The City of San Antonio has been one of the fastest growing urban areas in the United States for over a decade, and providing water security for the city has required the development of new water supplies. The San Antonio Water System (SAWS) was historically dependent on groundwater supplies from the Edwards Aquifer, but has sought to diversify its water asset portfolio through conjunctive use of imported surface water and groundwater supplies. One of those efforts involved an agreement with the Lower Colorado River Authority (LCRA), under which SAWS would fund certain agricultural conservation and groundwater development projects in the Colorado River Basin and in exchange would receive a portion of the conserved water for up to 80 years. The proposed transaction was similar to large agricultural conservation-based transfers from the Imperial Valley to San Diego, California and from northern Victoria to Melbourne, Australia in recent years. Unlike those transfers, however, the proposed LCRA-SAWS transaction faltered before it even began.

SAWS and LCRA entered into a Definitive Agreement for joint development of the water conservation and transfer project on March 1, 2002. The two agencies initially contemplated that the project would generate up to 330,000 acre-feet per year, of which 150,000 acre-feet would be exported to San Antonio with the remainder left in the lower Colorado River Basin for agricultural use. The contract provided for two phases, a Study Period followed by an Implementation Period. From 2002 through 2009, the two agencies conducted a number of technical studies, which showed that the yield of the project would be less than originally anticipated. In April 2009, LCRA determined that the project would not generate sufficient water supplies to meet its goals and notified SAWS that it would not proceed with the project. SAWS filed suit against LCRA shortly thereafter, claiming that the project continued to be feasible and that LCRA had breached the Definitive Agreement based on improper political and financial considerations. SAWS had spent approximately $43 million in development of the project and sought recovery of that investment, plus damages for the alleged difference between the cost of water from the project and an alternative source, totalling $1.23 billion.

In February 2010, the trial court held that LCRA was immune from suit and therefore dismissed the case. SAWS appealed that decision, and the Third District Court of Appeals addressed the issue de novo. In an opinion released on July 29, 2011, the Court of Appeals reversed the trial court and remanded the case for further proceedings.

In reaching its decision, the Court of Appeals analyzed the waiver of immunity contained in Texas Local Government Code § 271.152, which provides in part that: “A local governmental entity that is authorized by statute or the constitution to enter into a contract and that enters into a contract … waives sovereign immunity to suit for the purpose of adjudicating a claim for breach of the contract.” LCRA argued that the waiver of immunity should not apply for two reasons: (i) the statutory subchapter concerns contracts for providing goods or services to the local government entity, and the proposed water transfer would not supply goods or services to LCRA; and (ii) Texas Local Government Code § 271.153 contains additional requirements for waiver that did not exist in this case. The court held that the Definitive Agreement was a qualifying contract because it provided for SAWS to fund feasibility studies that subsequently became the property of LCRA, which constituted “providing goods or services” to LCRA. The court also held that the requirements of § 271.153 limit the statutory waiver of liability rather than the § 271.152 waiver of suit. As the court described the distinction, “[i]mmunity from suit bars suit against a governmental entity altogether and deprives a court of jurisdiction, whereas immunity from liability bars enforcement of a judgment but does not affect a court’s jurisdiction.” Because § 271.153 only limited the waiver of liability, it did not act to deprive the court of jurisdiction over SAWS’ lawsuit.

The Court of Appeals decision does not represent a significant development in water resources law, although it does clarify the scope of the waiver of local government immunity contained in Texas Local Government Code § 271.152, which is important since most water providers in Texas are local governmental entities. Rather, the primary result of the decision is to give new life to the dispute between SAWS and LCRA over their failed water transfer. SAWS has to some extent moved on from the transaction to other water supply planning efforts, such as a smaller collection of proposed import projects with private parties and brackish groundwater desalination. Nevertheless, if SAWS were to prevail in its lawsuit against LCRA, the financial consequences would be significant for both agencies. It is a good reminder of the damage that shifting politics can inflict on water projects, and that such projects also are commercial arrangements, in which participants can effectively protect their investments against changes in political will through properly drafted contracts.