Our colleague William Wade, in addition to being an economist, is a prolific author on the topic we find fascinating, takings. He looks at the issues with an economists’ perspective, and we’ve found his articles very helpful. We’ve even posted a few over the years:
- Temporary Takings, Tahoe Sierra, and the Denominator Problem
- Sources of Regulatory Takings Economic Confusion Subsequent to Penn Central
- Confusion About “Change in Value” and “Return on Equity” Approaches to the Penn Central Test in Temporary Takings
- Federal Circuit’s Economic Failings Undo the Penn Central Test
- Penn Central’s Ad Hocery Yields Inconsistent Takings Decisions
Bill has graciously sent us a guest post, a preview of what may be his next article.
He focuses on the impact of the Texas Supreme Court’s landmark decision in Edwards Aquifer Authority v. Day, 369 S.W.3d 814, 832 (Tex. 2012), in which the court held that land ownership includes groundwater rights, and concluded that a property owner could not have its groundwater rights taken and was entitled to prove up its Penn Central claim.
Bill writes about how Day is being applied in another case involving Edwards Aquifer water — reputed by a source no less than Wikipedia to be “one of the most prolific artesian aquifers in the world” — and how water rights are valued in takings cases.
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Liquid Gold or Water for Pecans: Valuation of Edwards Aquifer Water for the Braggs’ Orchards
by William W. Wade, Ph.D. [1]
wade@energyandwatereconomics.com
The Texas Supreme Court’s Day decision[2] reversed a hundred years of water law in 2012, and changed groundwater ownership rights from a “rule of capture” to ownership of “groundwater in place.” That decision equated groundwater ownership to oil and gas, and concluded that differentiating “between groundwater and oil and gas in their importance to modern life would be difficult.” [3] Day set up a conflict between value of the owner’s groundwater in place, and management of the Edwards Aquifer for public benefit – including the people of San Antonio, who rely on the Aquifer for their public water supply.
The ongoing Braggs v. Edwards Aquifer Authority litigation is the first of what could be a number of Texas cases invoking Day to claim a regulatory taking due to the Edward Aquifer Authority’s (EAA) management of the groundwater. On May 1, 2015, the Texas Supreme Court denied petitions by the plaintiffs Mr. & Mrs. Bragg, and the defendant EAA to review the 2013 appellate court ruling.[4] This let stand the Court of Appeals’ decision that EAA’s permit denials for the Braggs’ two orchards amounted to a regulatory taking under Penn Central.[5] As a result of the Texas Supreme Court’s denial, the appellate court’s remand for the valuation of Braggs’ damages for their taken water supply is the remaining issue in the case.
Plaintiffs’ counsel demands just compensation for Braggs’ water as a tradeable commodity (akin to “Black Gold” for oil in the ground). The EAA based its view of damages for Braggs’ taken water use on the replacement cost of leased water to irrigate their pecan orchards. The difference between the plaintiffs’ and the EAA’s economic loss estimates is nearly $4 million.
The appellate court remanded for valuation of the pecan orchard land with and without access to Edwards Aquifer water. [6] The Braggs’ land, however, was not the taken property. Rather, the Braggs lost the right to use Edwards’ Aquifer water to irrigate their pecan orchards. The correct valuation method would be the present value of reduced farm income, past and future, with and without access to the EAA water—not FMV of land values. The appellate court remand direction is an economic error. Economic loss of Braggs’ farm income should be measured by standard Daubert-vetted lost income methods.[7]
These problems with both the plaintiff’s and the defendant’s valuation approaches, together with the deficient appellate remand approach, have ramifications for future Penn Central litigation attendant to Day and Bragg. A long history of Penn Central takings cases reveals that Penn Central’s famous three-prong test[8] entails a quantitative measurement of the plaintiff’s severity of economic loss. This begins with a proper economic measurement of losses, and subsequent benchmarking of those losses to a denominator value that reveals whether the plaintiff’s distinct (or reasonable) investment-backed expectations have been frustrated.[9] The property owners’ briefs in the Bragg case reveal dissatisfaction with any valuation approach but the tradeable value of the water. The EAA’s briefs reveal that no quantitative Penn Central test appears in the proceedings.
In view of the importance of dependable water supplies for Texas, the outcome of the remand is significant to more than the Braggs and EAA. This water resource economist hopes that standard valuation approaches will lead to a balancing of private water rights with public needs for Texas water supply management.[10] If ever-careful attention was needed to Penn Central’s famous three-prong ad hoc balancing[11] of property rights and government regulation for the common good, it would seem that the Texas Supreme Court’s denial of the Bragg petition was a missed opportunity.[12]
Unresolved is whether the Braggs might enjoy a sufficient reciprocity of advantage as identified in Penn Central[13] by EAA’s pumpage regulations to offset their losses, or whether the gains all accrue to the rest of Texas while the Braggs unfairly shoulder the burden that in all fairness should be shared across society.[14]
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Notes
[1] The author is a water resource economist who has worked on water policy and litigation across the country since 1986 and provided expert testimony on valuation of lost and contaminated water supplies. He is experienced in financial economics and has served as an expert witness at state and federal courts in Penn Central regulatory takings cases. He has published extensively on the economic underpinnings of the Penn Central test.
[2] Edwards Aquifer Auth. v. Day, 369 S.W.3d 814, 832 (Tex. 2012) (Each landowner “owns separately, distinctly, and exclusively all the water under his land.”).
[3] Id. at 831.
[4] Edwards Aquifer Auth. v. Bragg, No. 13-1023 (Tex. 2015).
[5] Edwards Aquifer Auth. v. Bragg, 421 S.W.3d 118, 138 (Tex. App. 2013) (citing Penn Cent. Transp. Co. v. New York City, 438 U.S. 104 (1978)).
[6] Id. at 152-153.
[7] Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). See also Fed. R. Evid. 702.
[8] Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978) (“[T]he Court’s decisions have identified several factors that have particular significance. The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. So, too, is the character of the governmental action.”).
[9] Economic losses must be measured against the “parcel as a whole.” Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 935-36 (Tex. App. 1989) (citing Penn Central, 438 U.S. at 130-131). This comparison has come to be known as the “takings fraction,” which compares the with and without regulation values as the numerator to the owner’s stake in the entire property as the denominator to evaluate the severity of economic impact. Keystone Bituminous Coal Ass’n. v. Debenedictis, 480 U.S. 470, 497 (1987). Thousand of words by hundreds of litigators, jurists and scholars including the author have sought to explicate the Penn Central test. See, e.g., William W. Wade, Temporary Takings, Tahoe Sierra and The Denominator Problem, 43 Envtl. L. Rep. News & Analysis 10189 (2013).
[10] See the author’s “Liquid Gold or Water for Pecans: Valuation of Edwards Aquifer Water for the Braggs’ Orchards,” Draft August 5, 2015, for details about valuation issues within the Braggs litigation.
[11] 438 U.S. at 124.
[12] 421 S.W.3d at 144-145 (citing Day, 369 S.W.3d at 840 (“In many areas of the state, and certainly in the Edwards Aquifer, demand exceeds supply. Regulation is essential to its conservation and use.”)).
[13] Id. at 141 (Rehnquist, J. dissenting) (citing Pennsylvania Coal Co. v. Mahon, 260 U.S.,393, 415(1922) (“[This] Court has ruled that a taking does not take place if the prohibition applies over a broad cross section of land and thereby “secure[s] an average reciprocity of advantage.”)). The interested reader who wonders exactly what this phrase means may find useful the author’s article, “Average Reciprocity of Advantage: ‘Magic Words or Economic Reality: Lessons from Palazzolo,” 39 The Urban Lawyer 319 (2007).
[14] Id. at 123 (citing Armstrong v. United States, 364 U.S. 40, 49 (1960): “The question of what constitutes a “taking” for purposes of the Fifth Amendment has proved to be a problem of considerable difficulty. . . . this Court has recognized that the “Fifth Amendment’s guarantee . . . [is] designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”).