On February 24th, the U.S. Supreme Court accepted the Special Master Report in Kansas v. Nebraska concerning Nebraska’s over-use of water under the Republican River Compact. The Special Master awarded Kansas $3.7 million in damages for lost water supplies and another $1.8 million for partial disgorgement of Nebraska’s gains from overuse of its water apportionment for the period 2005-2006. The Court also accepted the Special Master’s change in the Compact Accounting system and agreed that Kansas’s request for an injunction against Nebraska for further compact violations be denied.
Background
In 1943, Congress approved the Republican River Compact that apportioned among Colorado, Kansas and Nebraska “the virgin water originating” in the Republican River Basin. The Compact gives each state a share of available supply for beneficial consumptive use: 49% to Nebraska, 40% to Kansas and 11% to Colorado.
A dispute arose in the late 1990s when Kansas complained about increased groundwater pumping in Nebraska from “thousands of wells hydraulically connected to the Republican River and its tributaries,” although the pumping of groundwater did not impact the Republican River and its tributaries on a “one-for-one” basis. Nebraska maintained that the groundwater pumping was outside the scope of the Republican River Compact, a claim rejected by the U.S. Supreme Court in 2000. The Court remanded the case back to the Special Master.
The states entered into a Final Settlement Stipulation in 2002 determining how best to measure and reflect in the Compact Accounting the depletion of the Basin’s stream flow from groundwater pumping. The purpose was to accurately measure the supply and use of the Basin’s water and assist the states in staying within their defined limits. To smooth out annual fluctuations, the Settlement based all Compact Accounting on five-year running averages, except in “water short” periods when two-year running averages are used. Groundwater pumping would count in a state’s consumption to the extent that it depleted the Basin’s stream flow. Finally, the Settlement excluded from the calculation the use of “imported water” (water used not originating from the Basin).
Disputes broke out in 2007. Kansas complained that Nebraska was over-using water from the Basin. Nebraska complained that Accounting Procedures were charging them for the use of imported water. When the disputes could not be settled before the Republican River Compact Commission (comprised of representatives from the three states) and non-binding arbitration (per the dispute provisions of the Compact), Kansas appealed to the U.S. Supreme Court in 2011, who remanded the dispute to the Special Master. The Special Master held two years of hearings in preparation of his report.
Issues
Nebraska objected to the Special Master’s finding of a “knowing breach” and the partial disgorgement of its gains. Kansas argued that the Special Master should have ordered a larger disgorgement of Nebraska’s gains, issued an injunction against Nebraska and not change the Compact’s accounting for imported water.
Decision
Nebraska’s Breach and Appropriate Remedies. The parties do not dispute that Nebraska’s water use in 2005-2006 (the first period of accounting under the Settlement) exceeded its water allocation by 70,869 acre-feet, or about 17% more than its proper share. They also agree that Kansas’s losses from Nebraska’s over-use is $3.7 million, or about $50 per acre-foot. Therefore, the Court’s decision focuses on whether it was appropriate to grant Kansas additional damages and how much. Further, Kansas wanted an injunction against future violations.
The Court rejected Nebraska’s argument that it had taken “persistent, earnest and extraordinary” steps to comply, including changing its water law to reduce groundwater pumping. Further, it alluded to drought conditions as an excuse. The Court claimed the arguments do not “hold water.”
“Nebraska failed to put in place adequate mechanisms for staying within its allotment in the face of known financial risk that it would otherwise violate Kansas’s rights.” The Court noted that Nebraska proceeded at a “snail-like pace.” The Legislature waited a year and a half to amend its water law. It did not make the act effective for another year. Its known overuse of water increased in 2003 through 2005. Further, Nebraska knew that reducing pumping does not immediately impact stream flows.
The management plan adopted in 2005 called for a 5% reduction, without any evidence that these reductions were sufficient to address the issue. The state further established no credible enforcement mechanism. Control was granted to local districts whose irrigators were the beneficiaries of groundwater pumping. “No sanctions or other mechanisms held those local bodies to account if they failed to meet the plan’s benchmarks.” “They bore no legal responsibility for complying with the Compact, and assumed no share of the penalties the State would pay for the violations.”
In the end, the Court accepted the Special Master’s conclusion of a “knowing breach.”
The role of partial disgorgement originated from the fact that an acre-foot of water is more valuable for farmland in Nebraska than Kansas. So, Nebraska’s gain from breach “was much larger than Kansas’s loss, likely by more than “several multiples.” Based on Nebraska’s culpability, the Special Master believed that a partial disgorgement of $1.8 million was warranted, an almost 50% increase over Kansas’s uncontested damages. Rejecting analogies to private contract law, the Court said that what mattered was that Nebraska’s conduct, rather than intent, was gambling with Kansas’s water resources. Therefore, partial disgorgement is a “fair and equitable” remedy.
The Court rejected Kansas’s requests for larger disgorgement ranging up to “roughly $25 million.” The Court said that it was reasonable to select a number between none and full disgorgement of gains. The Court stuck with the Special Master’s number because the Court agreed that a “small number” was appropriate, because Nebraska altered its conduct after the 2006 breach and has complied with the Compact ever since.
The Court agreed with the Special Master rejecting Kansas request for an injunction against future violations. “Kansas wants such an order so that it can seek contempt sanctions against Nebraska for any future breach.” But Kansas failed to show a “cognizable danger of recurrent violations.” “As just discussed, Nebraska’s new compliance measures, so long as followed, are up to the task of keeping the State within its allotment. And Nebraska is now on notice that if it relapses, it may be subject to disgorgement of gains—in part or full as the equities warrant. That, we trust, will guard against Nebraska’s repeating its former practices.”
Accounting Mechanism. The Court rejected Kansas’s objection to the Special Master adjusting the Accounting Mechanism to assure that the use of imported water is not counted against a state’s apportionment. The Court found that the change implemented the objective of the Compact and Settlement—to exclude imported waters. The change in the Accounting Mechanism was simply a correction of an error.
Implications
The interaction of groundwater and surface water is well acknowledged generally as well as in the Republican River Compact and Settlement. The proper measurement of the relation is critical for administration of water rights. Changes in methods of measurement in and of themselves does not change compacts, but instead result in better implementation of the intent of compacts.
The Court decision also shows the importance of diligent development of effective institutions to meet compact obligations. The water industry is well known for its “snail-like pace” of change. The deference to “local interests” and the reluctance of states to hold local interests accountable for their decisions is a standard recipe in western water politics. However, when compact obligations are at stake, which involve federal law and interstate obligations, the U.S. Supreme Court was not amenable to hearing “we are working on this.” Nebraska’s effective change after its 2006 breach proved significant in limiting its damages under partial disgorgement and avoiding an injunction against future violations.
A final observation about damages. The Court’s decision suggests that there may be an “upward sliding scale” regarding the portion of disgorgement of gains depending on a pattern of conduct. Nebraska paid modest disgorgement gains for its breach of the first period of accounting under the Settlement. The Court’s final observation about disgorgement “in part or full” for future breaches suggests that reputation will matter. Will diligence be punished less severely than slothfulness?
Written by Rodney T. Smith, Ph.D.