WHO OWNS WATER?

An important U.S. Supreme Court decision earlier this month involving water rights has received limited media attention. At issue was whether one state could cross its border and take water from a river in another state. The Court held that it could not.*

The Red River Compact allocates Red River water as between four states, including Texas and Oklahoma. A regional Texas water district sought additional water from a tributary of the River at a point within Oklahoma. The district filed suit seeking to enjoin Oklahoma's enforcement of that state's laws which prevent out of state entities from taking water from within Oklahoma.

The Supreme Court stated that interstate compacts are to be interpreted under contract law principles. It found that the Red River Compact essentially was silent on cross border water rights and that it was necessary to interpret the intent of the parties.

The Court said that a state does not easily cede its sovereign powers, including control of waters within the state. It cited an 1842 ruling that states have an "absolute right to all their navigable waters and the soils under them for their own common use." It added, "we have held that the ownership of submerged lands, and the accompanying power to control navigation, fishing, and other public uses of water 'is an essential attribute of sovereignty'". Accordingly, the Court held that the silence in the Compact on the subject of cross border water rights shows the parties had no intent to permit them.

The Court also rejected the district's argument that Oklahoma's law violates the Commerce Clause of the U.S. Constitution because it allegedly prevents water unallocated under the Compact from being sent to another state. The Court found that there is no unallocated water under the Compact, and it did not address the constitutional issue if there had been some unallocated water. However, given the Court's strong language as to a state's right to control water within its borders, perhaps the Court would be unlikely to find a Commerce Clause issue under any situation. Of course, on the other hand, there is the matter of federal jurisdiction over navigable waters.

As demand for water continues to grow, and outpaces supply in some areas, the pressure to find new sources of supply from out of area likely will increase, along with efforts by more water-rich states to resist such efforts.

For an interesting sidebar, see"Who Owns The Rain? Water Rights For Rainwater Harvesting" in the June, 2013 issue of the WE&T Magazine, p.39 (WEF.org).

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*Tarrant Regional Water Dist v. Herrmann, No. 11-889, 560 U.S.__(2013)

THE INFRASTRUCTURE ISSUE, PART 2--WHO SHOULD PAY?

The long established principle of sound ratemaking is that rates should recover all the costs of service from those receiving service. That is, the cost causers should pay the costs of serving them. For example, one of the costs of service is depreciation expense on physical assets such as treatment facilities and mains used to provide service.

If water or wastewater infrastructure needs to be replaced or upgraded, what alternative sources of funds may be available for such work? In other words, who should pay for the infrastructure improvements? Possible alternatives may include the following:

** Rates. Depending upon the extent and timing of improvements, rates may provide a source of funding, either through rate increases, surcharges or special assessments.

** Reserves. A prudent utility have have established a depreciation reserve or replacement reserve from revenue to provide a source of funding for infrastructure improvements.

** Debt. Issuance of revenue bonds or other borrowings amy be a source of funding. Along these lines, a refinancing of existing debt to lower debt service may be helpful. The costs of debt will be recoverable in rates.

** Equity. In the case of investor owned utilities, additional equity investment may provide funding, with a return allowed on rate base increases.

** Contributions. In communities experiencing growth in residential or commercial customers, developer contributions of actual plant or payment of connection fees may satisfy infrastructure expansion or upgrade requirements.

** Privatization. In the situation of municipal owned utilities privatization may provide a solution. Privatization can be achieved through outright sales or leases, management contracts or public-private partnerships, any of which may include commitments by the private entity to fund capital improvements.

** Consolidation and Regionalization. Where individual utilities may be in proximity to each other, efficiencies and economies may be achieved by combining resources. For example, perhaps one utility may purchase finished water from an adjoining one, thus eliminating the need for a separate treatment plant or source of raw water.

** Regulatory Action. Where upgrade needs arise from possible regulation changes, a utility may choose to respond to more strict requirements by objecting to a proposed regulation, or seeking a variance or exemption, or asking for a phase-in over time or by outright litigation against the requirement.

** Government grants and low interest loans. Various federal agencies, including USEPA, give grants from time to time to utilities and states for infrastructure projects. In addition, with funding from USEPA, states may offer low interest loans to certain utilities. Two issues should be considered in the case of such programs. First, these resources are limited and clearly not every utility needing infrastructure improvements will get a grant or even a loan. Second, in the case of grants or possibly even loans, someone is subsidizing the funding for the benefit of some one else. The person subsidizing is, of course, the taxpayer, not the utility customer receiving service.

THE INFRASTRUCTURE ISSUE, PART 1--WHY IS THERE A WATER INFRASTRUCTURE PROBLEM?

There has been extensive media discussion about the purported need to replace aging water and wastewater infrastructure in the United States. This week, USEPA released the conclusions of a survey showing the alleged need to spend $384 billion to replace drinking water infrastructure through 2030 to enable safe water to be provided. It stated that this cost reflects the needs of some 73,000 water systems. USEPA asserts that "the nation's water systems have entered a rehabilitation and replacement era in which much of the existing infrastructure has reached or is approaching the end of the useful life."

The survey results raise an interesting question: Why is there such a need to replace water infrastructure? USEPA asserts that the need is due to the aging of water facilities: "In many cases, drinking water infrastructure was reported to be 50-100 years old".

However, it would seem that the age of infrastructure is not the only cause of a need to upgrade facilities, and it may not be the most important. Age alone does not imply inadequacy. For example, ductile iron or plastic water mains may have useful lives of 100 years or more. Older facilities may be functioning well provided that they have been properly maintained over time.

What are some possible other causes of the infrastructure issue?

** Failure To Plan For Replacements. In many cases of then growing municipalities, backbone water and wastewater plant and mains were contributed to utility systems by developers at no cost to the municipalities. If the municipal systems have not charged rates which recover depreciation or accrue reserves, there may be no funds available at the end of the useful lives of the contributed facilities to enable replacement.

** Failure To Properly Maintain. If water and wastewater utilities have not charged rates over time to recover full costs of service, including maintenance expense, it may be maintenance of facilities that is deferred. Without proper maintenance, facilities' useful lives obviously will be compromised.

** Regulation. It is perhaps ironic that much of the need to upgrade infrastructure discussed by USEPA's survey may result from the need to comply with USPEA's increasingly more strict and pervasive regulatory requirements.

** Demand. When a new subdivision or factory is proposed, a local water utility may need to expand treatment capacity or mains to satisfy increased demand for service, including fire protection.

** Security. Since 9-11, utilities have faced a need to upgrade security for water and wastewater facilities. Such measures, including electronic security measures and physical barriers, can impose substantial infrastructure costs, particularly for smaller utilities.

** Technology. Advances in technology, particularly relating to monitoring of treatment processes and flows and data processing, can impose infrastructure requirements.

** Failure of materials. Sometimes, regardless of age, such factors as corrosion and excessive breaks can create the need to replace components of systems.

There is not a sense that the need to replace or upgrade infrastructure in many systems is exaggerated or unrealistic. If the current need were satisfied today, it is likely that the whole discussion will be repeated in 50 years. For a look at resolving the infrastructure issue today, I will discuss funding of new infrastructure in Part 2--Who Should Pay The Bill?