Divided Arizona Supreme Court Greenlights Major Development in Southern Arizona

On August 9, 2018, the Arizona Supreme Court issued a decision with potentially important implications for future residential and commercial development in Arizona. In Silver v. Pueblo Del Sol Water Company, a divided court held that the Arizona Department of Water Resources (“ADWR” or the “Department”) properly applied a long-standing regulation implementing Arizona’s adequate water supply program when the Department approved a large proposed development known as Tribute, consisting of 7,000 residential and commercial lots near the southern Arizona community of Sierra Vista.

Challenges to ADWR’s Adequate Water Supply Determination

The Tribute development is approximately five miles away from the San Pedro River, a portion of which was designated by Congress as the San Pedro Riparian National Conservation Area (“SPRNCA”) in 1988. When it created SPRNCA, Congress assigned to the federal Bureau of Land Management (“BLM”) responsibility for protecting SPRNCA’s natural resources and it also expressly reserved an unspecified quantity of water for SPRNCA under the federal reserved water rights doctrine.  Congress also instructed the BLM to assert water right claims for SPRNCA in the Gila River General Stream Adjudication pending in Arizona’s Maricopa County Superior Court.  The BLM made the required filings more than 20 years ago, but the Gila Adjudication court has not yet quantified the water rights for SPRNCA (a quantification trial is currently scheduled to begin in January 2019).

Arizona’s adequate water supply program requires certain residential and commercial developments to demonstrate that an adequate quantity of water is “continuously, legally and physically available” to serve the proposed development for a period of 100 years. The ADWR regulation analyzed by the Supreme Court limited ADWR’s consideration of “legal” availability to a determination of whether the water company that would serve the development has secured a certificate of convenience and necessity (“CC&N”) from the Arizona Corporation Commission, which regulates the business activities of private water companies but does not have jurisdiction over water resources.

Based on this regulation, ADWR issued an administrative decision confirming that the Tribute development would have an adequate water supply and could move forward with construction of homes and businesses, with water to be served by Pueblo Del Sol Water Company. The BLM and several other parties challenged ADWR’s determination, asserting that ADWR should have considered whether SPRNCA’s unquantified federal reserved water right claims might limit Pueblo Del Sol’s ability to pump groundwater during the mandatory 100-year period for determining an adequate water supply.  The majority opinion of the Supreme Court rejected this argument, holding that ADWR’s regulation properly implemented the statutory requirement to evaluate the legal availability of the proposed water supply.

The Supreme Court Upholds ADWR’s Determination

The majority based this holding on the fact that ADWR’s legal availability regulation preceded the Arizona Legislature’s adoption of the legal availability requirement. The original adequate water supply statute simply required ADWR to determine whether a proposed development had an adequate water supply, a term that the Legislature did not further define.  ADWR subsequently adopted its regulation specifying that it would evaluate whether the water supply for a proposed development would be “continuously, legally and physically available” for 100 years and narrowly defining “legal” availability to mean that a private water company had secured a CC&N from the Corporation Commission.  Twelve years later, in 2007, the Legislature amended the adequate water supply statute and for the first time incorporated ADWR’s “continuously, legally and physically available” requirement into the statute.  On this basis, the Supreme Court applied the “prior-construction” canon of statutory interpretation to conclude that when the Legislature amended the assured water supply statute in 2007 and incorporated ADWR’s existing regulatory language, it “amended the statute to adopt ADWR’s definition” of adequate water supply, including ADWR’s narrow definition of “legal” availability.

Implications for Future Development in Arizona

Although the Court’s holding is based on a rarely-invoked canon of statutory interpretation, the practical implications of the decision for Arizona could be significant. Most immediately, the decision clears the way for the Tribute development to proceed.  More generally, the decision authorizes ADWR to review other proposed developments under its current, narrow definition of “legal” availability.  This may make the adequate water supply process easier and more predictable for other developments similar to Tribute that face conflicting claims based on unquantified federal reserved water rights.

Even more broadly, the Court’s reasoning also may limit the ability of federal reserved water right claimants to use their unquantified claims as a basis for objecting to other types of state-issued water permits and approvals. On this point, the Court reaffirmed a long-standing principle that “ADWR does not have the authority to quantify BLM’s rights; that is the exclusive domain of the Gila Adjudication.”  [Opinion, ¶ 32.]  The Court also noted that it has historically “construe[d] federal reserved water rights narrowly due to their ‘disruptive effect in prior appropriation jurisdictions.’” [Opinion, ¶ 12, quoting In re General Adjudication of All Rights to Use Water in the Gila River System and Source, 231 Ariz. 8, 13 ¶ 16 (2012).]  Further, the Court noted that its prior “caselaw also disfavors consideration of unquantified federal reserved water rights.”  [Opinion, ¶ 33.]  Based on these established standards, the Court “decline[d] Plaintiffs’ implicit invitation to transform ADWR, by judicial fiat, into a forum for anticipatory injunctive relief through regulation based upon unquantified federal reserved water rights.”  [Opinion, ¶ 37.]

In light of these statements by the Court, unquantified federal reserved right claims will not provide a sufficient basis for future objections to state law-based permits and approvals issued by ADWR.  Until federal claims are quantified by the Gila Adjudication court, they will be just that – unquantified claims – and not an effective means of blocking ADWR’s actions under state statutes addressing water management in Arizona.