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Utah Legislative Report—2017 General Session Water Related Bills

HB 84

This bill was designed to clarify the effect of filing a series of non-use applications on a water right. The filing of non-use applications is authorized by UCA §73-1-4)2)(b). It allows a water user to place a perfected water right in a statutorily protected status against forfeiture, so that there is no risk of losing the water right to non-use while the right is in this protected status. Non-use applications run for up to seven years, and may be renewed any number of times. This helps a land owner/water user who may develop the land previously irrigated. A portion of the water used for irrigation may have transferred to a city to support the development, but the water user may have excess water and needs to find a new use for it.

The bill clarified that the filing and approval of serial non-use applications does not constitute beneficial use of a water right, nor does it protect a water right that is already subject to forfeiture for non-use that occurred prior to the filing of the initial non-use application. This amendment was considered necessary to prevent people from speculating in long-dormant water rights, by attempting to revive such a right by filing back-to-back non-use applications for long enough (15 years) to hopefully revive the right under §73-1-4(c)(i), the so-called Lazarus clause, that allows a water user to place a dormant water right back to use, and if that use continues for 15 years without anyone suing for forfeiture, the right is considered valid. The fear was that speculators would claim to have the right in non-use status for 15 years and then claim it was a valid right. HB 84 makes it clear that authorized non-use does not equate to beneficial use, nor does it absolve a water right that was subject to forfeiture for non-use before the non-use application was filed.

HB 118

The State Engineer has long-administered irrigation water rights on a head gate diversion duty basis. The duty is calculated by geographic area of the state by factoring the elevation of the land, average annual precipitation, temperature, and local climate conditions. The methodology used in Utah was devised by Professor Robert Hill of Utah State University, in his seminal report titled Crop Land and Wetland Consumptive Use and Open Water Evaporation for Utah, August 31, 2011, Utah Agricultural Experimentation Station Report #213. If the duty is 4 ac-ft. per acre in a given area, a farmer owning 100 acres would have the right to divert 400 ac-ft. for irrigation over the course of the irrigation season.

However, there is nothing in Utah statutes or rules that actually defines duty. Nevertheless, the administration of irrigation water rights on a diversion duty is embedded in Utah administrative policy. HB 118 then specifically amends UCA §73-2-1(4)(g) to provide the State Engineer with express statutory authority to adopt a rule that defines duty. It is anticipated that any such rule will continue duty administration, but also at the request of a water user, the State Engineer may administer her water right on a depletion based analysis. This change would enable Utah to move towards allowing split-season uses of irrigation water for instream flows, water banking, and other temporary uses without expanding the water right.

SB 63

Non-Profit Corporation Amendments: This bill initially ran during the 2016 general session as HB 218/SB 116, to correct problems identified by the Utah Supreme Court in Utah’s Non-Profit Corporation Act. The decision in Southam v. South Despain Ditch Company, 337 P.3d 236, 2014 UT 35, concluded that shares in water companies were not transferrable generally because of the express language of the statute. This ruling impacted all shareholders, as they must be able to transfer title to their shares for ordinary commercial transactions, collateral for loans, sale of land and/or shares, inheritance and other necessary transfers. The court also seemly ignored the real property aspect of water rights, and the restriction on transferred might also impact the ability to use shares of water stock to support §1031 exchanges of property. The 2016 bill’s sponsors unfortunately proposed a bill that went far beyond the sponsors’ stated objectives, and would have essentially destroyed corporate governance of water companies and the contractual nature of the relationship between a water company and its shareholders. The bill would also have vested in a shareholder, an actual real property title interest in the water rights in all of the shareholders, essentially making them all tenants in common in the water rights held by the company. The bill died last year due to significant opposition from water corporations among others.

Still, the problem identified by the court in Southam needed to be resolved, and SB 63 was introduced to address that issue. It also clearly defined exactly what the shareholder in a non-profit mutual water company owned. The bill amends §16-6a 606 of the Utah Non-Profit Corporation Act by making it clear that shares of water stock in a water company are transferrable. However, the bill also recognizes that corporations are contractual in nature, and that the contract is established by the articles of incorporation, by laws and policies, procedures and rules of the corporation. The corporation must be able to impose reasonable restrictions on transfers of shares to protect the interests of other shareholders. To avoid a water company imposing unfair or unreasonable transfer restrictions on shares, the bill provides that any restrictions on transfer of ownership must be reasonable; be adopted in good faith and for a legitimate purpose; must protect the best interest of the water company and its shareholders; and may not discriminate against any individual shareholder or class of shareholders. Restrictions may, however, apply differently to different classes of shares.

The bill also defined statutorily what a shareholder in a mutual water company actually owns by virtue of share ownership. Case law over the history of state has adopted no clear standard. Therefore, §16-6a-611 as amended clarifies that absent a conflicting provision in the articles of incorporation or bylaws of a corporation, a shareholder has an equitable, beneficial interest in the use of the water supply of the water company, which interest is proportionate to the shareholder’s shares in the water company, and that it is an interest in real property.

Conclusion and Implications

Water legislation is almost always contentious and it frequently takes several years to refine proposed legislation and build consensus. Once the water community comes together on legislation, as it did on SB 63, the Legislature is willing to pass a bill. However, where controversy exists, Legislators are reluctant to act recognizing the complicated nature of water law and water rights, and their own limited appreciation of the ramifications of the laws they pass.

(Steven E. Clyde)