Thursday, August 29, 2013

Bragg, Takings, and the Economics of Limited Resources

Yesterday the Court of Appeals of Texas, Fourth District handed down Bragg v. Edwards Aquifer Authority, a decision that anyone interested in takings or water law ought to read (the Lexis cite is 2013 Tex. App. LEXIS 10838).  The Braggs had brought a takings claim alleging that the Edwards Aquifer Authority’s regulatory restrictions on the Braggs’ groundwater use amounted to a regulatory taking.  The appellate court agreed and remanded for an assessment of damages.  But I suspect—and hope—the case will first be appealed to the Texas Supreme Court.  It is a deeply flawed and harmful decision with mistakes that additional appellate review hopefully will fix.

Understanding those problems requires a little bit of factual context.  The Edwards Aquifer is a large and highly productive aquifer in central Texas.  It provides an important source of water for municipal and agricultural users, and its discharges support vibrant ecosystems, several of which contain unique and threatened or endangered species.  But those competing uses came into stark conflict, and in the mid-1990s the Texas Legislature responded by creating the Edwards Aquifer Authority and charging it with regulating water withdrawals (for articles on that history, see here and here). 

In 1979 and 1983, years before the Edwards Aquifer Authority’s regulatory scheme went into effect, the Braggs bought two parcels of land with the intention of growing pecans.  Initially, their water needs were modest; young pecan trees are small and do not require much water.  But as the trees grew, the Braggs sought regulatory authorization to increase their water use.  The Edwards Aquifer Authority authorized a lower level of use than the Braggs wanted (according to the Braggs, the limits rendered their farming operation economically inoperable), and the Braggs sued, alleging a taking.  The trial court ruled in their favor, and the current appeal followed.

Before getting to the problems with the court’s decision, it’s worth noting a few things the court did right.  First, the court analyzed the Bragg’s claims using the regulatory takings analytical framework set forth in Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978).  The appropriateness of that analytical framework for this case might seem obvious, but in recent years some takings advocates have argued—on rare occasions successfully—that regulatory restrictions on water rights should be analyzed as potential physical takings.  The Bragg court appropriately avoided that path.  Additionally, I have no quibble with the court’s application of the nature-of-the-government-action prong of the Penn Central analysis.  The court wrote that “[g]iven the importance of ‘protecting terrestrial and aquatic life, domestic and municipal water suppliers, the operation of existing industries, and economic development of the state,’ we conclude this factor weighs heavily against a finding of a compensable taking.”  That seems rather sensible.

But the Edwards Aquifer Authority still lost.  That’s primarily because of the court’s application of the other two Penn Central factors—the diminution in value and the interference with reasonable investment-backed expectations—both of which the court found weighed in favor of the Braggs.  And it reached both findings largely because of a consistent and deeply flawed reason: in applying each factor, it simply assumed away the reality that the Edwards Aquifer is a limited, oversubscribed resource.

The court's diminution in value analysis illustrates that problem.  That analysis reduces to a mathematical problem: the court’s job is to ask what the value of the property would have been without the contested restriction and what the value was with the restriction.  The court purported to do that, but instead its denominator was the value of the property assuming the viability of the Braggs’ desired property use.  In other words, the court simply assumed that without the restriction in question, the Braggs would have been able to use as much water as they wanted.  When the time came to instruct the lower court on a damages formula, the court of appeals said the same thing: “we conclude that the ‘property’ actually taken is the unlimited use of water to irrigate a commercial-grade pecan orchard.”  But even if the regulation had not existed, there was no guarantee that the Braggs could have withdrawn as much water as they wanted (unless, of course, the Braggs were the only landowners exempted from the Authority's regulatory scheme).  The Edwards Aquifer does not have unlimited quantities of water, and the Braggs would have been in competition with every other user whose pumping might affect water levels beneath the Braggs’ land.  In that competition, they might well have fared worse than they did under the EAA’s scheme, and at the very least they would have confronted greater uncertainty.   Thus a more appropriate denominator would have been the value of the Bragg’s land in a legal environment of unfettered competition for a limited resource, with all the uncertainty and risk that entails. 

The same problem applies to the court’s analysis of reasonable investment-backed expectations.  Essentially, the court held that it was reasonable for the Braggs to invest in a large, water-intensive, long-term farming operation in reliance on pumping from a shared and strained aquifer.  That does not seem like something a wise business owner would do, or that law should encourage businesses to do.  Granted, at the time, no regulatory restriction limited their pumping, but that cuts both ways: it meant less reason to anticipate governmental restriction but also less reason to anticipate governmental protection from competing users.  And even by the late 1970s and early 1980s, any reasonable expectation ought to have factored in the possibility that environmentally valuable resources would receive government protection.  Yet the court’s analysis of reasonable investment-backed expectations  discounts any factor other than the Bragg’s unilateral expectation that they would be able to pump whatever they needed.

The consequences of these errors are serious and far-reaching.  A simplified hypothetical illustrates the problem.  Suppose that 10 farmers own land above an aquifer with a sustainable annual yield of 1000 acre-feet of water.  Suppose that each landowner wants to create a pecan farm, and each anticipates that the pecan farm, at maturity, will require 200 acre-feet of water per year.  And suppose a regulatory body instead restricts each landowner to an equivalent share of the aquifer, so each instead receives 100 acre-feet per year.  Under the valuation formula propounded by the Braggs and adopted by the court, each landowner has suffered a substantial diminution in value, and therefore could be entitled to takings compensation for a “lost” 100 acre-feet/year of water, even though all the regulator did was restrict their collective use to the amount of water actually available.  If each landowners sues—and with this formula, they would be fools not to—the regulator will wind up paying compensation for “taking” 1,000 acre-feet/year of water that the aquifer never could have sustainably supplied anyway.  On a larger and more complicated scale, that essentially is the reality of the Edwards Aquifer, and of a great many other aquifers—a fact that was not lost on the Texas Legislature when it passed the Edwards Aquifer Act.  But that reality seems to have eluded the court.

To all of this, some readers might have a response: weren’t the court’s hands tied by Edwards Aquifer v. Day, 369 S.W.3d 814 (Tex. 2012)?  In Day, the Texas Supreme Court held that landowners hold property rights in water beneath their land, and that restrictions on those water rights could create compensable takings.  But that holding doesn’t inexorably lead to kind of analysis the Bragg court used.  As I’ve argued in much more detail in a forthcoming article, Day's holding is not unique; most states that have considered the issue consider groundwater use rights to be property rights with potential constitutional protection against takings.  Yet other states also have repeatedely held that the exercise of those rights may—indeed should—be substantially regulated without any need for the state to pay compensation.  Even in Texas, which has a partially-deserved reputation for particularly lax groundwater use regulation, court cases—including the Day decision itself—contain abundant language acknowledging the important governmental role in regulating groundwater use.  So, while I think there are problems with Day, it did not preordain this extreme result.

-Dave Owen

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