Edwards Aquifer Authority v. Day (369 S.W.3d 814, 2012)

Justice HECHT

delivered the opinion of the Court.

We decide in this case whether land ownership includes an interest in groundwater in place that cannot be taken for public use without adequate compensation guaranteed by article I, section 17(a) of the Texas Constitution. We hold that it does. We affirm the judgment of the court of appeals and remand the ease to the district court for further proceedings.

I

In 1994, R. Burrell Day and Joel McDaniel (collectively, “Day”) bought 381.40 acres on which to grow oats and peanuts and graze cattle. The land overlies the Edwards Aquifer, “an underground layer of porous, water-bearing rock, 300-700 feet thick, and five to forty miles wide at the surface, that stretches in an arced curve from Brackettville, 120 miles west of San Antonio, to Austin.” A well drilled in 1956 had been used for irrigation through the early 1970s, but its casing collapsed and its pump was removed sometime prior to 1983. The well had continued to flow under artesian pressure, and while some of the water was still used for irrigation, most of it flowed down a ditch several hundred yards into a 50-acre lake on the property. The lake was also fed by an intermittent creek, but much of the water came from the well. Day’s predecessors had pumped water from the lake for irrigation. The lake was also used for recreation.

To continue to use the well, or to drill a replacement as planned, Day needed a permit from the Edwards Aquifer Authority. The Authority had been created by the Edwards Aquifer Authority Act (“the EAAA” or “the Act”) in 1993, the year before Day bought the property. The Edwards Aquifer is “the primary source of water for south central Texas and therefore vital to the residents, industry, and ecology of the region, the State’s economy, and the public welfare.” The Legislature determined that the Authority was “required for the effective control of the resource to protect terrestrial and aquatic life, domestic and municipal water supplies, the operation of existing industries, and the economic development of the state.”

The Act “prohibits withdrawals of water from the aquifer without a permit issued by the Authority”. The only permanent exception is for wells producing less than 25,000 gallons per day for domestic or livestock use. The Act gives preference to “existing user[s]” — defined as persons who “withdr[ew] and beneficially used underground water from the aquifer on or before June 1, 1993” — and their successors and principals. With few exceptions, water may not be withdrawn from the aquifer through wells drilled after June 1, 1993. Each permit must specify the maximum rate and total volume of water that the water user may withdraw in a calendar year, and the total of all permitted withdrawals per calendar year cannot exceed the amount specified by the Act.

A user’s total annual withdrawal allowed under an “initial regular permit” (“IRP”) is calculated based on the beneficial use of water -without waste during the period from June 1, 1972, to May 31, 1993. The Act, like the Water Code, defines beneficial use as “the use of the amount of water that is economically necessary for a purpose authorized by law, when reasonable intelligence and reasonable diligence are used in applying the water to that purpose.” Although other provisions of the Water Code governing groundwater management districts define beneficial use more broadly and include recreational purposes, they also state that “any special law governing a specific district shall prevail”. “Waste” is broadly defined.

A user’s total permitted annual withdrawal cannot exceed his maximum beneficial use during any single year of the historical period, or for a user with no historical use for an entire year, the normal beneficial use for the intended purpose. But the total withdrawals under all permits must be reduced proportionately as necessary so as to not exceed the statutory maximum annual withdrawal from the aquifer. An “existing user” who operated a well for three or more years during the historical period is entitled to a permit for at least the average amount of water withdrawn annually. And every “existing irrigation user shall receive a permit for not less than two acre-feet a year for each acre of land the user actually irrigated in any one calendar year during the historical period.”

For various reasons, the Authority did not become operational until 1996, and all IRP applications were required to be filed before December 30, 1996. Day timely applied for authorization to pump 700 acre-feet of water annually for irrigation. Attached to the application was a statement by Day’s predecessors, Billy and Bret Mitchell, that they had “irrigated approximately 300 acres of Coastal Bermuda grass from this well during the drought years of 1983 and 1984.” The application’s request for 700 acre-feet appears to have been based on two acre-feet for the total beneficial use of irrigating the 300 acres plus the recreational use of the 50-acre lake.

In December 1997, the Authority’s general manager wrote Day that the Authority staff had “preliminarily found” that his application “provide[d] sufficient convincing evidence to substantiate” the irrigation of 300 acres in 1983-1984 and thus an average annual beneficial use of 600 acre-feet of water during the historical period. The letter invited Day to submit additional information, but he did not respond. In December 1999, the Authority approved Day’s request to amend his application to move the point of withdrawal from the existing well to a replacement well to be drilled on the property. Although the Authority cautioned that it still had not acted on the application, Day proceeded to drill the replacement well at a cost of $95,000. In November 2000, the Authority notified Day that, “[biased on the information available,” his application would be denied because “withdrawals [from the well during the historical period] were not placed to a beneficial use”.

Day protested the Authority’s decision, and the matter was transferred to the State Office of Administrative Hearings for hearing. During discovery, Billy Mitchell testified at his deposition that in 1983 and 1984, an area totaling only about 150 acres had been irrigated, that this had been done using an agricultural sprinkler system that drew water from the lake, and that no more than seven acres had been irrigated with water directly from the well. Day offered no other evidence of beneficial use during the historical period. The administrative law judge concluded that water from the lake, including the well water that had flowed into it, was state surface water, the use of which could not support Day’s application for groundwater, and that the recreational use of the lake was not a beneficial use as defined by the EAAA. The ALJ found that the maximum beneficial use of groundwater shown by Day during the historical period was for the irrigation of seven acres of grass and concluded that Day should be granted an IRP for 14 acre-feet of water. The Authority agreed.

Day appealed the Authority’s decision to the district court and also sued the Authority for taking his property without compensation in violation of article I, section 17(a) of the Texas Constitution, and for other constitutional violations. The Authority impleaded the State as a third-party defendant, asserting indemnification and contribution for Day’s taking claim. The court granted summary judgment for Day on his appeal, concluding that water from the well-fed lake used to irrigate 150 acres during the historical period was groundwater, and that Day was entitled to an IRP based on such beneficial use. The court granted summary judgment for the Authority on all of Day’s constitutional claims, including his takings claim. The court remanded the case to the Authority for issuance of a new IRP.

Day and the Authority appealed. The court of appeals agreed with the Authority that groundwater from the well became state surface water in the lake and could not be considered in determining the amount of Day’s IRP. Thus, the court affirmed the Authority’s decision to issue Day a permit for 14 acre-feet. But the court held that “landowners have some ownership rights in the groundwater beneath their property ... entitled to constitutional protection”, and therefore Day’s takings claim should not have been dismissed. Rejecting Day’s other constitutional arguments, the court remanded the case to the district court for further proceedings.

The Authority, the State, and Day each petitioned for review. We granted all three petitions. We begin by considering whether, under the EAAA, the Authority erred in limiting Day’s IRP to 14 acre-feet and conclude that it did not. Next, we turn to whether Day has a constitutionally protected interest in the groundwater beneath his property and conclude that he does. We then consider whether the Authority’s denial of an IRP in the amount Day requested constitutes a taking and conclude that the issue must be remanded to the trial court for further proceedings. We end with Day’s other constitutional arguments, concluding that they are without merit.

II

Day contends that the Authority was required to base his IRP on his predecessors’ beneficial use of water drawn from the lake, supplied in part by the well, to irrigate 150 acres for two years during the historical period. The Authority counters that the lake water, whatever its origin, was state surface water and could not be considered in determining the amount of the IRP.

The Water Code defines state water— water owned by the State — as “[t]he water of ordinary flow, underflow, and tides of every flowing river, natural stream, and lake, and of every bay or arm of the Gulf of Mexico, and the storm water, floodwater, and rainwater of every river, natural stream, canyon, ravine, depression, and watershed in the state”. Day argues that because groundwater — defined by the Code as “water percolating below the surface of the earth” — is not included in this list, it can never be state water. But the character of water as groundwater or state water can change. The Code recognizes this reality, providing, for example, that storm water or floodwater — state water— when “put or allowed to sink into the ground, ... loses its character and classification ... and is considered percolating groundwater.” By the same token, irrigation runoff draining into a stream or other watercourse wholly loses its character as groundwater and becomes state water.

There is an exception. Groundwater can be transported through a natural watercourse without becoming state water. The Code specifically allows the Water Commission to authorize a person to discharge privately owned groundwater into a natural watercourse and withdraw it downstream. But this exception proves the rule. The necessary implication is that when the water owner has not obtained the required authorization for such transportation, the water in the natural watercourse becomes state water. Before such authorization was required, we, too, acknowledged the propriety of transporting non-state-owned water by natural watercourse, but only when the water owner controls the discharge and withdrawal so that the water moves directly from the source to use.

In this case, Day’s predecessors did not measure the amount of water flowing from the well to the lake or the amount pumped from the lake into the irrigation system. There was no direct transportation from source to use; the flow into the lake was as constant as the artesian pressure allowed, except when water was diverted to irrigate the seven acres, while withdrawal was only periodic as needed to irrigate the 150 acres. Nor does it appear that the lake was used to store water for irrigation. While the water remained in the lake, it was used for recreation, and since most of the water in the lake came ficom the well, that appears to have been its principal purpose. Indeed, there is no evidence that lake water was used for irrigation during the historical period other than in 1988 and 1984, while the lake was used constantly for recreation. This was substantial evidence to support the Authority’s finding that the groundwater became state water in the lake. We do not suggest that a lake can never be used to store or transport groundwater for use by its owner. We conclude only that the Authority could find from the evidence before it that that was not what had occurred on Day’s property.

Day having offered no other evidence of beneficial use during the historical period, the Authority’s decision to issue an IRP for 14 acre-feet must be affirmed.

Ill

Whether groundwater can be owned in place is an issue we have never decided. But we held long ago that oil and gas are owned in place, and we find no reason to treat groundwater differently.

A

We agree with the Authority that the rule of capture does not require ownership of water in place, but we disagree that the rule, because it prohibits an action for drainage, is antithetical to such ownership.

We adopted the rule of capture in 1904 in Houston & T.C. Railway v. East. A well on East’s homestead, five feet in diameter and thirty-three feet deep, had long supplied him with water for household purposes. But the Railroad dug a well nearby, twenty feet in diameter and sixty-six feet deep, from which it pumped 25,000 gallons a day for use in its locomotives and machine shops, and East’s well dried up. East sued the Railroad for the destruction of his well. After a bench trial, the trial court found that the Railroad’s use of water was unreasonable under riparian law, but concluded it was not actionable, and rendered judgment for the Railroad. The court of appeals reversed and rendered judgment for East for the damages claimed, $206.25. The Railroad appealed.

“Under the common law ..., a riparian use must be a reasonable one, and ... [a] use which works substantial injury to the common right as between riparians is an unreasonable use....” The issue before us was whether this law applied. The same issue had been considered by the English Court of the Exchequer in Acton v. Blundell As in East, a landowner had sued for damage to his well from wells dug nearby, and the question was “whether the right to the enjoyment of an underground spring, or of a well supplied by such underground spring, is governed by the same rule of law as that which applies to, and regulates, a watercourse flowing on the surface.” That rule was “well established”:

each proprietor of the land has a right to the advantage of the stream flowing in its natural course over his land, to use the same as he pleases, for any purposes of his own, not inconsistent with a similar right in the proprietors of the land above or below; so that, neither can any proprietor above diminish the quantity or injure the quality of the water which would otherwise naturally descend, nor can any proprietor below throw back the water -without the license or the grant of the proprietor above

After considering the basis for the rule, the consequences of applying it to groundwater, and such authorities as it could find, the court concluded that the law governing the use of groundwater should be different. The court stated the applicable rule as follows:

That the person who owns the surface may dig therein and apply all that is there found to his own purposes, at his free will and pleasure; and that if, in the exercise of such right, he intercepts or drains off the water collected from the underground springs in his neighbor’s well, this inconvenience to his neighbor falls within the description of damnum absque injuria, which cannot become the ground of an action.

This Court, noting that arguments regarding the applicable law had been “thoroughly presented” in Acton> and believing that the English court’s rule had been “recognized and followed ... by all the courts of last resort in this country before which the question has come, except the Supreme Court of New Hampshire”, adopted the rule for Texas. We later came to refer to the rule as the “rule or law of capture.”

Under that rule, we held that the Railroad’s conduct was not actionable. “The practical reasons” for the rule, we explained, had been summarized by the Ohio Supreme Court in Frazier v. Brown:

In the absence of express contract and a positive authorized legislation, as between proprietors of adjoining land, the law recognizes no correlative rights in respect to underground waters percolating, oozing, or filtrating through the earth; and this mainly from eonsider-ations of public policy: (1) Because the existence, origin, movement, and course of such waters, and the causes which govern and direct their movements, are so secret, occult, and concealed that an attempt to administer any set of legal rules in respect to them would be involved in hopeless uncertainty, and would, therefore, be practically impossible. (2) Because any such recognition of correlative rights would interfere, to the material detriment of the commonwealth, with drainage and agriculture, mining, the construction of highways and railroads, with sanitary regulations, building, and the general progress of improvement in works of embellishment and utility.

By “correlative rights”, we referred specifically to the right East claimed: to sue for damages from a loss of water due to subsurface drainage by another user for legitimate purposes. The reasons the law did not recognize that right — the “hopeless uncertainty” involved in its enforcement and the material interference with public progress — did not preclude all correlative rights in groundwater. On the contrary, we noted that East had made “no claim of malice or wanton conduct of any character, and the effect to be given to such a fact when it exists is beside the present inquiry”, suggesting at least the possibility that an action for damages might lie in such circumstances, despite difficulty in proof. Malice and wanton conduct were only examples. Acton’s rule of non-liability, we said, was a “general doctrine”.

The effect of our decision denying East a cause of action was to give the Railroad ownership of the water pumped from its well at the surface. No issue of ownership of groundwater in place was presented in East, and our decision implies no view of that issue. Riparian law, which East invoked, governs users who do not own the water. Under that law, the Railroad would have been liable even if East did not own the water in place. The Railroad escaped liability, certainly not because East did own the water in place, but irrespective of whether he did. Our quote from the New York Court of Appeals’ decision in Pixley v. Clark must be read in this context:

An owner of soil may divert percolating water, consume or cut it off, with impunity. It is the same as land, and cannot be distinguished in law from land. So the owner of land is the absolute owner of the soil and of percolating water, which is a part of, and not different from, the soil. No action lies against the owner for interfering with or destroying percolating or circulating water under the earth’s surface.

Whatever the New York court may have intended by this statement, we could have meant only that a landowner is the absolute owner of groundwater flowing at the surface from its well, even if the water originated beneath the land of another.

In four cases since East, we have considered the rule of capture as applied to groundwater. In none of them did we determine whether the water was owned in place. In City of Corpus Christi v. City of Pleasanton, the parties all owned wells pumping from the same sands. The City of Corpus Christi was using natural watercourses — the Nueces River and Lake Corpus Christi — to transport its water 118 miles from its wells to the point where it withdrew the water for use. The other well owners complained that the loss of water along the way to evaporation, transpiration, and seepage was waste, and that water reserves for all the wells were being depleted unnecessarily because the City was taking much more water than it used. We reaffirmed that, under the rule of capture, “percolating waters are regarded as the property of the owner of the surface”, but as in East, the water ownership to which we referred was at the surface, not in place. “The precise question” in East, we said, was “whether the Railway Company was liable in damages to East” for its use of water. East established

that an owner of land had a legal right to take all the water he could capture under his land that was needed by him for his use, even though the use had no connection with the use of the land as land and required the removal of the water from the premises where the well was located.

Just as the Railroad was not liable to East, the City was not liable to other well owners for the loss of water involved in its transportation. But as we had suggested in East, the rule of capture was not absolute. “Undoubtedly,” we noted, “the Legislature could prohibit the use of any means of transportation of percolating or artesian water which permitted the escape of excessive amounts, but it has not seen fit to do so.”

In Friendswood Development Co. v. Smith-Southwest Industries, Inc., the Court held that a landowner pumping water from wells on its property was not liable for the resulting subsidence in neighboring property. This result, the Court concluded, was necessitated by East, which had “adopted the absolute ownership doctrine of underground percolating waters.” But without overruling East, the Court held that prospectively, a landowner could be liable for subsidence caused by removing groundwater. Avoiding the tension in these seemingly inconsistent views of East, Justice Pope argued convincingly in dissent that the rule of capture was irrelevant to the case and that the Court had based its decision on “the mistaken belief that the case is governed by the ownership of ground water.” East was about liability for a loss of water, not liability for a loss from water. In any event, no claim of right to groundwater in place was made or decided.

In City of Sherman v. Public Utility Commission, a water utility petitioned the PUC to prohibit the City of Sherman from drilling wells in the utility’s service area to obtain water for the City’s needs outside the area. The Court concluded that the City’s activities were permitted by East, which had adopted an “absolute ownership theory regarding groundwater”, to which “[a] corollary ... is the right of the landowner to capture such water.” The PUC, we held, had no statutory authority “to regulate groundwater production or adjudicate correlative groundwater rights.” Rather, the Legislature had chosen to regulate groundwater use and production through groundwater districts under the Water Code. The issues in the case did not implicate ownership of groundwater in place.

Finally, in Sipriano v. Great Spring Waters of America, Inc., we revisited the rule of capture in a factual setting virtually identical to that in East: landowners sued their neighbor for pumping so much water (90,000 gallons a day) that their wells were depleted. Once again, we explained:

The rule of capture answers the question of what remedies, if any, a neighbor has against a landowner based on the landowner’s use of the water under the landowner’s land. Essentially, the rule provides that, absent malice or willful waste, landowners have the right to take all the water they can capture under their land and do with it what they please, and they will not be liable to neighbors even if in so doing they deprive their neighbors of the water’s use.

The right to capture was not unfettered; it precluded the plaintiffs’ suit but not legislative regulation, which we expressly recognized and encouraged. The concern was that with no common law liability for a landowner’s unlimited pumping, legislators had inadequately provided for the protection of groundwater supplies. No issue regarding the ownership of groundwater in place was involved.

But while the rule of capture does not entail ownership of groundwater in place, neither does it preclude such ownership. Although we have never discussed this issue with respect to groundwater, we have done so with respect to oil and gas, to which the rule of capture also applies. In Stephens County v. Mid-Kansas Oil & Gas Co., Mid-Kansas, the assignee of an oil and gas lease, argued that its interest in the minerals was not taxable because, by the rule of capture, they were “subject to appropriation, without the consent of the owner of the tract, through drainage from wells on adjacent lands.” The argument “lack[ed] substantial foundation”, we explained, because Mid-Kansas could likewise drain oil and gas from adjacent lands.

Ultimate injury from the net results of drainage, where proper diligence is used is altogether too conjectural to form the basis for the denial of a right of property in that which is not only plainly as much realty as any other part of the earth’s contents, but realty of the highest value to mankind ... and often worth far more than anything else on or beneath the surface within the proprietor’s boundaries.

Ownership of gas in place did not entitle the owner to specific molecules of gas that might move beneath surface tracts but to volumes that, while they could be diminished through drainage, with “proper diligence”, could also be replenished through drainage. Recapping our decision years later, we stated that while the rule of capture, “at first blush, would seem to conflict with the view of absolute ownership of the minerals in place, ... it was otherwise decided in [Stephens County]."

[Notwithstanding the fact that oil and gas beneath the surface are subject both to capture and administrative regulation, the fundamental rule of absolute ownership of the minerals in place is not affected in our state.

Most recently, in Coastal Oil & Gas Corp. v. Garza Energy Trust, we observed that “the rule of capture determines title to [natural] gas that drains from property owned by one person onto property owned by another. It says nothing about the ownership of gas that has remained in place.” The same is true of groundwater.

B

We held long ago that oil and gas are owned in place. In Texas Co. v. Daugherty, the issue was whether an oil and gas lessee’s interest was subject to ad valorem taxation. If the lessee’s interest were “a mere franchise or privilege ... with the usufructuary right ... to appropriate a portion of such oil and gas as might be discovered,” then the interest was part of the value of the land on which the landowner, not the lessee, should be taxed. But we concluded that the lessee’s interest was a separate, real interest, “amount[ing] to a defeasible title in fee to the oil and gas in the ground”. We recognized that “[b]ecause of the fugitive nature of oil and gas, some courts, emphasizing the doctrine that they are incapable of absolute ownership until captured and reduced to possession and analogizing their ownership to that of things ferae naturae,” had held that oil and gas interests, unlike interests in non-fugacious minerals, were not interests in realty. We thought that the rule of capture provided no “substantial ground” for treating the two kinds of interests differently.

The possibility of the escape of the oil and gas from beneath the land before being finally brought within actual control may be recognized, as may also their incapability of absolute ownership, in the sense of positive possession, until so subjected. But nevertheless, while they are in the ground, they constitute a property interest.

Notwithstanding the rule of capture, we concluded, a landowner’s “right to the oil and gas beneath his land is an exclusive and private property right ... inhering in virtue of his proprietorship of the land, and of which he may not be deprived without a taking of private property.” Ownership of oil and gas in place is the prevailing rule among the states.

Groundwater, like oil and gas, often exists in subterranean reservoirs in which it is fugacious. Unless the law treats groundwater differently from oil and gas, Daugherty refutes the Authority’s argument that the rule of capture precludes ownership in place. The Authority contends that the rule of capture deprives a landowner’s interest in groundwater of two attributes essential to the ownership of property: a right of possession (i) from which others are excluded and (ii) which may be enforced. Because a landowner is not entitled to any specific molecules of groundwater or even to any specific amount, the Authority argues that the landowner has no interest that entitles him to exclude others from taking water below his property and therefore no ownership in place. The lessee in Daugherty made essentially the same argument, and we rejected it. Furthermore, we later held that a landowner is entitled to prohibit a well from being drilled on other property but bottomed in an oil and gas formation under his own — a slant or deviated well. Thus, a landowner has a right to exclude others . from groundwater beneath his property, but one that cannot be used to prevent ordinary drainage.

The Authority argues that groundwater must be treated differently because the law recognizes correlative rights in oil and gas but not in groundwater. The Authority points to East’s observation that “the law recognizes no correlative rights in respect to underground waters percolating ... through the earth” but over-reads this statement. As we have explained above, East did not rule out an action for “malice or wanton conduct”, including waste. Likewise, the rule of capture does not preclude an action for drainage of oil and gas due to waste, as we held in Elliff v. Texon Drilling Co. More importantly, however, the Court observed in Elliff that “correlative rights between the various landowners over a common reservoir of oil or gas” have been recognized through state regulation of oil and gas production that affords each landowner “the opportunity to produce his fair share of the recoverable oil and gas beneath his land”. Similarly, one purpose of the EAAA’s regulatory provisions is to afford landowners their fair share of the groundwater beneath their property. In both instances, correlative rights are a creature of regulation rather than the common law. In 1904, when East was decided, neither groundwater production nor oil and gas production were regulated, and we indicated that limiting groundwater production might impede public purposes. The State soon decided that regulation of oil and gas production was essential, adopting well-spacing regulations in 1919, and it has since determined that the same is true for groundwater production, as for example, in the EAAA.

The Authority argues that regulation of oil and gas production to determine a landowner’s fair share is based on the area of land owned and is fundamentally different from regulation of groundwater production. It is true, of course, that the considerations shaping the regulatory schemes differ markedly. The principal concerns in regulating oil and gas production are to prevent waste and to provide a landowner a fair opportunity to extract and market the oil and gas beneath the surface of the property. Groundwater is different in both its source and uses. Unlike oil and gas, groundwater in an aquifer is often being replenished from the surface, and while it may be sold as a commodity, its uses vary widely, from irrigation, to industry, to drinking, to recreation. Groundwater regulation must take into account not only historical usage but future needs, including the relative importance of various uses, as well as concerns unrelated to use, such as environmental impacts and subsidence. But as the State tells us in its petition: