The ‘Commoditization’ of Water in The West

The ‘Commoditization’ of Water in The West

The treatment of water as a commodity, rather than a utility service, is gaining momentum in the western U.S. A recent Pro Publica/The Atlantic (February 9, 2016) article addresses the acquisition of water by hedge fund investors as commodity investments, instead of water service.

A New York City hedge fund manager, Disque Dean Jr., has identified numerous financially distressed agricultural properties with valuable water rights. Mr. Dean has acquired a number of these properties through his Water Asset Management fund, with an eye toward bringing a market based approach to water allocation.

Historically, access to water in the West has been allocated on the principle of “prior appropriation”-a concept of “first in time, first in right” to the water. While numerous limitations on the use (“beneficial use” is required to retain water rights) and its transfer, Mr. Dean asserts that allowing the purchase and sale of water on a market basis is one solution to the issue of the growing scarcity of water west of the Mississippi.

The experience of Crowley County, Colorado however, is offered as a cautionary tale on the treatment of water as a commodity. One of Colorado’s most fertile agricultural areas has dried up in the face of the sale of water to metropolitan water districts located far from the area where the water rights were originally held. Farmers and ranchers in the area seized the opportunity to cash out on their valuable water holdings, leaving much of the county’s former farm land high and dry. While other western states have dealt with the water as commodity issue more successfully (California’s Palo Verde Valley is offered as a success story) the creation of “water markets” and their ultimate impact in the West, is still up for grabs.

©2016 All Rights Reserved. Lewis Roca Rothgerber LLP

Phosphorus in Wisconsin: The Clean Waters, Healthy Economy Act

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On April 23, 2014, Wisconsin Governor Scott Walker signed the Clean Waters, Healthy Economy Act (Act) into law. This legislation establishes the basis for creating a multi-discharger variance for point sources struggling to meet Wisconsin’s stringent numeric phosphorus water quality criteria. Although several conditions must be met before it is available to permit holders, this legislation could have significant impacts on Wisconsin agribusinesses that hold Wisconsin Pollution Discharge Elimination System (WPDES) permits, as well as agricultural produces that may be targeted for non-point source reductions of phosphorus. In addition, since the Environmental Protection Agency (EPA) has noted that it generally favors these multi-discharger permit approaches, Wisconsin’s approach may be replicated in other areas of the country that are considering stricter water quality standards for nutrients like phosphorus and nitrogen.

What does the Act do?

Very simply, the Act sets in motion the collection of economic information to justify a multi-discharger variance based on a finding of adverse widespread social and economic impact. The Act requires the Department of Administration (DOA) to look at costs of compliance for categories of point source dischargers statewide. If the DOA finds that the “cost of compliance with water quality based effluent limitations for phosphorus by point sources that cannot achieve compliance without major facility upgrades” would cause substantial adverse social and economic impacts on a statewide basis, then the Department of Natural Resources (DNR) will seek approval from the EPA for a variance under 40 CFR Part 131. The Act also defines the criteria for qualifying for the variance and what a point source must do if it opts into the variance.

How would this multi-discharger variance work for permit holders?

Agribusinesses that hold WPDES permits may be eligible for the variance. To qualify, permit holders will need to:

1)    Demonstrate the economic determination made by the DOA applies to the source;

2)    Certify the permittee cannot achieve compliance without a major facility upgrade (defined to mean the addition of both new treatment equipment and a new treatment process); and

3)    Agree to comply with the requirements of the variance.

Once DNR has confirmed these requirements have been met, the permittee may participate in the variance for up to four permit cycles as long as it meets the discharge limits established by the multi-permit variance and takes steps to reduce phosphorus contributions from other sources.

First, the permit must comply with decreasing phosphorus discharges. These concentrations begin at 0.8 mg/L in the first permit term and then drop to 0.6 mg/L and 0.5 mg/L in the third and fourth permit term, respectively. In the fourth permit for which the variance is available, the DNR will require the permittee to achieve – by the end of the term of that permit – the water quality based effluent limit for phosphorus that would apply without the variance.

Second, while complying with these reduced discharge limits, the permittee must also undertake some activity to reduce phosphorus contributions from other sources in its watershed. This concept borrows from Wisconsin’s EPA-approved adaptive management program, and requires the permittee to:

1)    Enter into a binding, written agreement with the DNR under which it implements a project or plan designed to reduce phosphorus contributions from other sources; or

2)    Enter into a binding, written agreement that is approved by DNR with another person under which the other person implements a project or plan designed to phosphorus contributions from other sources; or

3)    Make a payment to the counties of the watershed in which the permittee is located. These payments are calculated by multiplying $50/lb times the difference between what the permittee is currently discharging, and what the permittee would discharge if its effluent met a target limit. The target limit is either the limit set by a TMDL (total maximum daily load), if applicable, or 0.2mg/L if no TMDL is approved.

How might the Act affect producers as nonpoint sources?

Counties that receive money through this program must use at least 65% of the amounts received to fund cost-sharing for projects governed by 281.16(3)(e) or (4) (the state’s nonpoint source program). These must be applied to projects that have been prioritized by their potential to “reduce the amount of phosphorus per acre entering the waters of the state, based on an assessment of land and land use practices in the county.” Up to 35% can be used for staffing, or toward modeling or monitoring to evaluate the amount of phosphorus in waters for planning purposes. In Wisconsin, producers that are not currently meeting state performance standards may be asked to install certain practices when cost share dollars are available. The Act has the potential to increase the amount of cost share dollars available to county work in this area.

What’s Next for the Act?

Before this program is available to permittees, a number of things must happen. First, the DOA must complete an economic study that demonstrates compliance with the phosphorus standard will have adverse and widespread social and economic impact. This study must also identify the categories of dischargers that will be eligible for the multi-discharger variance. Second, EPA must approve the variance before it may be implemented in Wisconsin. Finally, permittees would need to apply for the variance to alter any existing permit conditions that have been imposed to implement the phosphorus standard. Look for further updates in 2015!

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EPA’s Proposed Waters of the U.S. Rule: Does It Regulate Puddles? – Environmental Protection Agency

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In a leaked draft, EPA was seen to have been contemplating explicitly excluding puddles from regulation, but, in the end, didn’t do so. EPA provided an explanation as to why, but the rule is so broad, we think EPA’s explanation may not be completely relevant. In other words, because the rule is so broad, many puddles actually might fall under federal jurisdiction. The reason is the host of new definitions proposed by EPA. Previously undefined terms like tributary, neighboring, and floodplain are all now defined, and in a way that creates a web of federal jurisdiction. Here’s how:

  1. The rule starts with an initial list of jurisdictional areas, which includes (a) waters that are, have been, or could be used in interstate commerce, (b) interstate waters, and (c) the territorial seas.
  2. The rule then adds to this list all tributaries of these waters. Tributary gets defined for the first time as any feature with a bed and bank that contributes flow to any water on the initial list. Many features, like dry arroyos and mountain channels, have bed and bank even though they only flow when it rains or the snow melts:
  3. The rule then continues, adding to the list of jurisdictional waters all waters that are adjacent to the initial waters and their tributaries. Adjacent is “bordering, contiguous or neighboring.”
  4. EPA then defines neighboring for the first time to include any water in the floodplain or a riparian area of the initial waters and their tributaries. These also get new definitions. Floodplain is an area along a water, formed by sediment deposition and inundated during moderate to high flows. Riparian area is one bordering any water where surface or groundwater “directly influence the ecological processes and plant and animal community structure in that area.”

The end result is that areas are jurisdictional, as far upstream as one can find a bed and bank, and as far outward from that bed and bank as the area “directly influences” the area’s ecology or is formed by sediment and gets inundation from high flows. That is a lot of area. To give you a sense of the potential breadth of areas “subject to inundation,” this map shows in blue the flooding along the Mississippi River in 2011 and the counties/parishes at risk of significant flooding:

Fully one-third of Arkansas was covered. One half of the counties in Illinois were at risk.

This brings us back to puddles. In the proposal’s preamble, EPA says it removed puddles from the “not jurisdictional” list for clarity, not to imply they are jurisdictional.

Some puddles, it says, are not jurisdictional. The language of the rule, however, suggests that puddles are arguably jurisdictional if they are in floodplains or riparian areas. The fact that puddles aren’t always wet may not be decisive: EPA considers streams which flow only when it rains or snow melts to be jurisdictional and identifies dry features as “water”:

We’re not saying that EPA would take the position that puddles are jurisdictional – our only point is that the language of the proposed rule is so broad that it could. And we haven’t even started on the “significant nexus” test.

This is the second in a series of posts regarding EPA’s proposed rule redefining “waters of the United States” under the Clean Water Act.

For Part One, click here.

Photo credits, from top: Photo of the Las Cruces Arroyo from Wikipedia. Mississippi River map from the US Census Bureau. Photo of a wetland from the Arid West Region Regional Supplement to the Corps’ Wetland Delineation Manual.