Last week, the U.S. District Court for the Eastern District of California (Judge Wanger) issued a decision in Tehama-Colusa Canal Authority v. U.S. Department of the Interior, Case No. 1:10-cv-0712 OWW DLB (August 2, 2011), holding that Central Valley Project (CVP) contractors in the Sacramento Valley are not entitled to an area of origin priority over contractors in the San Joaquin Valley (see general area map below). This decision is the latest in a long series of disputes between north-of-Delta and south-of-Delta contractors, with the U.S. Bureau of Reclamation (USBR) in the middle as owner of the CVP.

The Tehama-Colusa Canal Authority (TCCA) is a joint powers authority made up of 16 CVP contractors in the Sacramento Valley. Each of those contractors has its own water service contract with USBR, originally entered into during the 1960s or 1970s, and renewed in 2005. The terms of those contracts are standard across all contractors, including the Article 12 provisions related to water shortages. During the last 33 years, USBR determined that a water shortage existed in 10 years, including 2008 and 2009. In 2008 and 2009, respectively, the Sacramento Valley contractors received 100 and 40 percent of their full contract supplies, as opposed to 50 and 10 percent for San Joaquin Valley contractors. Nevertheless, TCCA claims that its members are entitled to 100 percent allocations before San Joaquin Valley contractors may receive any Sacramento River water from the CVP, based on the awarding of prior rights to water users within the area of origin of the Sacramento River.

The CVP is an extensive system of reservoirs, pumps and canals that delivers water for irrigation, municipal, industrial and environmental purposes within the Central Valley of California. Its largest reservoir is Lake Shasta on the Sacramento River, which holds 4.552 million acre-feet of water and was completed in 1948. The CVP began as a project envisioned by the State of California in 1933, but was assumed by the USBR as a federal project in 1935 due to a lack of state funding. The purpose of the CVP is to develop, store and deliver water from the Sacramento River and other streams draining the Sierra Nevada mountains for beneficial use in the Sacramento and San Joaquin Valleys. The Sacramento River and its tributaries are the largest source of water for the CVP.

When the CVP was being developed, there was a concern expressed by residents and lawmakers in the Sacramento Valley that the export of Sacramento River flows to the San Joaquin Valley would deprive them of adequate water resources. This is a common concern seen in opposition to interbasin water transfer projects across jurisdictions and throughout history, including new projects being planned today. It was manifested in 1933 by the California Legislature adopting California Water Code §§ 11460-11463, known as the “area of origin” statutes. Those statutes provide that the appropriation of water for export from a watershed may not deprive potential users within the area of origin of water in the future. Federal and state courts and the State Water Resources Control Board (SWRCB) over the years have determined that the area of origin statutes allow a person within a watershed to apply for an appropriative water rights permit that is senior to the rights of exporters, even though the area of origin application is filed later in time. Thus, the statutes create an exception from the doctrine that the relative priority of appropriative rights is determined by when each appropriation was initiated, commonly known as “first in time, first in right.”

At issue in the TCCA v. US decision was whether the area of origin statutes also require the USBR to allocate water within the CVP to Sacramento Valley contractors with a higher priority than to San Joaquin Valley contractors. The first question presented was whether the USBR has legal authority to allocate water according to a method that does not include area of origin priorities, and the second question was whether the USBR exercised its discretion arbitrarily and capriciously by allocating water in 2008 and 2009 without regard to area of origin priorities.

Regarding the first question, the court held that USBR is not required to allocate water within the CVP based on area of origin priorities. The court relied heavily on Section 4 of the Act to Authorize Sacramento Valley Irrigation Canals, Central Valley Project, California, Pub. L. No. 81-839, 64 Stat. 1036, § 2 (1950), which directed that the canals used to deliver water to TCCA members be “coordinated and integrated” with “the existing features of the [CVP] in such manner as will effectuate the fullest and most economic utilization of the land and water resources of the Central Valley of California for the widest public benefit.” (Emphasis in court opinion, at 14.) As read by the court, Section 4 does not evince a Congressional intent for water to be allocated among CVP contractors according to any particular set of priorities, such as to an area of origin, but rather gives USBR considerable discretion in the operation of the CVP. USBR has historically allocated CVP water supplies pursuant to the shortage provisions of Article 12 of the CVP service contracts. Each of the TCCA members executed such an agreement and subsequent renewals with USBR, despite USBR’s refusal to include an area of origin priority, which undercut their assertion that the allocation method was illegal.

The court also cited a California Attorney General Opinion in 1955 that analyzed the scope and effect of the area of origin statutes. The Attorney General opined that the statutes create an inchoate priority only, and in order to seize that priority, a water user must comply with the general state laws regarding the formation of a water right. In the case of an appropriative right such as held by the CVP or, potentially, a TCCA member, that would mean filing and prosecuting an application with the SWRCB. Neither TCCA nor any of its members has ever filed such an application, leading the court to conclude that they could not have obtained any rights with area of origin priority. Furthermore, TCCA did not claim any water rights, but only a priority to water deliveries from the CVP, which is entirely outside the scope of the area of origin statutes. As the court explained, “[a]rea of origin statutes do not dictate the allocation by the Bureau of CVP water. Area of origin statutes help determine the quantity of water available to the Bureau for allocation, not how the water is allocated by the Bureau’s Contracting Officer.” This is reflected in Term 22 of the USBR permit issued by the SWRCB, which provides that USBR’s diversions are subject to rights initiated by applications for use within the Sacramento River watershed “regardless of the date of filing applications,” which is the hallmark of the area of origin laws.

Within federal reclamation law. the court noted the lack of any statutory provision supporting TCCA’s claim of area of origin priority. The acts governing the CVP do contain two provisions giving area of origin priority to certain water users, in the Trinity River and Stanislaus River watersheds, but there is no such provision favoring Sacramento Valley contractors. The court noted that the provisions favoring other areas of origin demonstrate Congress’s awareness of the policy issue and ability to create a priority when intended, so that the absence of a specific statutory section for the Sacramento Valley means Congress did not intend to create area of origin priority for north-of-Delta contractors.

TCCA’s best argument in favor of area of origin priority came from language contained in an important state court decision, State Water Resources Control Board Cases, 136 Cal.App.4th 674 (2006). The opinion in that case stated that:

To the extent § 11460 reserves the inchoate priority for the beneficial use of water within its area of origin, we see no reason why that priority cannot be asserted by someone who has [or seeks] a contract with the Bureau for the use of that water. (See Robie & Kletzing, Area of Origin Statutes – The California Experience (1979) 15 Idaho L. Rev. 419, 436-438 (discussing right of area of origin users to contract with Department [of Water Resources] for SWP water). This does not mean a user within the area of origin can compel the Bureau to deliver a greater quality of water than the user is otherwise entitled under the contracts [sic]. It simply means the Bureau cannot reduce that user’s contractual allotment of water to supply water for uses outside the area of origin, absent some other legal basis for doing so that trumps § 11460. (Emphasis in original.)

The federal court rejected TCCA’s reliance on this language, because operation of the CVP and its water service contracts were not at issue in the SWRCB Cases (making it non-precedential dictum), the focus of the law review article cited was on the State Water Project rather than the CVP, and interpreting the area of origin laws in this way would bring them into conflict with the federal law that requires operation of CVP facilities for the widest public benefit. The court did not mention, but I will add, that the language quoted above merely states that a water user with an established area of origin priority could request that USBR deliver such water to it, similar to the arrangement by which USBR delivers water to pre-existing water right holders on the Sacramento River pursuant to Settlement Contracts. Consistent with that language, USBR has no discretion to reduce deliveries of water to Settlement Contractors except in critical years, and even then only by 25 percent pursuant to the terms of those agreements. The TCCA members have water service contracts with USBR, not water service agreements.

Based on the analysis above, the court determined that USBR possesses the legal authority to allocate water without regard to any area of origin priority for north-of-Delta contractors. The court next turned to whether USBR acted in an arbitrary or capricious manner in its implementation of the CVP water service contracts.

The water service contracts executed by USBR and the TCCA members provide that in the event of shortage, defined as a condition when USBR cannot fulfill complete deliveries to all CVP contractors, USBR will allocate water among the contractors pursuant to the then-existing M&I Water Shortage Policy. The current policy generally allocates water on a pro rata basis, except when “specific operational constraints require otherwise,” and does not distinguish between north-of-Delta and south-of-Delta contractors. The court held that USBR has not acted in an arbitrary or capricious manner in applying those provisions or in refusing to allocate water to Sacramento Valley contractors according to an area of origin priority, because there is no contractual language requiring such a priority.

In addition to interpreting the contract language, the court analyzed the course of dealing and course of performance of the parties under the CVP water service contracts. The court noted that USBR has consistently refused to recognize any area of origin priority in its negotiation or performance of the contracts or renewals, despite TCCA’s repeated requests. The court noted that TCCA and its members had their water service contracts validated as a matter of state law after execution, including the shortage provisions. In a final coup de grace, the court found that TCCA and its members are equitably estopped from claiming that USBR allocation of water pursuant to the CVP contracts is unlawful, because they intentionally misled USBR into believing that the parties were in agreement with the meaning of the shortage provisions. The court agreed with the defendants’ argument that “TCCA’s strategy of feigning agreement to induce the Bureau to execute the Renewal Contracts so it could then claim there was no agreement to the essential terms governing shortage is behavior equity should not countenance.” Accordingly, TCCA was barred from seeking any equitable relief from the court, including a declaration of rights or injunction.

In summary, the court rejected every argument that TCCA offered to establish a priority right to CVP water allocation based on area of origin. Under this ruling, USBR may allocate water according to its M&I Water Shortage Policy without regard to whether contractors are located north-of-Delta in the Sacramento Valley or south-of-Delta in the San Joaquin Valley. While TCCA or parties with similar interests may continue making future claims to priority allocations of CVP water supplies, as of now those claims do not appear likely to gain a favorable result from Judge Wanger. As he has become in many respects the de facto watermaster of the Sacramento River and Delta, this is significant. It remains to be seen whether TCCA will appeal the decision.

Outside the context of the CVP, this case has provided a good discussion of the process for obtaining prior water rights in an area of origin in California. Such area of origin rules continue to create uncertainty for large interbasin water transfer projects, which are subject to the possibility that their yield may be decreased based on later appropriations for intrabasin use. Such rules threaten the investment-backed expectations of project owners and discourage the making of investments in water infrastructure in the first place. While it may be hard to imagine the successful permitting of an intrabasin water project in the Sacramento Valley that would have a significant impact on CVP operations, there are a number of potential projects across the United States that face opposition from residents in the area of origin, and such rules are often proposed as a way of mitigating the conflict. Legislators and project sponsors should be wary of establishing or accepting such rules.

UPDATE: TCCA has appealed Judge Wanger’s decision to the Ninth Circuit. That review will likely take approximately two years to complete. TCCA might withdraw its appeal, but given the importance of the issue to the parties and the strong nature of Judge Wanger’s decision, I would not expect any settlement of the direct merits of the dispute.