Colorado uses a prior-appropriation system to assign the relative priorities of water rights. Water rights established earliest are assigned senior priorities relative to water rights established later. Priority is assigned to a water right when the claimant files to adjudicate the right in water court, and the water court confirms other attributes of the right, including rate or volume and decreed locations and uses for the right. Once adjudicated, a water right may be permanently changed to other uses through further court proceedings or temporarily changed to other uses through administrative proceedings conducted by the Division of Water Resources (DWR).
When a change of use is confirmed, the original priority date of a water right is maintained. This attribute of prior-appropriation water rights makes senior water rights particularly valuable from a financial and reliability standpoint, and it creates demand for water right transactions in Colorado. Water users with needs that cannot be satisfied with junior water right appropriations invest in permanent or temporary interests in senior water rights, and they go through the water court or administrative processes to change water right use. At this point in time, change proceedings and the maintenance of senior priority is critical for new water users, since many of Colorado’s rivers are fully or even over-appropriated, and acquiring a senior water right is the only way for a new water user to satisfy their supply needs.
For example, a growing municipality might secure senior irrigation water rights and change them for current or future water supply. When the water rights are changed, the water court will confirm their historical consumptive use (HCU) for their originally decreed purposes, and that HCU will serve as a limit on the amount of water available for new purposes. Limits on the use of changed water rights ensure that other water rights in the stream system
are not injured due to an expansion of use when water rights change purposes.
In another example, the Water Trust might lease a senior irrigation water right and change it to instream flow use by the Colorado Water Conservation Board (CWCB). The CWCB is the sole entity in Colorado authorized to use water for instream flow purposes, and it does so under a statutory program authorized in 1973. Since 1973, the CWCB has made instream flow appropriations and, soon afterwards, gained water rights acquisition authority. While the instream flow program has over 1700 water rights statewide appropriated to preserve the environment (Instream Flow Program | DNR CWCB, 2022), those water rights are extremely junior to the water rights that were decreed for agricultural, industrial and municipal uses beginning around the time of Colorado’s statehood in 1876 and the 1903 Water Rights Adjudication Act. Many rivers were over-appropriated before the state’s instream flow program began and would be deprived of opportunity for streamflow protection without the legal mechanism for water right acquisition. Accordingly, environmental water right transactions are critical to protect streamflow in Colorado. To date, instream flow water rights transactions protect flows on only 35 stretches of water statewide (Instream Flow Program | DNR CWCB, 2022). If streamflow protection is a priority for Colorado, the availability and fluidity of water right transactions must be improved.
Changing demographics and climate pressures further limit water resources for new uses, making water right acquisitions necessary, particularly in circumstances where water users can enter transactions that enable them to share in the use of a water right (Read The Plan | DNR CWCB, 2022). Acquisitions can lead to senior water rights being used for new purposes, and for multiple shared purposes to meet water supply gaps and preserve agricultural heritage and local economies. Colorado’s water rights system is fully adjudicated, with nearly all rights having been confirmed in water court decrees, whereas several other western prior-appropriation states are still in the process of adjudication. While the discrete identification of water rights in Colorado facilitates acquisitions, there are many complexities that could be addressed through emerging technologies.
A primary barrier to water right transactions in Colorado is the lack of acquisition opportunities. Given an acquisition opportunity, additional barriers arise, including complex and uncertain due diligence processes, high transaction costs in the form of engineering and legal fees, and uncertainties inherent in the scope of a water right after it has been through change-of-use proceedings. Each of these and the reasons behind them is discussed in this section.
Colorado has specific water markets, but no single, comprehensive market (Moyer et al., 2021). Unlike the Multiple Listing Service system for real estate sales, there is no singular database available to market water rights for acquisition. Transactions for some end-uses, including environmental water transactions, are often identified through individual communications and negotiations between a water rights owner and the acquiring entity. There are also a handful of water brokers who facilitate transactions. These endeavors are time consuming and require specialized knowledge in water rights and water right transactions. For example, Water Trust staff spend hundreds of hours each year doing outreach to water users about its Request for Water program, and this work develops only a few acquisition leads annually (Request for Water Process | Colorado Water Trust, 2022). Additionally, many individual water rights are used to irrigate or otherwise serve real property. Irrigation and agricultural water rights tend to be a focus for acquisition in Colorado, since they comprise more than 89% of water consumed statewide (Instream Flow Program | DNR CWCB, n.d.). If irrigation rights are transferred to a disassociated use, the transfer could negatively impact the value of the land where the water was used (Upper Basin Demand Management Economic Study in Western Colorado, 2020).
Consequently, there is a lack of a defined market and an imbalance between high demand for water rights and a slim supply of water rights available for acquisition.
Water right transactions that continue to benefit both an irrigated property and a new end-use are possible, but far from easy. For instance, the Water Trust and some municipalities implement lease-fallowing and other shared water arrangements (Projects Map | Colorado Water Trust, 2022). However, finding a match between sellers and buyers or lessors and lessees is difficult since their needs and the attributes of their water rights must align.
Over time, the Water Trust has found that few water right owners are interested in selling their assets. Water sharing opportunities and short-term leases are of much greater interest. However, the analysis required for a temporary change of water rights is nearly as detailed as that required for a permanent change, leading to imbalance between the escalating costs and diminishing benefits of such acquisitions. The analysis and legal issues that lead to such high transaction costs are described below. While the discrete identification of water rights in Colorado facilitates acquisitions, there are many complexities that could be addressed through emerging technologies.
Once an acquisition opportunity is identified, certain steps must be undertaken to make the transaction successful and accomplish a change of water rights. These include due diligence and title review, completing the engineering necessary to ensure that a change of water rights will not expand use of the right or injure other water users, and completing an application for judicial or administrative proceedings to confirm the change of use. In some acquisitions of water rights, a change of use is not required, such as for acquisitions of stored water rights that are already decreed for an end-user’s desired purposes. Outside of these circumstances, change of use proceedings are required if water will be used for a new
purpose or in a different location.
Due diligence is costly and detailed. It is also crucial for water right transactions since there is no title insurance for water rights. Title research is done using the same county records maintained for real property, but it is not automated, and title companies do not conduct title review because of its complexity and potential for error. Many water right transactions are performed by legal counsel, which can be costly. Title review for water rights involves reviewing records maintained at the Clerk and Recorder’s office for the county in which a water right is located. Some of these are accessible via the internet, but many are not, depending on the location of a water right and its decree date. In those circumstances, timeconsuming review of paper files and indices is required. Additionally, many water rights are located in and subject to transaction in multiple counties, doubling the time and effort required for title review.
Due diligence for a water right transaction also necessitates review of the historical use and diversion history of a water right. Since the diversion rate of water acquired in a transaction will differ after change of- use proceedings, a buyer or lessor will often work with attorneys, water resource engineers, or both prior to a transaction to ensure that the water right they are acquiring has a good history of use. In Colorado, idled water rights are subject to abandonment under certain circumstances or a diminished allocation after change proceedings if they were underutilized. Therefore, purchasers and lessors must undertake detailed inquiry prior to acquisition. Even when inquiries are made, the Division of Water Resources might not have historical diversion and use records for a particular water right. This results in the need for undefined research methods into the history of use of a water right based on professional experience. Results are uncertain and the process is time-consuming. The Water Trust, for example, typically spend a year or more in the due diligence phase of project development prior to completing an acquisition.
Engineering Support for Change Proceedings
Professional engineering analysis is required to conduct almost all change-of-use proceedings. The analysis typically needs to describe the impact of the historical use of a water right on a river, including patterns of diversions, return flows, net depletions, and HCU in time, place, and amount. It is a complex and frequently expensive endeavor. In the Water Trust’s experience, water right change engineering analysis typically costs tens of thousands of dollars and is unpredictable. However, it is also useful to structure projects undertaken using water right acquisitions.
Uncertainties add to the complexity and expense of water right change engineering. These include determining a representative period of time to describe the use of a water right, lack of appropriate diversion or use records, and the range of assumptions that go into calculating the consumptive use of a water right, such as evaporative losses, irrigation efficiencies, and soil moisture balance. There are some engineering analyses that use standardized inputs to measure water right use, but in many other instances the analyses required to change a water right are subject to climate or streamflow measurements that might be incomplete and require substitution using professional judgment.
Legal Support for Change Proceedings
Legal counsel is also required for most change-of-use proceedings. In Colorado, a water right owner is entitled to represent themselves pro se in water court. But in the experience of the Water Trust, legal representation is vital to a successful water court application and for temporary change-of-use proceedings that maximize the amount of water available for change to new uses. The Water Trust has in-house counsel, but the time dedicated to legal work for most change-of- use proceedings costs tens of thousands of dollars, and it is unpredictable.
Water court applications and administrative proceedings may be decided through trial before a judge, but they are more often decided based on negotiated settlements between applicants and opposing parties. In some circumstances, these proceedings take only a couple of months and involve little opposition. In other circumstances, including most circumstances on heavily used rivers, water court proceedings take two years or more to resolve and involve several opposing parties.
Accordingly, legal fees are high. Additionally, the terms and conditions attached to changed uses of water can be something an applicant never predicted but decided to accept in order to complete the change process. Also, despite best efforts at due diligence and engineering analysis, a change-of-use applicant often learns of ways in which their new use might injure other water users only after an application is underway, resulting in unanticipated constraints on the new use.
Prior to implementing the opportunities presented in this report, barriers need to be considered. Colorado has a robust water planning administrative agency in the CWCB, a comprehensive water rights administrative agency in the Division of Water Resources, and regional communities of water users deeply engaged and protective of their water rights and livelihoods.
Water users might oppose increasing transparency regarding their water rights, particularly since there is a perception that “use it or lose it” legal principles threaten their water rights. The use of water rights is as complex as the legal and policy environment of Colorado, so water right owners might be understandably reticent to open a window into examination of the practices in which they engage.
Through “buy and dry” acquisitions, facilitating water right acquisitions also threatens rural communities dependent on agriculture. This threat was once seen as coming primarily from the pressures of urban growth, but lawmakers recently became aware of pressure imposed by investment opportunities. They strive to avoid it by investigating statutory anti-speculation measures. Digital platforms should not be used to create a market so fluid that it becomes subject to investment based on speculation in water rights (Moyer et al., 2021). Investment-based speculation also threatens new water users like the Water Trust, who could be outcompeted by financial investors were water rights acquisitions to be overly fluid. On the other hand, if digital platforms can be used to assist anti-speculation measures as well as to increase the fluidity of water right transactions, that technology is more likely to be palatable to Colorado’s water rights stakeholders.