 codifies existing State Engineer practice. It allows the holder of an unperfected application (either an application under review or an approved application) to withdraw the application by submitting written notice to the State Engineer.
• S.B. 225 applies to change applications filed for United States Indian Irrigation Service water rights that are used to provide public water supply. It requires the change applications to be signed by both the local public water supplier and the water right’s owner.