COMPENSATION FOR TAKING OF WATER RIGHTS UNDER THE FEDERAL ENDANGERED SPECIES ACT
Presented by Michael J. Van Zandt
INTRODUCTION
The United States Constitution does not prohibit the taking of property for public purposes. Rather, the Fifth Amendment to the Constitution requires that "just compensation" be paid when property is taken for a public purpose. The origins of the Takings Clause of the Fifth Amendment arise from the acts of the British government prior to the Revolutionary War in which the British military regularly confiscated private property and goods from the colonists without compensation. Moreover, the Founding Fathers believed that citizens of the newly formed United States of America should enjoy certain inalienable rights, including freedom of speech, freedom of assembly, the right to representation, freedom of religion, the right to bear arms, and the right to own property. Nevertheless, the new government recognized that there were times when the sovereign might need to use property that belonged to a private individual and in order to protect this right, the Founding Father devised in the Bill of Rights the right to receive just compensation if the federal government takes private property for a public purpose. The concept of just compensation was borrowed from several of the State Constitutions that contained either a prohibition on the taking of private property or allowed for just compensation.
No single act of the United States Congress has had the impact on state water rights like the federal Endangered Species Act ("ESA"). 16 U.S.C. §§ 1531-1544. The ESA has been used to curtail water rights for irrigation, for stockwatering, for power generation, for development, for mining, for industrial uses and in some cases for domestic uses. The far-ranging effects of the ESA upon the use of water resources is only beginning, as the U.S. Fish and Wildlife Service ("USFWS"), the National Marine Fisheries Service ("NMFS"), and various environmental groups work to apply the ESA to all human activities that have a direct impact and potential impact on endangered and threatened species and their habitats.
This article will address the impacts of the ESA on private property rights and how the emerging area of Takings jurisprudence is dealing with these issues. Private property owners are now realizing some success in the federal courts on the issue of decisions under the ESA impacting property rights and courts are for the first time allowing compensation for the taking of water rights where endangered and threatened species are involved.
OVERVIEW OF THE ENDANGERED SPECIES ACT
The ESA was passed in 1972 but it had predecessor legislation that was signed into law in 1967. There were no mandatory protections in the 1967 Act; nonetheless, when the 1972 act was passed, the species listed under the 1967 act were "grandfathered." The act of listing a species consists of a determination by the Secretary of Interior or Secretary of Commerce based upon the best scientific and commercial data available that the species is either threatened or endangered. 16 U.S.C. § 1533 (b)(1)(A). Citizens may petition for rulemaking under 5 U.S.C. § 553 to have a species considered for listing by the Secretary. Id. § 1533(b)(3)(A). At the same time the Secretary makes his listing determination, he must also make a determination whether critical habitat will be designated for the species based on the best available scientific and commercial data, and after taking into consideration the economic impact os such critical habitat designation. Id. § 1533 (b)(2).
Once a species is listed, the Secretary shall promulgate regulations to protect and conserve the species. Id. § 1533(d). The Secretary shall also develop a recovery plan for the conservation and survival of the species. Id. § 1533(f). The Secretary shall also monitor the status of species and when they have sufficiently recovered, he shall continue such monitoring for at least five years in cooperation with the states. Id. § 1533 (g).
The ESA prohibits the "take" of a listed species. "Take" is defined as: "to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or to attempt to engage in any such conduct." Id. § 1532(19). The Secretary has further defined "harm" to mean "an act which actually kills or injures wildlife. Such an act may include significant habitat modification or degradation where it actually kills or injures wildlife by significantly impairing essential behavioral patterns, including breeding, feeding or sheltering." See TVA v. Hill, 437 U.S. 153 (1978). The take prohibition appears in section 9 of the ESA. 16 U.S.C. § 1538(a)(1)(B).
Special requirements apply to federal agencies under the ESA. These are known as Section 7 Consultations. Id. § 1536. The ESA requires all federal agencies to consult with the respective Secretary when their actions have the potential to affect endangered or threatened species or to modify their habitat. The federal agencies are required to prepare a biological opinion and submit it to the Secretary. That opinion will describe the project or proposal and its potential impacts on the listed species. It will also make a determination of the likelihood of the effects of the project on the species. Once the Secretary receives the biological opinion from the federal agency, then the Secretary makes a determination whether the federal action will jeopardize the listed species in a biological opinion. A jeopardy opinion from the Secretary requires that reasonable and prudent measures be applied to protect the species. Terms and conditions will be developed in the opinion and imposed on the federal agency. The Secretary may allow "incidental take" of the species under section 7 of the act. There are provisions in the ESA that allow federal agencies to escape these terms and conditions but they are rarely invoked. Id. § 1536(e).
Section 10 of the ESA allows for certain exceptions to the take prohibition of section 9 for nonfederal and private party applicants. The private party applicant must submit a conservation plan that addresses the impacts to the species, the steps taken to minimize such impacts, the alternatives considered, and such other measures the Secretary may require as necessary or appropriate. The Secretary may issue an incidental take permit under section 10 if he determines that the impacts on the species will be minimized. Id. § 1539.
IMPACT OF THE ESA ON WATER RESOURCES
There are many examples of the use of the ESA to prevent the use of water resources. In the famous case of TVA v. Hill, the U.S. Supreme Court ruled that a dam in Tennessee could not be operated because it could harm the snail darter. In a case in Washington, the Forest Service has prevented the diversion of water through a one quarter mile portion of a ditch that crosses the National Forest because of the potential impacts on endangered fish. In California, the U.S. Bureau of Reclamation has prevented the pumping of water from the Sacramento Delta to the Central Valley Project in order to protect the winter-run chinook salmon. In New Mexico, the Forest Service has prevented livestock owners from accessing their vested water rights in order to protect endangered plants and has restricted grazing in order to protect the Mexican spotted owl.
The manner of the protections imposed by the federal agencies is critical to an analysis of how these protections will be viewed by the courts. The question is whether the actions of the federal government amount to physically preventing the use of the water or has the federal government engaged in a regulatory action that has the effect of destroying the economic value of the water right.
As a sovereign entity, the United States government and its agencies have the power to prevent the use of private property. Clearly, the federal agencies can overtly condemn such property and pay just compensation for it. However, if through their regulatory power over private activities, the federal agencies act to prevent the use of water resources, the questions remains whether those acts result in a physical barrier to the use of the water.
TULARE LAKE BASIN DECISION
The most recent and most significant case to address the issue of whether the interference with water rights and water resources is Tulare Lake Basin Water Storage District v. United States, 49 Fed. Cl. 313 (2001). The case involved the shutting off of pumps that would allow water from the Sacramento-San Joaquin Delta to be diverted to the Central Valley Project ("CVP") in California. Plaintiffs in the case had contractual rights to the use of the water. The National Marine Fisheries Service ("NMFS") began discussions with the Bureau of Reclamation ("BOR") on the impacts of the CVP on the winter-run chinook salmon, an endangered species. As a result of those discussions, the NMFS issued a biological opinion that the proposed operation of the State Water Project ('SWP") and the CVP would jeopardize the salmon. Reasonable and prudent measures were developed that would restrict the timing and manner of pumping water out of the Delta. Thus water that would otherwise be available for diversion was made unavailable. The Tulare Lake Basin Water District and others then sued in the Court of Federal Claims for a taking of their contractual water rights.
The United States raised three separate defenses to the alleged taking. First, the government argued that the actions of the BOR merely frustrated the contract's purpose and did not effect a taking. Second, it argued that the taking, if it did occur, must be analyzed as a regulatory taking, and since that analysis requires the existence of reasonable investment-backed expectations and a significant decrease in economic value, no taking occurred. Finally, the United States contended that it could not be held liable for a taking when it does no more than impose a limit on plaintiffs' title that background principles of state law would otherwise require.
The court addressed each of these arguments in turn. First, the court distinguished the Tulare lake situation from one where the mere purpose of a contract is frustrated. The court analyzed the case of Omnia Commercial Co. v. United States, 261 U.S. 502 (1923). In that case, there was a contract between Omnia and Allegheny Steel for the purchase of a large quantity of steel plate. The government requisitioned the entire production of steel plate for the year and Omnia sued. The Supreme Court denied Omnia's claim because the contract had been merely ended rather than appropriated. The Court reached its decision in Omnia because the Fifth Amendment "has always been understood as referring only to a direct appropriation, and not to consequential injuries resulting from the exercise of lawful power." 261 U.S. at 510. The Court distinguished between the obligation to perform under the contract and the subject matter of the contract. Thus, if the government had stepped into the shoes of Omnia under its contract, there might have been a taking, but the government only appropriated the subject matter of the contract, to which Omnia had not title until the steel was delivered.
The United States argues in Tulare Lake that its action served only to frustrate the contract since the government did not substitute itself as a contracting party, nor did it assume any of Omnia's rights under the contract. The Tulare Lake court disagreed. The court stated that Omnia's distinction between a contract that has been appropriated and one that has been merely frustrated is relevant only where the contract right that is claimed remains separate and distinct from the subject matter of the contract. In other words, Omnia addresses the situation where the party claims a contract right to the property but cannot claim ownership of the property itself, since title has not yet passed.
The court in Tulare Lake determined that the situation with the CVP was not the same as the steel plate contract. The court found that the plaintiffs who had contracted for water in the CVP had an identifiable interest in a stipulated volume of water. The right to the use of the water had, in fact, been transferred to the end users, even though the state remained the legal title holder to the water itself.
The court then addressed whether the action by the government was a regulatory or a physical taking. The United States asserted that the actions of the government were merely restrictive and therefore the more exacting analysis under a regulatory takings analysis must be applied. The framework for the analysis of which law applies is based upon whether the intrusion by the government is "so immediate and direct as to subtract from the owner's full enjoyment of the property and to limit his exploitation of it." U.S. v. Causby, 328 U.S. 256, 265 (1946). In Causby, the Court ruled that frequent flights of aircraft over a landowner's property constituted a physical invasion and taking of the property. The court saw the elimination of the pumping of the water for the protection of endangered species as "exclusive possession of plaintiffs' water-use rights for preservation of the fish." Thus the court concluded that the prevention of the use of the water to which they would otherwise be entitled by the government rendered the usufructuary right to the water valueless.
The government next argued that it has no liability because plaintiffs' contracts only entitle them to water made available to the California Department of Water Resources ("DWR") and since no water was made available to DWR, through no fault of its own, plaintiffs have no claim to the foregone flows. Further, the government argued that plaintiffs' contractual rights were limited by the public trust doctrine, the doctrine of reasonable use and common law principles of nuisance, all of which provide for the protection of fish and wildlife. The reductions then merely reflect the limitations of title inherent in the background principles of state law.
The court distinguished the contract language limitations by noting that the limitations in the contract with DWR applied to actions by DWR and not the federal government. The United States cited to O'Neill v. United States, 50 F.3d 677 (9th Cir. 1995), wherein the plaintiffs sued under a breach of contract theory against the United States. In that case, the court held that restrictions on liability that applied directly to the United States prevented a breach of contract claim. However, since the contract limitation in Tulare Lake applied to the DWR and not the BOR, no such contractual limitation of liability applied here.
Next the court addressed the issues of public trust doctrine, the reasonable use doctrine and nuisance. The court noted that the State Water resources Control Board set the allocations to the plaintiffs in an order of the board. That order does not call for the adjustment of the allocations based on the need to protect fish or wildlife. The defendants urged the court to consider that if the issue were before the state, it would determine that plaintiffs' use of the water was unreasonable and therefore unlawful to the extent that it endangers the fish.
The Court of Federal Claims analyzed the situation and determined that it could not for the first time make California law with regard to whether the diversion of the water in question would be unreasonable or constitute a nuisance under state law. Defendants cited to Rith Energy, Inc. v. United States, 44 Fed. Cl. 108 (1999), wherein the court decided that background principles of state law did not allow as part of the property right the right to pollute groundwater. Moreover, in Rith Energy there had been an adjudication before the Department of Interior's Office of Hearing and Appeals that plaintiff's proposed activity would pollute groundwater. The background principles of the state law in questions would not allow the pollution of groundwater in that manner. Therefore, there could be no taking for a property right that was constrained by such background principles.
However, the court in Tulare Lake found that there had been no corresponding determinations by either the state or by the federal government that the actions of the water districts and farmers in diverting water to the CVP would violate state law as a nuisance or be considered as unreasonable. The court noted that the actions of the plaintiffs had been authorized by the state and any change in that determination would be an impermissible intrusion by the court into an area reserved for the state's judgment. Further, the public trust and reasonable use doctrines require a complex balancing of interests, requiring an exercise of discretion that the court refused to exercise.
The court found that the decision to curtail pumping of the water amounted to a physical taking of property for the endangered species for which just compensation was due.
COMPENSATION ISSUES FOR WATER RIGHTS
The compensation issues for taken water rights focuses on two very important areas, the quantity of water taken and the fair market value of such water. In the case of water that is withheld from diversions, the questions are how much water were the plaintiffs entitled to under the contract, decree or permit. Second, how much water was available to deliver to satisfy the water rights in question. Third, how much of the water impact, that is water loss , is directly attributable to the government action.
In Tulare Lake, the court heard evidence from various experts, including employees of DWR who had actually participated in the allocation decisions in question. Plaintiffs had their expert testify that over a three year period some 320,000 acre feet of water was forgone that was directly attributable to the endangered species.
Defendants contended that the mere existence of a statute, namely the ESA, prohibiting certain conduct, did not constitute a taking. The mere assertion of regulatory jurisdiction by a governmental body does not constitute a taking. United States v. Riverside Bayview Homes, Inc. 474 U.S. 121, 126 (1985). Moreover, the imposition of a permitting requirement, without more, did not rise to the level of a taking. Boise Cascade Corp. v. United States, 296 F.ed 1339, 1350 (Fed. Cir. 2002).
It was undisputed that DWR had taken action to curtail pumping in anticipation of the issuance of the biological opinion. The DWR witnesses testified that this was motivated by concern that the failure to take such action could result in criminal liability. The court determined that DWR's actions prior to the issuance of the biological opinion were strictly voluntary and were not as a result of federal action. Thus, a small period of time was subtracted from the period in which pumping was curtailed. However, the time period during which there was a direct determination that pumping must be restricted was deemed to be unquestionably the action of the federal government for which liability must attach.
There was certain additional water that the contractors were entitled to under their contracts if specific conditions were met. The court examined the evidence and determined that all of these conditions had been met and that the contingent right to receive this water had been perfected.
Turning to the value of the water taken, the court looked at evidence supplied by two valuation experts. The plaintiffs' expert testified based on the comparable sales method that the best comparable sales were from the Drought Water Bank, a program administered by DWR to secure excess water from sellers north of the Delta for use by water users in the south. The prices for an annual allocation of water for 1992 was $68.38 and for 1994 was $66.34 per acre foot.
The additional water entitlements under the contracts, when additional water would have been available was set at $3.00 per acre foot. The court then concluded that based on the amount of water taken and the values determined, the total amount of the taking was $13,915,364.78, plus interest from the date of the taking. Plaintiffs are also entitled to attorneys' fees and costs. The total liability of the United States is reported to be in excess of $26,000,000.
Since Tulare Lake is a temporary taking case, one in which the actions of the government expire of their own accord, it does not address the more difficult question of how a permanent water rights taking valuation would proceed. Nonetheless, the comparable sales method and income capitalization methods for determining value would apply to a permanent taking.
CONCLUSIONS AND IMPLICATIONS
Cases dealing with the takings of water rights are sparse. Cases such as Tulare Lake are important to the development of Takings jurisprudence because they give guidance to the federal agencies and to water right owners how the courts will treat such rights both in the manner of analysis of the taking itself and the quantification and valuation of those rights. There are still many unanswered questions and unaddressed issues. Nonetheless, the case law is shaping and water right owners can take solace that so far the courts are recognizing these valuable rights and the impacts the ESA and other federal statutes have on their use.
