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The
Legal and Political Background
Water marketing involves the purchase and the subsequent lease or sale of water or water
rights. Water resources which may be involved in water marketing transactions
include, water, water rights and storage or distribution infrastructure.
Successful water transfers have four essential elements: (1) ownership
or control of the water resource, (2) conversion of the water
right to the intended use, (3) transfer of the water right to the end
user, and (4) the ability to store the water for future use or to economically
deliver the water to an end user.
In the western United States, ownership
of water rights is typically set forth under state law. Western water law regarding water rights generally
falls into two categories: riparian rights and appropriative rights.
Riparian rights generally attach to property physically adjacent to a water
source and cannot be separated from the underlying property and reallocated
to another use. Appropriative rights are more common in the western
United States. An appropriative water right is a legally protected
interest which can be sold, leased or otherwise transferred in accordance with state law. This characteristic
imposes constraints on the reach of governmental regulatory powers over privately
owned water rights. State water regulations may, however, impose significant
restrictions on transfers of appropriative water rights.
The laws regulating appropriative water
rights vary from state to state, but generally consist of two broad tenets:
“first-in-time, first-in-right,” and “use it or lose it.” The “first-in-time”
tenet protects those who put water to an approved beneficial use from impairment
of their supply by other parties, and provides the necessary certainty to promote the
investment of capital to develop water supplies. Water rights applicants
must first demonstrate a state-sanctioned “beneficial use,” (such as municipal
supply, agriculture, ranching or mining). Water rights holders must
subsequently continue using their water or risk forfeiture (“use it or lose
it”) to the “next-in-line” user or applicant, since ownership for speculation
purposes or simple under utilization of water would not be in the public interest.
The value of an appropriative water right is strongly influenced by its
seniority. In dry years, the state water authorities may restrict allowable
diversions from the water source by less-senior users, in some cases prohibiting
their use entirely before the senior rights are affected. As such,
the most senior water rights are the most inviolate and uninterruptible,
and thus represent the most secure and valuable resources.
The process of changing water rights
to a different use varies from state to state. In most cases it involves a
water right which historically has been used for agricultural purposes being
changed to municipal or industrial use. In general, conversion requires
(i) documentation of historical and current water use, (ii) evidence
that the requested conversion will not materially harm other users, (iii) preparation
of groundwater and environmental studies and (iv) approval by the appropriate
administrative authority. This last step may also require involvement in public
hearings. Accordingly, the process requires the expertise of attorneys and engineers
familiar with the relevant state’s water law, hydrogeologists familiar with
the hydrology of the relevant stream system and/or hydrographic basins, and water professionals
sensitive to the mitigation of any users who may be potentially impacted
by the proposed transfer. The process from start to finish generally
takes between 18 and 24 months.
After a water right has been acquired and converted to its intended use,
the water usually must be transported to the location of the end user. In addition,
the water must be delivered at the time it is needed by the end user and therefore
may require storage for an interim period of time, often for years.
Frequently, proximity to end users and infrastructure can significantly affect
the value of water rights and water storage. For example, Nevada
lacks the geology to store all the water it will need, but due to recent
Arizona water code revisions, Nevada will have the opportunity to “bank”
surplus Colorado River water in Arizona aquifers for later use. Water
“banking” (recharge and storage) has already begun to occur in Arizona.
The Company has developed water storage in Arizona which the Company believes is a significant opportunity
for further water resource development.
Sales and Marketing
Upon acquisition of a particular resource, Vidler procures contracts
with end users, although discussions with end users to confirm their interest
in the subject water rights typically are begun well prior to the resource acquisition.
Vidler retains legal and political experts in its local markets to assist
in the transfer process.
Vidler’s staff contacts, or is contacted by, potential
end users. The Company representatives typically network with these companies and communities that need water resource assets.
The Company also participates in the Association of California Water Agencies, the
Colorado River Water Users, the American Water Resources Association, the
Nevada Water Resource Association and the American Water Works Association.
Management of the Company believes that participation in these groups allows the exchange of ideas and concepts required to address the water resource management needs in the Southwest. Additionally, attendance at
conferences also enables Vidler to keep abreast of current issues
and news affecting the industry, including changes in state and federal laws
and enforcement policies.
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