United States: Texas Supreme Court Recognizes Property Interest In Groundwater In Place

The Texas Supreme Court issued a long-awaited, landmark decision on groundwater rights, ruling that land ownership includes an interest in groundwater in place, and accordingly, under the Texas Constitution, that interest "cannot be taken for public use without adequate compensation." Edwards Aquifer Authority v. Day, No. 08-0964, slip op. p. 1, 2012 Tex. LEXIS 161, at *1 (Tex. February 24, 2012). The court, embracing a middle ground presented by Vinson & Elkins in amicus briefing, expressly recognized that regulation of groundwater production is not only permissible, but truly necessary, and may be accomplished without triggering a "taking." But the court also noted that the potential to trigger a taking "ensures that the problems of a limited public resource — the water supply — are shared by the public, not foisted onto a few." In practical terms, the stage is now set for allegations of "regulatory takings" claims if groundwater production permits are denied outright or unreasonably restricted as evaluated by a judge in a "fact-sensitive test of reasonableness."¹ There will be implications for existing permit holders, whose authorized production volumes cannot be viewed as sacrosanct, not only in the Edwards Aquifer Authority's jurisdiction, but throughout the state's groundwater conservation districts. For now, the Days remain empty-handed, with the case remanded back to the district court for further proceedings, despite finally getting a decision of this underlying issue in this case that has been pending before the supreme court since 2008 (after making its way through an administrative hearing, district court and the court of appeals).²

Groundwater, like oil and gas, has long been subject to the "rule of capture," commonly understood to mean that, "absent malice or willful waste, landowners have the right to take all the water they can capture under their land and do with it what they please, and they will not be liable to neighbors even if in so doing they deprive their neighbors of the water's use."³ Attendant to the rule of capture was recognition of private ownership of groundwater at least when produced at the surface — but the question of ownership of groundwater in place has not previously been decided under common law or foreclosed by clear legislation, unlike oil and gas, which was "long ago" held to be owned in place under common law.⁴

The issue was finally squarely presented to the courts when the Edwards Aquifer Authority (the "Authority") issued production authorizations based solely on historic use during a defined period and up to the full amount it can authorize under the Edwards Aquifer Authority Act (EAAA). Mr. Day and Mr. McDaniel (collectively, "Day"), after applying for an authorization to produce 700 acre-feet of groundwater per year, were ultimately granted only 14 acre-feet, based on an administrative record demonstrating only seven acres of irrigation directly from the well during the historic period defined by the EAAA.⁵ While facial challenges to the EAAA were formerly ruled insufficient to support a takings claim,⁶ Day challenged the outcome of the regulatory proceeding as a taking of private property for public use without adequate compensation. The Authority "impleaded the State as a third-party defendant, asserting indemnification and contribution for Day's taking claim."⁷

The Authority argued that there could be no property right to groundwater in place because the rule of capture means that you cannot exclude others from taking the property by drainage, nor enforce your interest absent production of the water.⁸ The state argued that there is a property interest in groundwater in place, but it is "'too inchoate' to be protected by the Takings Clause of the Texas Constitution."⁹ The court ultimately determined that groundwater is sufficiently like oil and gas — "a shared resource that must be conserved under the Constitution"¹⁰ — that the common law principle of ownership in place applies equally to groundwater, "whatever difficulties might lie in determining adequate compensation."¹¹

Having finally crossed the critical threshold of defining a property interest, the question is: "whether the EAAA's regulatory scheme has resulted in a taking of that interest."¹² That remains a question for another day. The court denied the Authority's and state's motion for summary judgment, finding that "full development of the record may demonstrate that EAAA regulation is too restrictive of Day's groundwater rights and without justification in the overall regulatory scheme."¹³ The court revisited its framework for regulatory takings and sheds some important, even if not wholly illuminating, light.

There is no doubt that the legislature is empowered to regulate groundwater production.¹⁴ The rule of capture never precluded legislative regulation, which the court expressly recognized and encouraged in prior cases.¹⁵ While this cased involved the Authority, which is governed by the EAAA, the holdings equally impact groundwater conservation districts governed by Chapter 36 of the Texas Water Code. Local groundwater conservation districts are the state's preferred method of regulating groundwater production.¹⁶ The 75th Texas Legislature in 1997 enacted Senate Bill 1, requiring groundwater conservation districts to adopt management plans identifying supplies, demands, and goals and setting out a regional water planning process.¹⁷ There are presently 99 groundwater conservation districts covering all or part of 174 counties.¹⁸ Groundwater conservation districts must manage their respective aquifers to achieve a defined "desired future condition," and through modeling, work with the Texas Water Development Board to identify a volume that can be sustainably pumped while achieving the desired future condition, known as the Managed Available Groundwater (MAG).¹⁹ The Authority has a statutory cap on permitting.

The legislature has granted groundwater conservation districts authority to favor historical users in their permitting regimes,²⁰ but where existing permits and use reach the MAG, new applicants would have strong challenges to regulations that outright deny them the ability to produce groundwater or even perhaps severely curtail that ability. This court expressly found that "a landowner cannot be deprived of all beneficial use of the groundwater below his property merely because he did not use it during an historical period and supply is limited."²¹ And while the court acknowledged the exception to permitting for domestic and livestock use, it denied the notion that this very limited ability to use groundwater would be sufficient to avoid a "taking."²²

Under a regulatory takings claim, a judge would evaluate as question of law whether the facts are sufficient to constitute a taking, focusing on the "severity of the burden that government imposes upon private property rights" in a "fact-sensitive test of reasonableness."²³ The court aligns the Texas standards for a regulatory taking with the federal standards. First the question is whether there is a "deprivation of all economically beneficial use of the property," which would likely be viewed as the land and groundwater together, not the groundwater "property" in isolation. Assuming there remains some beneficial use of the property, a three factor test comes into play: 1) what is the degree of economic impact on the claimant; 2) what is the extent to which the regulation has interfered with distinct investment-backed expectations; and 3) what is the character of the government action.²⁴ But within these framework elements it remains to be seen whether Day can satisfy the burden of proving a regulatory taking, having purchased the property after the enactment of the EAAA, and having been authorized to produce 14 acre-feet in addition to permissible domestic and livestock use.

Because the supply of groundwater, while subject to recharge, is still limited and demands either do, in some cases, or may come to exceed supply, adjustments to numerous regulatory schemes are likely necessary. Those adjustments may be to create mechanisms to fund "adequate compensation" for "takings" or to avoid "takings" in the first instance by evaluating regulations to "afford each owner of water in a common, subsurface reservoir a fair share."²⁵ Notably, in recognition of the fact that groundwater may be replenished or diminished based on hydrological and use conditions and may be transported off-site for use or sale elsewhere, the court held that "[r]egulation that affords an owner a fair share of subsurface water must take into account factors other than surface area."²⁶

Much has been unsettled by this ruling. Holders of permits, even with volumes tied to historic use, cannot view their production authorizations as sacrosanct; markets for permits in jurisdictions where demand exceeds sustainable supply (i.e., MAGs or statutory caps) are more uncertain. And while new production applicants have refreshed opportunity, there is more uncertainty about the long-term reliability of production authorizations.

But the practical reality is simply not revealed by this court's ruling. The dust must settle — more definition must be applied to fact patterns to define the edges of what constitutes a taking requiring adequate compensation; valuation of the "adequate compensation" must be developed. And those developments will only occur through additional, long-winding litigation by those property owners with the stomach to make the journey; and may only be avoided in the (seemingly unlikely) event that the legislature overrides this common law ruling and, by statute, redefines the nature of groundwater interests. For today, though, the Authority and the state's 99 groundwater conservation districts must take a long pause, a deep breath and a hard look around to evaluate the risks associated with their present regulatory schemes, and property owners, like the Days, can enjoy a moment of assurance that there is some level (undefined as it may be) of groundwater usage that they have a right to produce or for which they will receive compensation.

Footnotes

1 Edwards Aquifer Authority v. Day, No. 08-0964, slip op. at 38 (Tex. February 24, 2012).

2 Id. at 8, 45.

3 Id. at 19.

4 Id. at 11, 21.

5 The court upheld this determination of 14 acre-feet of historic use, finding that there was substantial evidence to support the Authority's determination that the groundwater impounded in a lake on the Day property became state surface water and the lake could not be relied upon to establish greater historic use of groundwater. Id. at 9-11.

6 Barshop v. Medina County Underground Water Conservation District, 925 S.W.2d 618, 625-26 (Tex. 1996).

7 Day, slip op. at 7.

8 Id. at 22-23.

9 Id. at 27.

10 Id. at 25. The Court also cited as support recent amendments to Tex. Water Code § 36.002 by the legislature, which states that "the legislature recognizes that a landowner owns the groundwater below the surface of the landowner's land as real property." Id. at 26-27.

11 Id. at 28.

12 Id. at 36.

13 Id. at 45.

14 In fact, the Legislature could override this decision, which was made under the common law, with new legislation redefining the scope of groundwater ownership.

15 Id. at 19, 40 ("Regulation is essential ...").

16 Tex. Water Code § 36.0015.

17 Act of June 2, 1997, 75th Leg., R.S., ch. 1010, 1997 Tex. Gen. Laws 3610.

18 Texas Water Development Board, Groundwater Conservation District Facts, available at http://www.twdb.state.tx.us/groundwater/conservation_districts/facts.asp.

19 See Tex. Water Code § 36.108.

20 Tex. Water Code § 36.116(b).

21 Day, slip op. at 45; see also id. at 43 ("To forfeit a landowner's right to groundwater for non-use would encourage waste.").

22 Id. at 44.

23 Id. at 38-39. This case does not involve a physical invasion of property. Therefore relevant case law lays out different two different tests. 

24 Id. at 38.

25 Id. at 41, 45.

26 Id. at 41.

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