If you were not at the 2016 Texas & Southwestern Cattle Raisers Convention, it looks like you missed a great presentation by San Antonio attorney and third-generation rancher, Joseph Fitzsimons.  Fortunately, Colleen Schreiber published a great article recapping the presentation for Livestock Weekly magazine.  With their permission, I am republishing Colleen’s article here.

Landowner Attorney Discusses Water Rights At TSCRA Meeting

By Colleen Schreiber

FORT WORTH — Landowners have won some important legislative and court battles in the property rights arena of late. Third-generation rancher and attorney Joseph Fitzsimons, however, told those attending the recent Texas and Southwestern Cattle Raisers annual convention here that those who do not view property rights and ownership of natural resources in the same manner continue to work overtime on these issues.

In a perfect world, Fitzsimons said, the property owner would hold all the rights of the surface estate, all the water rights, and all the mineral rights with exclusive control over the development of that property, but that is the rare exception today in Texas.

“Just about everyone has some sort of severance, be it a mineral severance or maybe a groundwater severance or a groundwater conservation district that makes the landowner subject to state and federal regulation.”

Severability, Fitzsimons explained, creates separate ownership interest in the same parcel of land, and just about any real property right can be severed, be it timber, oil and gas, or groundwater. One notable exception to severability with respect to groundwater, he noted, lies with the Edwards Aquifer Authority. The EAA is governed by its own legislation and its own set of rules.

“To get them to play by the rules, however, you have to sue them,” opined Fitzsimons. “That’s just the way they operate. The good news is we usually win.”

Other severable property interests include wind rights, and now there is even a push to sever the sunlight. Fitzsimons’ firm, Uhl, Fitzsimons, Jewell & Burton, of San Antonio, is just now beginning to work on some of the solar projects.

“That’s a whole new world, and I’m not really sure where it’s going to take us,” he admitted.

He reminded listeners of some of the critically important groundwater cases, one being Day, which essentially “enshrined” in the Texas Water Code the private ownership of groundwater by the surface owner. TSCRA, the Texas Wildlife Association and Texas Farm Bureau fought this battle on several fronts.

“We had to clear this up, because some groundwater districts were insistent that groundwater was not a real property right, that the surface owner only owned the water after it was pumped,” said Fitzsimons.

“Our biggest argument was that if the landowner doesn’t own the water in place, the resource can’t be conserved. If the court had agreed with the EAA’s theory that the only way to own it was to reduce it to possession, that would have created an incentive for waste and overproduction of groundwater. Thankfully, that argument did not win the day.”

An exception to ownership in place with regard to groundwater, Fitzsimons pointed out, is if the surface estate is governed by an old oil and gas lease. The mineral estate is the dominant estate in Texas. Thus, if the surface owner has severed minerals that are unleased, unless the water was specifically reserved in the original severance or in the lease from the mineral owner to the mineral lessee, the right to use all of the water on that property necessary for the development of the mineral estate passes to the mineral owner.

“It doesn’t apply to adjudicated surface water,” Fitzsimons added, “but it does apply to exempt surface water and groundwater. Landowners need to find out if this applies to them.”

This right stems from 44 year-old case law, Sun Oil Co. v. Whitaker.

“It’s just stunning to me that this is still the law in Texas,” said Fitzsimons. “And it’s the law in Texas because, unlike other producing states — Oklahoma, New Mexico, Colorado, and North Dakota — Texas does not have a surface damage act that would limit implied easement.”

The implied easement does not allow for water to be taken off-lease, but water can be used on pooled acreage or surface acreage that is under the same base lease.

The only protection the surface owner has comes with the accommodation doctrine. The accommodation doctrine applies “when there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under established practices in the industry, there are alternatives available to the lessee whereby minerals can be recovered.”

To say that protection that comes with the accommodation doctrine is narrow is an understatement. Fitzsimons likened it to a very “skinny tree” or a “fig leaf”, both of which are difficult to hide behind. Not only doesn’t it really protect the surface owner, but the worst part is that the surface owner has the burden of proof.

“The surface owner has to prove that the current use is precluded by the dominant estate, and he has to prove that there’s no reasonable alternative.”

He also noted that the accommodation doctrine has never been applied to groundwater severances. Landowners are hoping this will be rectified in Lubbock v. Coyote Lake, which the Texas Supreme Court has agreed to hear.

In 1953, the Purtell family conveyed groundwater to the City of Lubbock. The surface was later acquired by Coyote Lake Ranch LLC. In 2012 the City of Lubbock proposed a “well field plan” and began operations on the property. Coyote Lake sought an injunction on the grounds that the City of Lubbock had to accommodate the surface owner when implementing their wellfield drilling plan. The trial court granted the injunction on the basis that the city had failed to comply with the accommodation doctrine. The appellate court reversed and remanded, and now the case is at the Supreme Court.

Cattle Raisers submitted an amicus brief supporting Coyote Lake on the grounds that the accommodation doctrine should also be applied to surface owners who are subject to a severed groundwater right.

“If we don’t win, we need to be ready with legislation to fix this problem,” Fitzsimons told listeners. “We need to be ready to fix it because if this happens, no one is going to want to do a groundwater deal. That’s because the value of that remaining surface estate is going to be very low because subsequent owners won’t be able to do much with it because there won’t be any accommodation of that future use.”

To protect rights when reserving or purchasing severed groundwater rights in real property, Fitzsimons reminded listeners of the need to reserve or obtain a surface easement across the property as well as the right to drill water wells. Additionally, in a surface agreement, he suggested requiring that the oil and gas company purchase water for use in operations and at the same time prohibit the use of water from outside the property.

“If they’re not prohibited from bringing in water from off-lease, then you are in competition with all your neighbors, and someone next door may be willing to sell for less.”

Fitzsimons also suggested prices should be flexible, not fixed.

“Use a Consumer Price Index or a real term so that you’re negotiating to a price at or above the market on a periodic basis — perhaps every three to five years.”

Even in a groundwater conservation district the mineral lessee has the right to take groundwater as part of their easement. Another important point that few landowners are aware of is that if the oil company drills a water well to service the oil and gas development on the property and they drill under an oil and gas exemption, the ownership of that well can’t be transferred to the surface owner because that permit exemption is solely for drilling.

“Be really careful about that,” said Fitzsimons. “I know a lot of ranchers think they have a free water well, and they did get a free water well; it’s just a free illegal water well.”

To get around this Fitzsimons suggested that the surface owner have the oil company get a beneficial use permit in the surface owner’s name. That way, when the oil company is finished with its operation, the well legally belongs to the surface owner.

A most recent conundrum is whether or not hydraulic fracturing counts as drilling and exploration. This issue has come to the forefront because now numerous wells have been drilled that are not being fracked because of the price of oil. This raises the question of whether the use of that water is still part of the drilling operation.

“It’s an unsettled question, but two GCDs, one in the Panhandle and one in South Texas, have taken the position that fracking is not drilling and exploration, thus they’ve required the oil company to get a permit.”

If the surface owner doesn’t make the oil and gas company permit the well in their name, he said, the surface owner must understand that the GCD is not required to grant the surface owner a new permit for that well once exploration is done. Furthermore, he suggested that at one point in time landowners might have thought they could get away with not worrying about this, that the GCD would never know.

“A lot of us think we’re way out in the middle of nowhere and no one knows what we’re doing, but we also all know the status of satellite and GIS technologies, and all these taxing districts are using these technologies. The days of hiding in the brush are over.”

A groundwater conservation district, Fitzsimons opined, is one more entity that is “chipping away” at absolute ownership and control.

“The surface owner has a real property interest in the groundwater, but that groundwater is subject to the police power of the state, and that police power gives GCDs the right to manage that resource,” he reminded.

One of the issues with GCD management, and there are many, is that these groundwater districts are established on political boundaries rather than on aquifer boundaries. In some cases two or three different districts govern the same aquifer, and all have different rules.

“There is one in South Texas where the down-dip of the aquifer, where the pressure is, is completely unregulated because it’s outside the district, and the up-dip is regulated,” Fitzsimons said. “The water doesn’t know where the lines are, so you get overproduction on one side and an unmanaged resource on the other side.”

Fitzsimons touched on the issue of a “taking” with respect to groundwater. One of the lynchpins in Day, he reminded, was that the Texas Supreme Court said GCDs can’t discriminate against landowners who do not have historic use. Another major win for landowners came just recently in the Bragg decision, and now for the first time, property owners have “some real guidance” on the takings issue.

“The Braggs, pecan farmers in Medina County, were mistreated by the Edwards Aquifer Authority in that the EAA only gave them a fraction of the water needed to operate their pecan farm and a fraction of what they had historically used. God bless them, the Braggs didn’t take it.”

The court looked at the economic impact of the regulation on the user, the highest and best use of the user’s property, the user’s reasonable investment-backed expectations, and the nature and overall importance of the regulation. It took more than 10 years of litigation with a “great lawyer” before the Braggs prevailed. The court said EAA’s action resulted in a regulatory taking.

“That’s big, because many in the water world have been saying for a long time that a GCD that decided to reduce or deny a groundwater use permit is not a taking,” said Fitzsimons.

The court also said the taking constituted an inverse condemnation and therefore valuation was to be based on the time at which the taking occurred. On remand, the jury awarded the Braggs $2.5 million in compensation.

Given the Day and Bragg rulings, does this mean that GCDs will have to proportionately reduce historic use permits to accommodate those who were originally denied a permit or who only got a portion of what they asked for?

“We don’t know,” Fitzsimons admitted, but he opined that most likely it will ultimately be decided only through more litigation. That’s because even though the court clearly said in Day that a permit cannot be denied based solely upon the level of use during the historic period, the majority of GCDs continue to ignore this language.

“Not only do they ignore it, they structure their DFCs and their available groundwater to reverse engineer the number to meet what’s already been permitted to the historic users.”

Regardless of the recent developments in case law, Fitzsimons encouraged all landowners to keep records of their use, and when applying for a new permit, he said, landowners should be ready to demonstrate that the water will be immediately put to a productive use. Furthermore, those applying for permits should clearly show investment-backed expectations. Finally, landowners can best protect their groundwater rights by being involved in the process, particularly at the local level.

“You’ve got to go to the GCD board meetings. You’ve got to be involved. Alan Simpson said it best: ‘You’re either at the table or you’re on the menu.’ That’s never truer than in the water world. You’ve got to show up and know the rules, and it’s important for those GCDs to know you.”

As for surface water, in Texas surface water is owned by the state, and the Texas Commission on Environmental Quality is the agency that administers these adjudicated rights. A surface permit grants the user a specified volume of that surface water at a specified point of designation with a designated priority date. Texas’ prior appropriation system generally means that the permits with the oldest priority dates are superior regardless of the use. This was clarified in another recent landowner win in Texas Farm Bureau v. TCEQ.

“What TCEQ attempted to do was say that urban was more important than ag, and the Texas Farm Bureau, God bless them, took it all the way to the Supreme Court, saying that ‘Our permit is for ag, and you can’t trump our priority, and if you want it you have to buy it.’”

The Court of Appeals in Corpus Christi essentially agreed and the Supreme Court refused to hear the case, leaving the Court of Appeals opinion intact.

“It’s a good decision, because if they can’t just wave a magic wand and say urban is more important than ag, it means they have to enter the market and buy that water.”

Groundwater that is used for domestic and livestock use is exempt from permitting, as is “diffused” water, water impounded in a tank that has less than 200 acre-feet of capacity. On the latter, Fitzsimons pointed out that recently some oil companies in South Texas have been stirring things up, saying they’re no longer going to pay for water taken from a tank because the surface owner does not own that water.

“The TCEQ grabbed on to that, and though no one has litigated this yet, it would not be a good result for most landowners,” said Fitzsimons.

Furthermore, he reminded listeners that the issue of what’s “diffused” water that doesn’t require permitting and what’s not is now a huge mess, thanks to the new Waters of the U.S rule.

“WOTUS is a blatant federal land grab,” Fitzsimons told listeners. “The EPA is getting awfully close to federal ownership instead of federal regulation.”

What the EPA did, he said, is take some concurring opinion language in Rapanos that wasn’t as good as the majority opinion, which clearly said that there had to be a real nexus to a water of the U.S. Now the EPA is essentially trying to say that ditches, ponds, any water essentially is a water of the U.S.

The Sixth Circuit court, in response to lawsuits filed by Texas and other states, has stayed the rule for the time being, but the battle is far from over. And it gets worse. There’s the real potential that if WOTUS is not overturned, NRCS cost-share programs won’t even be exempt.

“The Corps would come in and say that you’ve violated the Clean Water Act, making you subject to a daily fine of $25,000 for every day you go without a permit. And the permit alone could cost $50,000 and could take a couple of years to get.”

To protect surface water rights, Fitzsimons suggested that landowners considering some new impoundments should perhaps build those now before the 200-acre exemption rule is changed.

“The river authorities don’t like the thousands of impoundments on these watersheds that they use, and each session of the legislature there’s some rumbling that that’s going to change. If you have some really perfect sites, it might be better to develop those sooner rather than later.”

Additionally, as with groundwater permits, he encouraged landowners to maintain good records of usage and always comply with the express terms of the certificate of adjudication to avoid potential cancellation for abandonment.

“Abandonment is not used in Texas currently, but if we get short enough on water, TCEQ could begin pushing abandonment claims.”

Presumptive abandonment is defined as 10 years of consecutive nonuse.

“They use this aggressively in New Mexico, Colorado and Montana, and I would expect eventually the same will be true in Texas.”

Finally, Fitzsimons told listeners that one of the best ways to ensure protection of property rights is to get involved in groups like Cattle Raisers that fight daily for property rights.

“As urbanization in Texas continues, we’ve got to be engaged. Today 75 to 80 percent of the water is used in ag. Going forward it will mainly be municipal and industrial use. The only question is are we going to be paid for our resources, and a strong water market is the way to do that. We can’t have a water market without secure property rights. That’s the bottom line,” he concluded.