July 17, 2003

Water rights no longer a hidden asset

  • Values can exceed real property in current market
    Aspect Consulting

    Photo courtesy of Aspect Consulting
    Transfer of water rights from irrigation to municipal or industrial use is a common re-allocation of water resources.

    Have you ever just let the faucet run, distracted with whatever else you were doing, and then suddenly felt compelled to turn it off, realizing how much water we waste?

    Having fresh water out of the tap is a wonderful convenience, something we all have become accustomed to at so little cost. Ironically, with the growing public perception of water scarcity in the Pacific Northwest, the potential value of water has yet to be realized.

    In the past when a water user needed more supplies they applied for and generally received a new water right authorization. Water supplies continually expanded to meet demands. This is no longer the case. So how are the growing water demands of so many stakeholders being met now?

    A largely fixed supply is being re-allocated through the transfer and change of existing water rights, often in conjunction with water conservation and re-use. In the current marketplace, a valid water right can be a highly valued asset, sometimes worth more than the property to which the right is designated.

    Although the laws governing the appropriation of water rights within Washington state have been around for a long time, awareness of how such rights affect the allocation and use of the state’s water resources has only recently entered the broader public conscience. Drought conditions, awareness of maintaining in-stream flows for fish, and population growth have all contributed to a greater awareness of the value of water rights.

    New rights hard to get

    The state’s watershed planning efforts offer a chance to better manage the resource in the future; however, prioritizing in-stream flow needs has made obtaining a new water right all but impossible in the short term.

    Current water policy encourages better use of existing “appropriated” supplies. This is done through purchase/sale and changes to existing water rights, a process that has evolved rapidly in the last few years.

    The process of acquiring and/or changing existing water rights involves legal, technical and market supply/demand factors that need to be considered. Given the hydrologic issues, hydrogeologists are often involved to provide technical support to attorneys specializing in water right transactions.

    Under state water codes, water rights are required for all surface water diversions and all groundwater withdrawals, excluding wells using less than 5,000 gallons per day for domestic and other specific allowable uses.

    Water rights authorize an annual volume of water use and a maximum rate of withdrawal, and define the purpose of beneficial use, place of use and point of withdrawal. There are two “lines” for processing transfers/changes to existing water rights — one directly with Ecology, and the other through a Water Conservancy Board in those counties where they have been established. The timeline for processing through a Conservancy Board process is more predictable, culminating in issuance of Ecology’s final decision after a Board issues its findings and recommendation.

    Transfers a viable alternative

    With new water rights difficult to obtain, a marketplace is developing for the purchase and sale of existing rights. Typically a transfer in water rights ownership includes a change in one or more of the technical conditions specific to the existing right.

    The criteria applied by Ecology in approving or denying a proposed change differs somewhat for groundwater versus surface water rights, but generally involves documenting the following: the existing water right is valid (not abandoned or relinquished); the proposed change will not impair existing water rights; the intended use is a beneficial use and is in the public interest; and, for groundwater, the point of withdrawal stays within the same body of groundwater.

    Certain types of water rights, such as irrigation rights issued under the Family Farm Act, may have restrictions on their ability to be changed. Recent changes have been adopted which can ease these restrictions and allow for broader use of the existing resource. Examples include entering into a short-term lease to allow other beneficial uses of a Family Farm Act right, and changing such a right to municipal use within an urban growth boundary. There are also recent changes to the “relinquishment provisions”, including the “future determined development” provision that extends the period over which the level of beneficial use is evaluated.

    A key attribute often misunderstood or ignored by water right holders is the potential for relinquishment resulting from lack of use. With some exceptions, including municipal supplies, water rights not put to beneficial use for 5 consecutive years without acceptable cause are considered relinquished.

    Due diligence to evaluate whether all or a portion of an existing right has been relinquished is critical whether you hold an existing right or are looking to acquire one. Actual use can be considerably less than the original “paper” authorization, which historically was often based on source capacity (“pumps and pipes”) versus actual water put to beneficial use.

    There are several methods for evaluating beneficial use depending on the purpose of use. In the absence of actual water metering data, use-specific analysis is required. Ecology’s new metering rule should streamline the process of documenting beneficial use.

    Avoiding pitfalls

    To reduce uncertainty in the change process and the ultimate decision, it is important that the applicant identify and work through the technical issues associated with a proposed change, and not rely on Ecology or a water board.

    For a proposed water right change, the analysis is focused on comparing current conditions to those anticipated with the change. The scope of the technical analysis is site specific and is driven by the nature of the change requested.

    In many cases, developing a clear conceptual understanding of the hydrologic conditions and the overall water balance is sufficient. In other cases, predictive models may be appropriate where there is considerable complexity or uncertainty regarding potential impairment.

    There may be both positive and negative ramifications to any given change. For example, converting a surface water diversion to a groundwater source can often have a positive net effect on in-stream flows, or depending on site conditions could, impair existing groundwater rights.

    What’s the value?

    Once the attributes of an existing water right are identified, then the focus shifts toward valuation. There is no formal water market per se in the state and, because transfers are constrained geographically to within a watershed, the markets are local and based on supply and demand. Information on prior transaction costs is limited and often inaccurate, requiring a location-specific market analysis to capture local supply and demand conditions.

    Water right acquisition is typically completed to support development, so the price a prospective buyer is willing to pay is determined largely by the value of the development and the cost of alternatives. Water right quantity, seniority, location and transferability, as well as water quality, can also be factors. If warranted, economists specializing in natural resource valuation can analyze a water right value for a particular market.

    Although there are few givens in valuation of an existing water right, one constant is that beneficial use of the water right quantity proposed for transfer must be demonstrated to the satisfaction of Ecology for it to be valid and to have any value.

    Even with increased competition for water, water remains an undervalued asset. An existing water right can be a tremendous financial asset to its holder, but only if it is valid and transferable. Water right holders potentially looking to sell such an asset must recognize this fact and fully understand the requirements to preserve that asset.

    Tim Flynn is a principal hydrogeologist and president of Aspect Consulting LLC, a specialty practice focusing on groundwater hydrology, water resources, environmental restoration, and geological engineering.

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