In November 2014, Californians voted YES on Proposition 1 authorizing a $7.5 billion water bond, including $200 million for the Wildlife Conservation Board (WCB) for projects that enhance stream flow (including express acquisition of water rights).

In addition, between 2015 and 2019, the California Department of Fish and Wildlife, Coastal Conservancy, and others will have hundreds of millions, potentially over a billion dollars, to spend on fisheries and ecosystem protection, enhancement, and restoration.

Eligible projects types include: onsite recycled water opportunities, ornamental and agricultural irrigation best management strategies, Low Impact Development (LID) storm water infiltration, Water Conservation Management Best Management Practices (BMP) employment, and voluntary water right transactions such as acquisition, lease, and donations.

The Wildlife Conservation Board’s California Stream Flow Enhancement Program is a historic opportunity for California to protect the long-term health of its rivers and streams despite the uncertainties of prolonged drought and climate change.

The WCB is expressly re-authorized enter the market as a conservation buyer who is ready, willing, and able to compensate fair market value (FMV) for non-diverted, non-pumped, or non-consumed legal entitlements to reasonably and beneficially used water in order to protect, enhance, and restore fish and other instream conservation values.

Voluntary water right transactions – acquisition, lease, and donation – can complement WCB and other California and federal strategies to ensure habitat linkages and corridors that are resilient to climate change, including projects that allow migration and movement of species and provide for habitat connectivity between identified habitat areas.

Such transaction projects would enhance stream flows and generate fishery resources benefits that reduce the impacts of climate change on California’s ecosystems.

Due Diligence and Need for Programmatic Response to Water Bond

Hicks is working regionally with a broad range of Consultants who are individually and collectively at the forefront of re-framing community level discussions about water resource stewardship and the impacts of cumulative groundwater and surface flow withdrawals on salmon, steelhead, and other species.

Across the state, Hicks has met with and is in stages of discussion with a variety of landowner and institutional water users to discuss how to link onsite water conservation with enhanced stream flows. These conversations confirm a landowner willingness to parlay the drought into a new level of stewardship responsibility to take care of endangered species. In exchange, there is interest in new assurances of water supply reliability.

Two complementary strategies have emerged:

• Creation of State agency guidance and grant proposal criteria on how Bond money will be spent from the top down; and
• Hicks and other Consultant representation on behalf of individuals/institutions to leverage specific transactional projects from the ground up to enhance stream flow into new, one-off, increments of flow.

In between top down and ground up strategies is a missing “middle layer” or cohesive programmatic response to provide a regional framework to account for positive increments of flow from individual projects into broader surface and groundwater quantification management. There reflects a need to quantify and aggregate, one-off landowner conservation projects that generate tangible “wet” results into an overarching flow registry or accounting of enhanced stream flow. This will properly help frame the costs and benefits of individual projects scaled to a regional level, potentially consolidated into generate a ground up model which might be scaled into an administrative and regulatory breakthrough along the lines of a “California Trust Waters Program” modeled on Washington State’s Trust Waters Program and Oregon’s Allocation of Conserved Water Program.

Monitoring

A California Trust Waters Program could be managed by a single public agency such as the State Water Resources Control Board or jointly managed through an Interagency Working Group. An Interagency Working Group of state (and potentially federal partners) could potentially partner with local qualified water transaction entities with the skills and expertise to convert agricultural reduced consumptive use or recycled water into instream flows, especially during the summer low-flow season.

State investments that create a robust system to account for, monitor, and protect such voluntary instream transfers, could be vouchsafed through a Trust Waters Program which provides the level of transactional certainty and due diligence to ensure that specific water rights are properly non-diverted, become instream flow, and reach their intended point downstream in both time and volume. Such a system could create new levels of ecological resilience in small streams and tributaries that have volume, temperature, and other stressors to fish and wildlife, especially in the late summer months.

Potential Bond money will improve and enhance the ability for state agencies to work with landowners to achieve permanent conservation benefits. These transactions will target the time value of water and will reduce water temperatures and provide other water quality benefits that protect and enhance fish and wildlife even under severe drought conditions.

California Water Bond funding has the potential to seismically advance the promise of this emerging and innovative conservation strategy that is already used in the Western states of Colorado, Montana, Oregon, Washington, and Nevada.

The Bond holistically authorizes use of public money for individual water right transactions, which simultaneously achieve municipal water supply reliability, sustainable agriculture, and/or preservation of instream conservation values.

Water right transactions could include relatively simple, yet legally enforceable forbearance agreements, which do not require an administrative change of point of diversion, purpose or place of use petition, or they might include the more costly and lengthy State Water Board Water Code Section 1707 administrative instream transfer process.

Either way, Bond dollars will potentially drive both temporary and permanent transactions that generate needed instream benefits that are tailored to the time value of water, e.g. split-season lease.

Voluntary Water Transactions and Instream Transfers

While regulatory enforcement to achieve instream objectives has been and will remain an important strategy to achieve increased instream flows, voluntary conservation efforts and instream transfers are an emerging alternative approach to achieve the same environmental outcome, especially in coastal tributaries and streams.

Voluntary transactions are a strategic alternative and complement to regulatory actions to protect or enhance the natural environment. Voluntary water right transactions which utilize Water Code Section 1707 or forbearance agreements continue to gain traction as an instream flow strategy alongside other regulatory enforcement actions.

A “Petition for Instream Flow Dedication (Section 1707)” is a State Water Resources Control Board administrative change to the point of diversion, purpose, and place of use, which adds fish and wildlife instream uses to existing uses of water, and legally protects conserved water from subsequent diversion as it flows downstream past other diverters for a more impactful conservation outcome. A 1707 Petition can dedicate water savings to a temporary or permanent stream flow and is distinct from a forbearance agreement, which enhances stream flow for a term or temporarily to the next point of diversion. A 1707 dedication becomes an enforceable instream flow right.

There is a statewide opportunity to reach out to landowners who are not staunchly anti-environmental, but which cringe at state and federal talk about “taking” water rights for instream flow without compensation. In each watershed, these water transactions could potentially benefit endangered species, water quality, and generate other beneficial uses such as recreation. State or federal regulatory enforcement litigation lasting for 10-20 years will not solve the chronic annual challenge of meeting minimum instream flows alone.

Regionally, landowners with water rights are open to compensation for non-diversion of water and are interested in non-regulatory approaches to get water instream. Voluntary water transactions with instream conservation benefits will ensure a moderate landowner-friendly trajectory in the broader policy discussion and emerge as an example of water resource sustainability and regional model for more balanced environmental, municipal, and agricultural water uses.

In recent years, a growing number of regional “Water Trusts” – as increasingly seen across the west since the formation of the Oregon Water Trust in 1993 – have emerged to protect and enhance instream river flows through voluntary water transactions. Here in California, qualified water transaction organizations are increasingly embracing protection of land and water conservation values.

These voluntary water right and real property transactions are increasingly coupled with instream water transfers, such as forbearance or Water Code Section 1707, to increase flows and create new levels of ecological resilience for species such as steelhead that live in small coastal streams and tributaries that have volume, temperature, and other stressors to their survival.

These transactions and instream transfers take on more importance in anticipation of potentially greater future systemic volatility – such as flood and drought – associated with climate change. Indeed, in a “critically dry” year, fish and rivers need more water, however it arrives as instream flow.

Landowners and fair market compensation are the common denominators in every voluntary transaction whether water right acquisition, temporary forbearance agreement, or donations.

Qualified Water Transaction Organization or Water Trust Overview

Use of WCB money or other public money will no doubt receive intense scrutiny. Borrowing from federal tax standards, any transaction, including donations of the real property interest in a water right must be permanently dedicated to either a government unit or a publicly supported 501(c)(3) charitable organization or both.

The public agency or charitable organization qualified and authorized to hold the water right interest in a right transferred instream must have the commitment and resources to monitor and enforce the agreement’s terms and restrictions. Even if the interest is donated for “free,” the state agency or qualified organization acquires all the liabilities of instream flow stewardship in perpetuity, including a long-term relationship with the landowner. Qualifications subject to IRS review include: a resolution by public agency or Board of Directors accepting the qualified conservation contribution, an annual report indicating track record and organizational finances, Board biographies and expertise, policies in regard to easement acquisition and enforcement, as well as a back-up grantee as necessary. Transactions which include easements can only be transferred to other qualified organizations.

Starting with the Oregon Water Trust (“OWT”) in 1993, a growing number of public interest, I.R.C. § 501(c)(3) non-profit organizations (qualified water transaction organizations) have been created to focus on the opportunities created by legal reforms which now recognize instream fish and wildlife uses of water as reasonable and beneficial.

These qualified water transaction organizations re-direct out-of-stream diversions back to instream flows. Generally, water trusts work to restore instream flows and water quality to support and enhance fish, wildlife and recreational resources. All or a portion of an water right is re-directed instream to maintain critical aquatic habitat and water temperature, especially during the late months of the summer irrigation season when it is not uncommon for fish migration, spawning, or rearing habitat to overheat due to low flows or to run completely dry.

Similar in concept to land trusts, the fundamental commonality of water trusts is the use of voluntary, private agreements with farmers, ranchers, irrigation districts, landowners, and others who hold water rights. Water trusts pay fair market-based financial compensation to willing water right holders in exchange for donated, leased, or purchased water rights, on a temporary or permanent basis, to increase instream flows. In some transactions, water trusts facilitate direct financial investment in physical and structural solutions to enhance agricultural water use efficiency on farms, ranches, or irrigation districts. Importantly, such water conservation efforts promote continued agricultural use of water rights alongside instream flow restoration.

Water trusts have emerged as specialized intermediaries conducting transactions, outreach and education between public agencies, land trusts, watershed groups, municipalities, tribal entities, other non-profit organizations, and the agricultural community. Water trusts address technical, economic, and other transactional issues locally and regionally, rather than centrally, and are strategically positioned to cultivate the essential ingredients of trust and relationship with water rights holders. Voluntary agreements greatly reduce or eliminate the need for adversarial, intrusive, and less flexible regulation or enforcement actions by public agencies while accomplishing the same flow objectives.

Existing steelhead, salmon and trout habitat, such as riparian vegetation, cool water, and clean gravel pools, is identified through surveys conducted by state or tribal fisheries biologists and private groups. Minimum instream flow targets and other habitat improvements are developed and flow-limited stream segments are prioritized by highest concern, often on tributaries where small increments of flow can have the most ecologically significant benefits and most quantifiable impact for native fish populations. Additional physical and biological parameters are measured by: pool volume, increased habitat volume, fish cover, undercut banks, terrestrial vegetation, and woody debris. Potential flows are evaluated and timed for critical periods of the fishery life cycle, such as late summer tributary flows that maintain juvenile rearing habitat or fall mainstem flows to increase upstream migration access to vital spawning areas or spring downstream passage flows, especially for anadromous species en route to the ocean.

Once critical aquatic habitat is identified, water trusts serve a lead role in bridging private rights and public interests in water. Multiple layers of information are processed to confirm the presence of targeted species, to ensure the availability and reliability of water rights, to gauge the interest of local partners, and to analyze and measure the costs and funding availability to maximize resources and impact. Project development and design involves the water rights holder (individual farmer, rancher or representative stakeholder from irrigation districts), technical consultants (engineers, hydrologists, biologists, attorneys), watershed councils, community groups, and public agencies among others.

Typical transaction costs include due diligence of credible historical water use records of actual and perfected consumptive use of water to “prove up” the amount of the appropriated right. Actual ownership of a particular water right must be confirmed and may include review of deed records for water conveyed with land. Due diligence can extend to property inspection, review of historic aerial or other photos, interviews with the property owner to solicit affidavits of water use, crop records, pump records, seed receipts – any evidence that demonstrates beneficial use of water as claimed. Such review is essential to show “no injury” to other users in anticipation of more formal state review and to protect the instream transfer from potential future challenges.

A potentially significant limiting factor in claiming a deduction for a water right donation is the cost of appraising the value of the deduction. Water trusts arrange for an independent appraisal of the water right, which can cost $10,000-$15,000, especially when there is little market information known about a particular area or the deal is of a large enough size to warrant its own appraisal. Other times, the amount of potential water does not merit a full appraisal for each transaction. In some instances, especially for smaller volumes of water, the cost of the appraisal may be a significant percentage of the overall transaction. In essence, the donor must pay to give away their water right asset.

Ultimately, water trusts help shepherd the transfer application to change the point of diversion, place, and purpose of use to an instream beneficial use purpose through the necessary public notices, state agency review and approvals, and local recordation with the county assessor. It may cost as much as $30,000 to add an instream beneficial use to a permitted or decreed right, enabling enforcement by a local water master.

Water trusts work with their respective public and tribal partners to monitor each project. Preliminary baseline conditions are used to measure progress towards restoration targets and goals. Seasonal site visits and use of manual or installed discharge gauges comprehensively monitor all related flows in streams, rivers, canals, ponds, and reservoirs to ensure contracted water is accounted for instream. Water quality factors such as temperature, pH (acidity), ORP (oxidation reduction potential), SC (specific conductivity), DO (dissolved oxygen), and TDS (total dissolved solids) are monitored and recorded to assess the physical and biological benefits of increased flows. Biological minimum flows are determined to ensure adequate pool and riffle habitat, and to measure and index benthic macroinvertebrates (insects without backbones that are an indicator of stream health and a food source for fish). Fish-per-mile and general population estimates over time are generated by fish shocking and underwater-snorkeling for census measurement and species identification purposes.

Monitoring and verifying the timing and volume of instream flows has ongoing costs, no matter how cost-effective. To comply with the I.R.C. such monitoring would need to substantiate non-diverted donated flows in situ beyond prior points of diversion as water molecules aggregate and mix with downstream waters. Instream flow accounting must be transparent and accurate to properly manage donated flows alongside existing rights between two points. In addition, donated rights would need to be monitored to quantify and measure the impact of conservation benefits attributable to the donated instream transfer.

Given the time and financial costs associated with each transaction, water trusts raise the necessary funds from varied state, federal, and private sources, to provide technical staff and cover hard costs to provide an important incentive for landowner participation.

Lastly, water trusts pursue enforcement actions as appropriate to ensure compliance with the terms of the conservation transaction agreement.