REPRESENTATIVE MCIFF REPORTS ON WATER RIGHTS BILL
I am most appreciative of this opportunity to report on HB 49, which relates to the filing of shareholder applications to make changes in the place or purpose of use of water. I hope to correct some misrepresentations and foster a better understanding of what the bill does, and does not do.
The Company/Shareholder Relationship:
Early in the settlement of Utah, it became apparent that individual appropriators of water could become much more effective and efficient by joining together in developing better diversions, delivery systems, and taking water turns. Mutual ditch or irrigation companies were formed and have been instrumental in the development of productive agricultural operations, attractive communities and the general beautification of these valleys. I cannot overstate the contribution they have made to the quality of life that we enjoy. I represent several water companies and have their support. I am equally supportive of them and water companies in general. Anyone who represents otherwise is wrong.
In dealing with applications to make changes in water use, it is necessary to understand the relationship between the company and its shareholders. It is a trust relationship. As early as 1900 in Carter Creek Water and Irrigation Company v. Lindsey, and reaffirmed in Salt Lake City v. Cahoon Irrigation Company in 1994, the Supreme Court held:
"Mutual ditch companies... [are] formed expressly for the purpose of furnishing water to shareholders, not for profit or hire. The mutual irrigation corporation is simply a trustee for the stockholders, and not the owner of the water."
The young lawyer who wrote the guest editorial in the Progress three weeks ago, repeated over and over again that the "company owns the water." It would have been more accurate to state that the company has "record title," but does not own the "right of use." That right, which is all that can be owned, rests with the shareholders. As stated in many cases, including Cahoon in 1994:
"Mutual irrigation corporations are not organized to make a profit for their shareholders but rather to allocate water to shareholders who already own the right to use that water."
Recently, opponents of HB 49 have circulated among irrigation companies a claim that owning stock in a mutual irrigation company is "no different than owning stock in Boeing Airline or Microsoft." Few things could be further from the truth. Such a claim was expressly rejected in Cahoon and cases dating back to early times:
"But the stock certificate [in a mutual water company] is not like the stock certificate in a company operated for profit. It is really a certificate showing an undivided part ownership in a certain water supply."
From these excerpts we should derive the simple lesson that a "water share" is not just a "share" in a corporation, but a "share" in the actual water right itself. It is a unique right and involves a pro-rata ownership in an extremely valuable asset that is irreplaceable and in ever increasing demand.
A Major Shift Away from the Shareholder
The first water code after statehood was adopted in 1903. It provided that any person having "right of use of water" could change the use. The language is still part of the change application statute. Until 1992, shareholders were able to file change applications and they were routinely ruled upon by the state engineer.
In 1992, the Utah Supreme Court reversed the state engineer's approval of Payson City's application to transfer to its well water shares in East Jordan Irrigation Company located in the Salt Lake Valley. Disregarding the change application statute and relying on corporate law, the court held that the company had to file the application. It was a dramatic shift from too little company involvement to complete company dominance. That produced its own set of problems.
The 2002 Act and "Stonewalling"
The balance of power was shifted even further away from the ultimate users in a 2002 statute that created what has come to be known as the "stonewall" option. The "stonewall" arises when a shareholder submits a written request to a water company to file a change application on his/her behalf. The company has 120 days to issue a written decision notifying the shareholder. This is not optional. It is a statutory duty. But it is followed in the code by what may be considered an unusual provision. If the company violates the written decision and notice obligation, the statute provides that "the failure to respond shall be considered to be a denial of the request." The consequence from the failed duty runs against the shareholder who is left in the dark, not knowing when or why his/her request was disregarded. The alternatives available to the shareholder are limited to two - walk away or file a lawsuit. The average, modest-income shareholder will walk away. He doesn't want and can't afford an expensive lawsuit. The big and powerful shareholder will do the reverse. It will roll over the stonewall like it was nothing. Either way, the "stonewall" is likely to produce an undesirable result.
Recent Case Law Developments
The Gessel guest editorial in the Progress treated the 1992 East Jordan case as the beginning and ending of water law on change applications. It is neither. The prior case law, discussed above, supports a more balanced approach, as does later case law. In 2005 the Supreme Court decided Strawberry Water Users Association v. Bureau of Reclamation. The Bureau, relying on the East Jordan decision, claimed that as the "record title owner" it was the only authorized change applicant - even to the exclusion of the irrigation companies in south Utah Valley. The court rejected the Bureau's argument and reinforced "right of use" as a basis for filing a change application. The Court also clarified a 2003 ruling in Prisbrey v. Bloomington Water Company so that it is in accord. Finally in 2008, the Supreme Court decided Salt Lake City v. Big Ditch which is now the controlling case law. The Big Ditch Court held:
"After analyzing all of our cases on the issue - East Jordan, Prisbrey, and Strawberry - we conclude that owner or appropriator status is not determinative of whether one may file a change application. Rather, one's right to use water is significant. While there are times when one's right to use is subsumed to other competing interests, as in East Jordan and Prisbrey, it remains the case that one with an entitlement to use water may file a change application."
The Development of HB 49
The foregoing is the backdrop against which HB 49 has been developed. The process has been ongoing for the last two years. There have been scores of meetings, many drafts, and much input. I have incorporated virtually all thoughtful recommendations. The bill has six simple objectives: (1) a fair balanced process (2) eliminate stonewalling, (3) get the issues on the table, (4) avoid having the process bog down, (5) attempt to resolve through mediation, and (6) get the water issues before the state engineer whose duty is to evaluate and rule on change applications.
Under HB 49, the process would flow as follows: (1) The shareholder fills out a change application and gives it to the water company for its response. (2) The water company has 90 days to consent, consent on condition, or decline consent and state the reasons (3) The packet is forwarded to the state engineer who simply examines whether the parties are in agreement. (4) If the parties are in agreement, the state engineer proceeds to process the application. (5) If there is a disagreement, the state engineer sends notice that (a) the parties must mediate, and (b) if the water company has not responded it must do so within 30 days or its consent is established. (6) If necessary, mediation is held within 60 days, but may be extended by an additional 90 days. (7) If the mediation produces an agreement, the state engineer processes the application. (8) If an agreement is not reached through mediation, either party has 60 days to seek a court ruling on a defining legal issue that is beyond the purview of the state engineer. (9) If such an action is not filed, the state engineer may process the application under long existing legal standards. (10) Either party may obtain de novo ("from the beginning") review by the district court.
What the Bill Does Not Do
The bill does not change the substantive law on what the state engineer can consider or approve. Comments reported in the Progress to the effect that it authorizes water to be transferred down the Green River or to the Wasatch Front are incorrect. The bill addresses only the process and is designed to not allow a "stonewall" to end the inquiry. There are in Utah about 1,000 water companies, 5,000 directors, and perhaps 200,000 shareholders. I respectfully submit that the process we rely upon needs to square with fundamental fairness to all these water owners and those who serve on the governing boards. We should want no less.
I also make clear that I do not support an effort to export water from the valleys where we live. There is some protection already built into Utah law and I will support any enhancement of that protection to the full extent possible.
I welcome additional opportunities to sit down together and will make myself available on the hill or on a weekend. Generally speaking, a line by line review of the bill has quelled most concerns and brought increased support. You may reach me at firstname.lastname@example.org or schedule a meeting with my intern Olyvia Lindgren at email@example.com or (435) 893-5232.