An ICS analysis of 1041 permitting practices across Colorado’s 64 counties begs the question: can this tool provide a mechanism to protect agriculture, restore natural systems, and more equitably apportion the water we need?

Colorado faces a water constrained future. The Colorado Water Plan projects a 2050 municipal and industrial gap up to 560,000 acre-feet. It seeks to reduce this gap to zero by 2030. Simultaneously, it aspires to protect the health of watersheds, with 80% of critical watersheds having watershed protection plans in place by 2030. And it looks to protect agriculture and see “agricultural economic productivity keep pace with growing state, national, and global needs.” Without concerted action, the plan says, “Colorado could lose up to 700,000…acres [20%] of irrigated [agriculture].”

Agricultural economies and natural ecosystems have a lot in common. They are large and complex—filled with autonomous actors connected by a web of interdependencies. They function best at scale. One hundred acres of isolated grassland will not support species biodiversity, but 100,000 acres of contiguous native grassland will. Similarly, large agricultural landscapes create opportunities for “market life” that cannot subsist on isolated farms. Both agriculture and nature are susceptible to “death by small decisions”—usually witnessed as a series of market actions and land use changes that, at some point, affect the “whole organism.” Think urban sprawl. Think buy-and-dry.

The production of food, the health of the economy, and the protection of the environment are all matters of state interest. The State of Colorado has long been concerned with the trajectory of impacts that various land and water development decisions have upon agriculture, nature, and human welfare. In 1974, the state established the Areas and Activities of State Interest Act (AASIA), which imbues local governments with the authority to regulate land use matters of state interest. This authority is commonly referred to as a local government’s 1041 powers, after the bill that created the AASIA: HB74-1041. The rationale for the AASIA is stated in the legislative declaration (C.R.S., 2018, § 24-65.1-101):

• The protection of the utility, value, and future of all lands within the state, including the public domain as well as privately owned land, is a matter of public interest;
• Adequate information on land use and systematic methods of definition, classification, and utilization thereof are either lacking or not readily available to land use decision makers; and
• It is the intent of the general assembly that land use, land use planning, and quality of development are matters in which the state has responsibility for the health, welfare, and safety of the people of the state and for the protection of the environment of the state.

Drought, climate change, and the pressures imposed on local land and water resources by both regional and global market forces—population growth, land conversion, water speculation—make it imperative for local governments to understand how 1041 land use authority can be employed to effectively navigate the forces of change.

Local governments use 1041 powers to regulate socio-economic, land use, and environmental impacts resulting from 14 designated areas and activities of state interest ranging from airport construction to nuclear testing (Colorado Revised Statutes (C.R.S.), 2018, § 24-65.1). Three have applicability in water development contexts:

1. Areas containing, or having a significant impact upon, historical, natural, or archaeological resources of statewide importance.

2. Site selection and construction of major new domestic water and sewage treatment systems and major extension of existing domestic water and sewage treatment systems.

3. Efficient utilization of municipal and industrial water projects.

Through their 1041 powers, local governments have the authority to regulate water development projects to address local needs and prevent or mitigate injury, including economic injury. We typically see 1041 powers being used to regulate construction projects (dams, pipelines, etc.). It is less commons to see the more systemic economic, land use, or environmental impacts of water development projects being regulated effectively. This is probably so because these impacts have been more difficult to quantify. Regulators often have to rely on the information provided by the applicants themselves.

Most local governments have a long way to go, if they are going to align 1041 practices with the aspirations identified in Colorado’s Water Plan and the AASIA. Many cities and counties haven’t adopted 1041 regulations to guide water projects. Those that have often have ambiguous or outdated code. Even when code is well articulated, it can be difficult to administer. Elected officials serve a quasi-judicial role in approving or denying 1041 permits. Usually, the officials who were involved in writing the code are not the ones in office when it comes time to oversee implementation of that code and enforce its standards. A basic understanding of constitutional property rights law, land use law, and water law are needed to effectively oversee 1041 permitting processes; but 1041 trainings don’t exist.

Twenty-five of Colorado’s sixty-four counties use 1041 powers to regulate water development projects. Only fifteen use “efficient utilization of municipal and industrial water projects” criteria—the activity of state interest best suited to address the systemic economic, land use, or environmental impacts of water development projects—and less than a handful of these employ precise standards and metrics to guide economic, environmental, and land use outcomes when water development projects occur. An ICS survey highlights where different 1041 practices related to water are being employed:

How water is used in Colorado is going to change. Climate and market forces are going to drive that change. Agriculture has the largest supply. Markets are going to exert pressure to move that supply to where the demand and price are highest. Are Colorado’s agricultural counties poised to address this challenge and protect their citizen’s interests? Can they maintain freedom in the marketplace while eliminating the zero-sum games that sometimes result from wholesale water transfers? What would the implications be if 1041 criteria were used more widely and effectively?

Since the early 20th century, the development of agricultural water rights for municipal and industrial uses has relied on willing-buyer, willing-seller transactions in locations where export and transport are feasible (some ditches and irrigation districts prohibit out-of-ditch exports; sometimes the transport of water from one location to another is not feasible). But the scale of dry-up impacts has grown significantly over the last 50 years, resulting in fragmented landscapes, declining agricultural economies, reduced biodiversity, hydraulic challenges for ditch companies, and fiscal and land use challenges for local governments. Willing-buyer, willing-seller approaches may benefit cities and sellers, but they do not support the strategic objectives of the AASIA and the Colorado Water Plan.

The Water Plan advocates for change—including alternative transfer mechanisms (ATMs) that attempt to obviate the zero-sum games of agricultural water appropriation practices through water-sharing approaches. State statutes enable a variety of ATMs, including augmentation plans, interruptible water supply agreements (IWSAs), rotational crop management contracts (RCMCs), and agricultural water protection water rights (AWPWRs). But adoption has been slow. Why? Sometimes the reason has to do with cost. Sometimes it has to do with complexity. Sometimes it has to do with uncertainty and risk. But, most often, it has to do with path dependencies. We are a species of habit, and we do things a certain way because that’s the way we’ve always done them. Large institutions in particular (be they utility companies or mutual irrigation ditch companies) are often challenged to advance new models because they have so much investment in a “business architecture” designed to address the costs, complexities, and risks inherent in an existing way of doing business.

With effective 1041 criteria, local governments can accelerate the adoption of best practices—discouraging certain types of water development projects and permitting those that advance multiple-benefit outcomes, which protect their citizens’ interests. Consider three 1041 “efficient utilization” requirements that—if thoughtfully codified in detail, with nuance based on local conditions and circumstances—could advance Water Plan objectives and result in better economic, land use, and environmental outcomes for local communities:

ECONOMICS. “The applicant will protect agricultural economic outputs and the growth potential inherent in the local agricultural industry.” (This would encourage water-sharing approaches and discourage buy-and-dry tactics; it would promote investment in new or alternative agricultural enterprises when dry-up occurs.)

LAND USE. “The applicant will provide for the planned and orderly development of land and water resources and ensure compatibility between land use types in accordance with the comprehensive plan.” (This would discourage or require remediation of landscape fragmentation resulting from market-based water-development approaches that don’t take land use impacts into account; it would ensure future land uses are compatible with agriculture and nature.)

ENVIRONMENT. “The applicant’s project will maintain or enhance ecological function.” (This would encourage multi-benefit projects when water development takes place, for example: restoring native ecosystems, rebuilding soil carbon, establishing connections between natural areas, and/or creating efficiencies that could improve water quantity and quality in rivers and streams.)

These sample requirements draw from code in a handful of counties with exemplary efficient utilization requirements. They meet 1974 AASIA purposes while addressing timely 21st century needs. Furthermore, they advance requirements and outcomes that, today, can be quantified with analytical models that were undreamed of in 1974. Sometimes the farsighted intentions of legislative actions and state plans take time to achieve. By linking AASIA practices with the aspirations of the Colorado Water Plan, we can approach land use and water managment planning in ways that are more visionary, integrated, equitable, and sustainable.

For an example of 1041 policy guidance using outcomes-based analyses, see the ICS report: The Economic Impacts of Dry-Up on Colorado’s Bessemer Ditch.

To inquire about help developing or administering 1041 criteria, contact us at info@innovativeconservationsolutions.com

This ICS article was produced for the Rocky Mountain Land Use Institute’s (RMLUI) 2022 Western Places | Western Spaces Conference and the RMLUI Seminar Series: The Colorado River Crisis—Connecting Land & Water Use for a Thriving Future.

Harvard University is helping ICS clients explore how social impact capital can be used to optimize limited irrigation water supplies in the American West. A grant from the university’s Loeb Fellowship Alumni Council is supporting an ICS-led collaboration among Colorado stakeholders and national conservation, finance, and water market experts. An October convening in Pueblo County, Colorado, kicked off the effort. The convening purpose was to explore the design of a water optimization fund, a conceptual impact investment vehicle, which could help farmers and conservation groups in Pueblo County optimize irrigation water supplies diminished by recent municipal acquisitions—creating better outcomes for cities, agriculture, and nature.

There are not many precedents for this type of effort. While experts across the American West are exploring alternatives to buy-and-dry practices (a term describing cities’ purchases of irrigated agricultural land interests to obtain new municipal water supplies—a practice that results in the permanent dry-up of land and, often, an ensuing array of land use, economic, social, and environmental challenges for agricultural communities), most of these alternatives are in pilot stage. In the meantime, cities with burgeoning populations, in river basins where demand exceeds supply, continue to appropriate water from farms because viable alternatives have yet to be brought to scale. These municipal acquisitions often target the most senior water rights (since the most senior rights are the most reliable) and the most productive lands (since the most productive lands demonstrate the greatest consumptive use history and therefore yield the most water).

Cities themselves are often obligated to undertake such actions because of intense competition in the marketplace and a lack of viable alternatives. That is the case in Pueblo County: a consortium of farmers initiated a sale of water interests, and the City of Pueblo’s municipal water provider, under threat of losing access to its Colorado River water supplies given the persistent drought and shortages the West faces, determined it was in city’s best interest to acquire the supply. It is essential that new water-sharing models be developed that obviate buy-and-dry practices and build equity between cities (which have substantial means to acquire water resources in the face of scarcity) and rural communities (which often lack the means to protect water resources for their own benefit); but it is equally critical to focus on guiding municipal water acquisitions so that they do not result in zero-sum games—where cities survive and rural agricultural communities do not.

New impact investment structures, such as those explored in the design of a Pueblo County water optimization fund, could help both the City of Pueblo and Pueblo County agriculture thrive in a water-constrained future. They would support efforts to preserve irrigation on and permanently protect critical production areas on the Bessemer Ditch through the use of a “substitution of dry-up” provision established in Colorado Water Court.  This provision—which was developed through a collaborative effort between ICS, Lyons Gaddis Attorneys & Counselors, Palmer Land Trust, the Pueblo Board of Water Works, Rocky Mountain Farmers Union, and parties to the Colorado Water Court change case—affords anyone who owns land and water on the Bessemer Ditch the opportunity to preserve water on the best farmland by substituting other areas for dry-up (for example: poor production ground where contaminants make their way into watersheds through surface irrigation practices). The result would be better farmland retained in agriculture, restored ecological systems, and improved environmental conditions.

Why would any farmer or impact investor want to do this?  Financial modeling indicates that purchasing land and water interests at fair market value to support substitutions can be profitable.  It can improve real estate values by linking limited water supplies to the best farmland, and it can also increase annual, per-acre production yields.  With this in mind, experts at the Pueblo convening kicked off the Harvard-funded effort by exploring the following questions:

• What types of capital structures could support exchanges of land and water interests that result in substitutions?
• What sorts of conservation transactions would they support?
• What sources of capital would they draw from?
• What financial returns could they produce?
• Who would invest in this effort?
• Who would manage it?

Both public and private entities have been supporting different forms of water optimization for some time, and the notion of a water optimization fund builds on numerous precedents. For example, investments in irrigation efficiency (e.g., converting from flood to drip irrigation) support a type of water optimization. Purchases of instream flow rights (e.g., by water trusts) represent another type of water optimization. However, these “investments” don’t usually create a monetary return for the investors themselves, which a Pueblo-based water optimization fund would seek to do. Furthermore, because the approach focuses on improving water use across complex urban, agricultural, and ecological systems while producing a return on investment, such a model, if deployed successfully, could have far-reaching implications for how water funds are developed in other arid contexts around the globe.

To learn more about the Pueblo County effort, see ICS Navigates the Wake of Municipal Water Sales, or read the Harvard grant report: Investing in Water Optimization: New Markets for Conservation on Colorado’s Bessemer Ditch.  To learn more about using private capital to support working lands conservation, see the Conservation Finance Networks’ publication, Private Capital for Working Lands Conservation: A Market Development Framework.

Can it be, in the midst of drought, with intense competition for limited water supplies, that a major tributary flowing through one of the Intermountain West’s largest, fastest growing cities, has too much water?

Descending an incredible 9,475 vertical feet in just 74.5 miles from tributary headwaters on Pikes Peak to its confluence with the Arkansas River in the City of Pueblo, Fountain Creek bisects the City of Colorado Springs. Observed from the heart of downtown, it looks like a major water course, and at flood stage it is. But Fountain Creek used to be ephemeral: dry in different places at different times of the year. Today, it’s perennial, with three times more water flowing in it than flowed there historically. And that’s not a good thing.

The history

Unlike Denver, Fort Collins, or Pueblo, which developed around major river systems—the Platte, the Cache la Poudre, and the Arkansas—the City of Colorado Springs, which is projected to become Colorado’s largest city within two decades, did not develop proximate to a robust array of local surface water supplies. The growing city derives the majority of its supply from rivers on Colorado’s Western Slope, importing water through a series of transbasin diversion, storage, and conveyance projects. Other communities in the Fountain Creek Watershed—the 927-sqare-mile hydrological basin that surrounds Colorado Springs—share a heavy reliance on imported water, and groundwater as well. But where does all that imported water end up? Not just in people’s taps, but in Fountain Creek.

In the Fountain Creek Basin, there is a correlation between water demand and increased creek flows. It takes 1.0 acre-foot (AF) of imported water, on average, to serve two single-family homes for one year. 0.6 AF of the water used in those homes goes down the drainpipe and, after treatment by sewage plants, is discharged into Fountain Creek as “new water.” The impervious surfaces created by those homes and the infrastructure that serves them creates 0.25 AF of additional flows into Fountain Creek in the form of stormwater runoff. So today, for every 1.0 AF of imported water, 0.85 AF is added to the Fountain Creek system. Accordingly, an average of 110,000 acre-feet per year (AFY) flows down Fountain Creek today compared to 38,000 AFY prior to 1970, and even small rain events produce much greater flooding than they did historically due to expanding impervious surfaces.

Why is more water in the creek a bad thing?

The simple answer is that the geology of the area cannot handle the increased flows. Loose, sandy soils define the region. Erosion has cut hundreds of banks. Cut banks disconnect the creek from floodplains. Floods become much more devastating. Sediments from erosion and flooding release dangerous contaminants such as selenium and arsenic. The cost to repair the damage in Fountain Creek is already well over $1 billion—and this does not count the costs to human life, health, and property that continue to accrue or the costs to address the causes of the problem.

So what’s to be done?

The key, as difficult as it sounds, is to address the root causes. This means uncoupling the relationship between water demand, which is driven by growth, and increased creek flows. To do this, Colorado Springs and surrounding communities—whose populations are some of the fastest growing in the state—will have to embrace three principles: reduce overall water use, increase water reuse, and capitalize on green infrastructure and low impact development opportunities. Reducing water use and increasing water reuse (recycling water as many times as possible, at a variety of scales—from the household to the utility scale) means less water is sent “down the system.” And green infrastructure and low impact development means stormwater is treated onsite and absorbed into the ground rather than running across impervious surfaces as sheet flows going straight into a river system that nature didn’t design to handle those flows.

Can it be done?

Yes, but not overnight. In the Fountain Creek Basin, it will mean course-correcting 100 years of water management history while addressing complexities in state and federal water law. An ICS-led team of scientists, policy analysts, and program managers from The Nature Conservancy (TNC) spent a year studying restoration needs in the 927-square-mile basin and determining how to navigate these issues. One key action to guide future endeavors will be the development of a stream management plan that helps basin stakeholders determine (and agree to) the combination of demand management, water reuse, hard infrastructure, green infrastructure, and floodplain restoration activities required to stabilized this highly unbalanced system. Colorado’s Water Plan calls for developing stream management plans on 80% of rivers and streams identified as basin priorities by 2030. Fountain Creek is an Arkansas River Basin priority. The  Colorado Water Conservation Board (CWCB) provides funds to develop stream management plans. It allocated $5 million for stream management planning efforts in 2017, and TNC is helping Colorado communities tap into these funds and launch planning efforts.

Numerous basin stakeholders—including state and federal water experts, water engineering firms, and NGOs—believe a CWCB-funded stream management plan, and the scientific studies that support it, can drive consensus for collective actions to restore the watershed. And there is more to do than just fix the altered hydrology. The Colorado Water Plan calls for stream management plans not only to assess existing hydrological and geomorphological conditions and prioritize management actions to achieve measurable progress toward improving flow regimes; it also calls for developing recreation opportunities, restoring habitat, and improving other physical conditions around the creek. These are critical needs in Fountain Creek, which is, today, a heavily degraded urban waterway throughout much of its course.

To learn more about the altered hydrology of Fountain Creek and TNC’s efforts to restore river flow and function, see ICS—Nature Conservancy Issue Urban Watershed Plan, or read the ICS report: Natural Solutions for a Communally Vibrant, Ecologically Resilient Fountain Creek.