District Court, Water Division No. 5 Gar?eld County, Colorado Court Address: 109 Street, Suite 104, Glenwood Springs, CO 81601 (970) 945-5075 CONCERNING THE APPLICATION FOR WATER RIGHTS OF Applicant: HIGH VALLEY FARMS, LLC IN PITKIN COUNTY DATE FILED: November 13, 2015 2:3 FILING ID: 6B398816B3112 CASE NUMBER: 2014CW3095 A A COURT USE ONLY 0PM Attorneys for Applicant: Rhonda J. Bazil, #14921 Rhonda J. Bazil, PC. 230 E. HOpkins Ave. Aspen, CO 81611 Telephone: (970) 925-7171 Facsimile: (970) 925?4668 E?mail: rjbazil@sopris.net Case Number: 14CW3095 Division: Courtroom: RESPONSE TO DIVISION CONSULATION REPORT Applicant High Valley Farms, LLC (?Applicant?), by and through its attorneys, hereby responds to the Division Engineer?s Consultation Report dated August 26, 2015 as follows. CONCERNS l. The applicant must explain how the claim for these conditional water rights can be granted in light ofthe de?nition ofbene?cial use as de?ned in C. RS. 59 Speci?cally, bene?cial use means ?the use of that amount of water that is reasonable and appropriate under reasonably e?cient practices to accomplish without waste the purposes for which the appropriation is lawfully made. (emphasis added). Response: High Valley Farms, LLC (?High Valley?) ?led this Water Court Application (?Application?) to provide water for commercial and irrigation uses inside a greenhouse in which marijuana is grown. Like most other commercial agricultural products grown in Colorado, marijuana cultivation requires supplemental irrigation. The Application seeks the approval of new In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 2 of 12 conditional water rights to utilize both underground and surface water, with augmentation water being provided through three different non?federal sources of supply. It is legal to cultivate marijuana in Colorado for both personal use and as a commercial enterprise. Notwithstanding any other provision of law, the following acts are not unlawful and shall not be an offense under Colorado law or be a basis for seizure or forfeiture of assets under Colorado law for persons twenty-one years of age or older: (6) Cultivating, harvesting, processing, packaging, transporting, displaying, or possessing marijuana; . . . if the person conducting the activities described in this paragraph has obtained a current valid license to operate a marijuana cultivation facility or is acting in his or her capacity as an owner, employee, or agent of a licensed marijuana cultivation facility. Colorado Constitution, Article Section 16(4). Emphasis added. High Valley is currently licensed to operate a ?marijuana cultivation facility?, which is defined as ?an entity licensed to cultivate, prepare and package marijuana and sell marijuana to retail marijuana stores, to marijuana product manufacturing facilities, and other marijuana cultivation facilities, but not to consumers.? Colorado Constitution, Article Section Because this is reportedly the first case of its type in Colorado, the Court has asked that High Valley address whether marijuana cultivation is a beneficial use under C.R.S. This is a critical issue to the entire industry. If marijuana cultivation is considered to be an unlawful use of water under State law, the Constitutional amendment would essentially be invalidated. Fortunately, there are regulations, case law and statutes that support the position that marijuana cultivation is a beneficial use of water in Colorado. The Colorado Department of Natural Resources, Division of Water Resources, Of?ce of the State Engineer (?State Engineer?) is the governmental entity responsible for the administration and distribution of the waters of the state. C.R.S. ?37-92-30l. As such [t]he state engineer and the division engineers shall administer, distribute, and regulate the waters of the state in accordance with the constitution of the state of Colorado, the provisions of this article and other applicable laws, and written instructions and orders of the state engineer, in conformity with such constitution and laws, and no other of?cial, board, commission, department, or agency, except as provided in this article and article 8 of title 25, In re: the Application of High Valley Farms, LLC Case No. RESPONSE TO DIVISION CONSULATION REPORT Page 3 of 12 C.R.S. [Water Quality Control], has jurisdiction and authority with respect to said administration, distribution, and regulation. C.R.S. In this regulatory role, the State Engineer has issued two statements supporting the use of water for marijuana cultivation. In the fact sheet entitled Well and Water Use in Regards to Amendment 64 and Cultivation of Marijuana dated October, 2014 (the ?Fact Sheet?), the State Engineer describes the scenarios for the legal bene?cial use of residential and domestic wells and irrigation water rights for marijuana cultivation. Provided that Colorado Constitution Article Section 16 (commonly referred to as ?Amendment 64?) is complied with, the State Engineer is treating marijuana like any other cultivated plant. For personal cultivation, a residential or domestic well may be used. The State Engineer authorizes the use of water from a residential well for the cultivation of marijuana just as it would any other ?in~house plants for personal use.? Fact Sheet, Page I. For a domestic well, marijuana cultivation in an outdoor garden ?would be similar to having other garden plants and would be allowed.? Fact Sheet, Page 2. When irrigation water is required for a commercial marijuana grow operation, new well permit that allows for use in a ?marijuana cultivation facility? or ?marijuana establishment? would have to be obtained. In most areas of Colorado, a well permit for this type use would not be available unless a decree for a plan for augmentation is ?rst obtained from the district water court. Fact Sheet, Page 2. This provision makes it clear that a well permit, a conditional water right and an augmentation plan may be obtained in water court and from the State Engineer for use inside a commercial greenhouse operation. The second statement issued by the State Engineer on the issue of marijuana irrigation is entitled Written Instruction and Order 2015?0] dated March 25, 2015 (the ?Order?). While the Fact Sheet addresses the use of well water, the Order addresses the use of water rights that have been decreed for irrigation purposes. The State Engineer?s treatment of decreed water and permitted well water is the same in both instances: ?The State Engineer and Division Engineers shall allow irrigation Water Rights to be used to irrigate any type of plant that may be legally grown under Colorado law. . Order, Page 1, emphasis added. The Order contemplates that the decrees for most irrigation water rights lack references to what crops might be cultivated with the water rights. The Order provides that when utilizing an existing irrigation water right for marijuana cultivation, the threshold criteria is whether the decree identi?es a speci?c crop. If so, the water may only be used for the identi?ed crop until an application for a change of use case is ?led. In most instances, the type of crop is not identi?ed in the decree, in which case the irrigation water may be used for marijuana cultivation. In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 4 of I2 For a water right that identi?es a bene?cial use of Irrigation, if there is no Specific limitation on the type of plant that may be irrigated, and lacking any other applicable limitation in the decree, the Division Engineers shall allow the water right to be used for the irrigation of any plant . . . Order, Pages 1?2, Paragraph 4.0. Once the ?type of plant? threshold criteria is met, the State Engineer then looks to see if the use of the irrigation water for marijuana cultivation will cause an enlargement of use. Both the season of use and any proposed ancillary uses of the irrigation water are assessed. The Order contains the following limitations on the expansion of use of irrigation water: The Division Engineers shall not allow irrigation in an indoor facility to the extent it would allow the extension of the irrigation season beyond the established irrigation season unless the decree for the water right speci?cally allows irrigation to occur inside such a facility at such time of the year. . . . The Division Engineer shall not allow the use of the Irrigation Water Right for any purposes other than application of water to the irrigation of the plants unless clearly allowed by the decree for the Irrigation Water Right. Order, Page 2, Paragraph 4.0. These are just expressions of basic Colorado water law concepts that have been applied to the marijuana industry. Water Courts have limited jurisdiction. The water judge of the district court has exclusive jurisdiction over water matters, which includes all matters identi?ed in the Water Right Determination and Administration Act. C.R.S. Water is a state resource dedicated to the public and ?[t]he right to divert the unappropriated waters of any natural stream to bene?cial uses shall never be denied.? Constitution of Colorado, Article XVI, Sections 5 and 6. All water rights are decreed in Water Court under state law. ?While the legislature cannot prohibit the appropriation or diversion of unappropriated water for useful purposes, it has the power to regulate the manner of effecting such appropriation or diversion. Kuiper v. Warren, 195 Colo. 541, 546, 580 P.2d 32, 35-36 (1978); Larimer County Reservoir Co. v. PeOple, 8 C010. 614, 618, 9 P. 794, 797 (1885).? Fox v. Division Engineer for Water Div. 5, 810 P.2d 644 at 646 (Colo. 1991). In response to Amendment 64, the Colorado legislature adopted the Colorado Retail Marijuana Code (the ?Code?). C.R.S. ?l2?43.3?101, et. seq. The Code established a state licensing authority, which is authorized to promulgate rules and regulations. C.R.S. 1 CCR 212?2 (the ?Regulations?). In addition to the Regulations con?rming the appropriateness of the use of water in marijuana facilities, the Regulations speci?cally require that an adequate supply of water he provided to marijuana facilities. Speci?cally, the Regulations provide that In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 5 of 12 Hand?washing facilities shall be adequate and convenient and be furnished with running water at a suitable temperature. Hand- washing facilities shall be located in the Licensed Premises and where good sanitary practices require employees to wash and/or sanitize their hands, and provide effective hand-cleaning and sanitizing preparations and sanitary towel service or suitable drying devices; That the water supply shall be suf?cient for the operations intended and shall be derived from a source that is a regulated water system. Private water supplies shall be derived from a water source that is capable of providing a safe, potable, and adequate supply of water to meet the Licensed Premises needs; That plumbing shall be of adequate size and design and adequately installed and maintained to carry sufficient quantities of water to required locations throughout the plant and that shall properly convey sewage and liquid disposable waste from the Licensed Premises. There shall be no cross-connections between the potable and waste water lines. 1 CCR 212?2, Regulation 504(B)2(c), 10 and 11. It is important to recognize that two separate State of Colorado regulatory bodies have promulgated rules that allow for water use in a marijuana facility. Court decisions consistently respect and generally defer to an agency?s interpretation of the law. Rules promulgated by an agency are presumed to be valid, and plaintiffs bear the burden of demonstrating that a rule?making body has exceeded its statutory authority. Regular Route Common Carrier Conf. v. Pub. Utils. Comm'n, 761 P.2d 737, 743 (Colo. 1 988). An agency's interpretation of its governing statutes and constitutional provisions is entitled to great deference, and a reviewing court may not substitute its judgment for that of the agency. See Bd. of County Comm'rs v. Colo. Pub. Utils. Comm'n, 157 P.3d 1083, 1088 (Colo.2007); Wine Spirits Wholesalers, Inc. v. Colo. Dep?t of Revenue, 919 P.2d 894, 897 (Colo.App. 1996). Although we apply a de novo standard of review, we generally accept an agency's statutory interpretation if it has been charged with the statute's administration and the interpretation has a reasonable basis in the law, and is warranted by In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 6 of 12 the record. Nededog V. Colo. Dep't of Health Care Policy Financing, 98 P.3d 960, 962 (Colo.App.2004). Under the state Administrative Procedure Act, a court may reverse an administrative decision only if the court ?nds that the "agency exceeded its constitutional or statutory authority, made an erroneous interpretation of law, acted in an arbitrary and capricious manner, or made a determination that is unsupported by the evidence in the record.? 257 P.3d 1218 McClellan v. Meyer, 900 P.2d 24, 29 (Colo.1995) (citing 24?4?1060), C.R.S.2010). Table Services, Ltd. V. Hickenlooper, 257 P.3d 1210 (Colo.App.Div. 6 2011). No one in this case has challenged or objected to the Regulations promulgated by the State Licensing Authority or the Fact Sheet and Order of the State Engineer since their promulgation. In addition, it is well settled law that when there appears to be a con?ict between a constitutional provision and a statute, the court must try to resolve the con?icts to effectuate the intent of the constitutional amendment. In this case, where the de?nition of ?bene?cial use? contains the requirement that ?the appropriation be lawfully made,? if Federal law is somehow implicated, it would invalidate the Colorado constitutional right to cultivate marijuana. The imposition of the Controlled Substances Act, 21 U.S.C. ?844(a)(2012), onto the bene?cial use statute in relation to Amendment 64 would result in every marijuana cultivation facility in this state being operated illegally whether they are providing their own water supply or are operating with water from a municipality. To follow this argument to its? logical conclusion, the State of Colorado would have to su3pend all marijuana retail, cultivation, testing and manufacturing facility licenses because there would not be any water available from any source. This would be an absurd result. In construing a constitutional amendment, our goal is to determine and give effect to the will of the people in adopting it. Huber v. Colo. Mining Ass'n, 264 P.3d 884, 889 (Colo. 2011). We apply general rules of statutory construction in construing citizen? initiated measures. Id. One of these rules is that we presume that when the legislature enacts a statute, it is aware of its own enactments and existing case law precedent. See Anderson V. Longmont Toyota, Inc., 102 P.3d 323, 330 (Colo. 2004). We therefore make the same presumption with regard to the drafters of a citizen?initiated measure. In addition, we must adopt a construction that avoids or resolves potential con?icts, giving effect to all legislative acts, if possible. Huber, 264 P.3d at 892. Finally, we avoid interpretations that lead to unjust, absurd, or unreasonable results. Id. at 889. People v. Boyd, 2015 COA 109, 12CA2607. In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 7 of 12 While the case of Coats v. Dish Network, 350 P.3d 849 (Colo. 2015) may initially seem to support the position that Federal law must be read into the term ?legal?, in that case, the court did not have any regulations or other interpretations adopted by regulatory agencies on which to rely. Coats, the plaintiff, a physically disabled worker, argued that he could not be terminated from his employment because his medical marijuana use was protected under the Lawful Activity Act of C.R.S. 24?34-4025. The court found that the meaning of ?lawful? was not otherwise defined, so it concluded that the federal Controlled Substances Act, 21 U.S.C. ?844(a) (2012) also applied. Coats had agreed to abide by the drug policy of Dish Network as a condition of his employment. In this particular situation, Coats? right to smoke marijuana should not be allowed to preempt his employer?s right to set qualifications for employment. This specific fact scenario affects a much broader public policy of employer and employee agreements. The Supremacy Clause of the United States Constitution could arguably support the proposition that if marijuana cultivation is illegal under the Controlled Substances Act, it should therefore be illegal in every state in the Union, but there is a signi?cant and uniquely distinguishing exception in water matters: the McCarran Amendment. US. Const. Art. VI, Cl.2 43 U.S.C. ?666 (1976). While the McCarran Amendment was ostensibly designed to waive the sovereign immunity of the United States in state water court cases, it has, however, often been relied upon as evidence of congressional recognition of the primacy of the western states? interests in regulating and administering water rights. See, 9. g, California v. United States, supra. The Senate Report on the McCarran Amendment states: In the arid Western States, for more than 80 years, the law has been that the water above and beneath the surface of the ground belongs to the public, and the right to the use thereof is to be acquired from the State in which it is found, which State is vested with the primary control thereof . . . . Since it is clear that the States have the control of water within their boundaries, it is essential that each and every owner along a given water course, including the United States, must be amenable to the law of the State, if there is to be a proper administration of the water law as it has developed over the years. United States v. City and County of Denver, 656 P.2d l, at 9 (Colo. 1982). Specifically, the McCarren Amendment is designed to allow for the joinder of the United States in water court cases, in which case, the United States ?shall (1) be deemed to have waived any right to plead that the State laws are inapplicable or that the United States in not amendable thereto by reason of its sovereignty and (2) shall be subject to the judgments, orders, and decrees of the court having jurisdiction, and may obtain review thereof, in the same manner and to the same extent as a private individual under the circumstances . . . 43 U.S.C. ?666(a) (1976). In short, state law In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 8 of 12 governs the adjudication of water rights. This was reinforced in the case of State of Colorado v. Southwestern Colorado Water Conservation District, where the Court stated that federal statutes, as interpreted by the United States Supreme Court, recognize Colorado?s authority to adopt its own system for the use of all waters within the state in accordance with the needs of its citizens, subject to the prohibitions against interference with federal reserved rights, with interstate commerce, and with the navigability of any navigable waters. 671 P.2d 1294, at 1307 (Colo. 1983). The US Department of Interior, Bureau of Reclamation (?Bureau of Reclamation?), as the nation?s largest wholesale water supplier, has even developed a Fact Sheet and Policy which reinforces Colorado?s right to use water for marijuana cultivation. Policy PEC prohibits the use of Reclamation facilities or water in a manner that is inconsistent with the Controlled Substances Act, but the Policy speci?cally excludes ?non-contract water commingled with contract water in non-Federal facilities.? Policy, Paragraph 6. In other words, water may be used under state law for marijuana cultivation as long as the water is not stored in a Federal reservoir and the water is not a Bureau of Reclamation water right. In addition, in a Fact Sheet, the Bureau of Reclamation has a stated priority to ?[h]onor State water rights?, which is consistent with the terms of the McCarran Amendment. The US. Department of Justice (the Of?ce of the Deputy Attorney General has issued three memoranda to all United States Attorneys providing guidance regarding marijuana enforcement. The most recent Memorandum dated August 29, 2013 sets forth the enforcement priorities, which includes such acts as the distribution of marijuana to minors. Essentially, the Memorandum encourages states to ?implement strong and effective regulatory and enforcement systems?. Memorandum, Page 2. After implementation, ?enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means of addressing marimana-related activity. Memorandum, Page 3, emphasis added. In conclusion, the State Engineer has already determined that marijuana cultivation is a bene?cial use under Colorado law. There are a number of state and federal statutes and regulations that support the right of the State of Colorado to use water in the manner it deems appropriate. If this Court were to determine that, contrary to the ?ndings of the State Engineer, the use of water for marijuana facilities is not a bene?cial use, the entire industry, which reportedly employs almost 16,000 residents, would be shut down. High Valley has met with all of the requirements to obtain a water right for this purpose through the application for new water rights and the utilization of non-Federal sources of augmentation water. In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 9 0f 12 2. The applicant must explain how a plan for augmentation can be granted pursuant to the de?nition of a plan for augmentation as de?ned in C. R. S. Speci?cally, a plan for augmentation means ?a detailed to increase the supply of water available for beneficial use. (emphasis added). Response: See Paragraph 1, above. 3. Applicant must provide additional information, including the overt acts that placed third parties on notice, justifying the claimed appropriation date of October 16, 2013 for the HVF Pump and Pipeline, VF Storage Tanks, HVF Operational Tank, new uses of the VF Well, and the HVF Exchange. If evidence of the claimed appropriation dates cannot be provided, the proper appropriation date should be the date of the application. The response to the initial consultation stated that the HVF Pump and Pipeline was staked on October 3 1, 2013 and that no other overt acts were performed and that the appropriation dates would be changed to the date of the application. However, the amended application did not change the appropriation dates. The court should grant appropriation dates based on the date of the initial application, August 15, 2014. Response: Applicant agrees to change the appropriation dates for the above-referenced water rights to August, 24, 2014, which is the date that the initial Water Court Application was ?led. Applicant has prepared a proposed Ruling of the Referee dated November 13, 2015 (?November 13, 2015 Proposed Ruling?) that incorporates many of the terms and conditions requested by the Division Engineer, which is included here as Attachment A. The requested change is re?ected in Paragraphs 9.C., 10C, ll.C, 12C, and 13C. of that Ruling. 4. The applicant has provided copies of valid contracts with the Basalt Water Conservancy District for 1.0 acre-feet and with the Colorado Water Conservation District for 0.2 acre- feet. However, the replacement required as amended in paragraphs 49.8 and are for 2.3 acre-feet and 0.9 acre-feet. The applicant must provide copies of valid contracts to cover the replacement supplies now required in paragraphs 49.3 and 49. prior to entry ofdecree. Response: Applicant has secured the requisite contracts with the Basalt Water Conservancy District and the Colorado Water Conservation District. Copies of these contracts are provided as Attachments and C, respectively. 5. The HVF Storage Tanks are described with one location. Applicant has con?rmed that all tanks will be located within 200 ?eet of the decreed location. The ruling should include this as a condition of the storage right. Response: The requested term and condition is provided in Paragraph lO.f. of the November 13, 2015 Proposed Ruling. In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 10 of 12 6. 7. Per the field inspection, the lawn around the residence has been historically irrigated, although there is no mention of lawn irrigation as a use in this application. Applicant claims the lawn irrigation will be accomplished with senior rights already in place for that purpose without identi?/ing the rights. Applicants must identify the rights, noting that the HVF Well cannot be used for such purpose without inclusion in a plan for augmentation. Reslgonse: To the best of Applicant?s knowledge, the lawn around the residence has historically been irrigated through diversions made under one or more of the water rights decreed to the Kester Ditch and/or Alexis-Arbaney Ditch. Applicant intends to continue this historical irrigation practice. Applicant will not use the HVF Well to irrigate the lawn around the residence without inclusion in a plan for augmentation. Applicant ?s response to the initial consultation relating to retained jurisdiction is not acceptable. The language should be as proposed in [Recommendation No. 4] below. Reslgonse: Subject to the one modi?cation noted below under the response to Recommendation No. 4, Applicant has included the requested term and condition in Paragraph 41 .A of the November 13, 2015 Proposed Ruling. RE OMMENDA I ONS Based on the above concerns, the State and Division Engineers that the following terms and conditions be included in any decree granted: 1. This HVF Exchange may only be operated with the prior approval of the Water Commissioner or Division Engineer in order to prevent injury to other water rights. Resgonse: After discussing this issue with the Division Engineer, the requested term and condition is included in Paragraph 36b of the November 13, 2015 Proposed Ruling, but it was amended to require prior notice, not approval. 2. Applicant shall install measuring devices, provide accounting, and supply calculations regarding the timing ofdepletions as required by the Division Engineer for the operation of this plan. The applicant shall also ?le an annual report with the Division Engineer by November 1 5m following each preceding irrigation year (November 1 through October 3 summarizing diversions and replacements made under this plan. Response: The requested term and condition is included in Paragraph 36d of the November 13, 2015 Proposed Ruling. The entity responsible for such reporting and accounting should be designated in any ruling or decree ??om this application. Notification of subsequent changes in the entity In re: the Application of High Valley Farms, LLC Case No. I4CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 11 of 12 responsible for accounting and reporting under this plan should be required to be made to the Division Engineer?s o?ce. Response: The requested term and condition is included in Paragraph 36c of the November 13, 2015 Proposed Ruling. 4. assure that adequate protection is provided to other vested water rights or other conditional water rights, the court should retain jurisdiction for a period starting at the date of the decree and continuing until five years after the Applicant provides written notice to the parties, the Division Engineer and the Court that the augmentation plan has become fully operational and that the proposed uses are all in place. Such notice must con?rm that the decreed augmenting sources are in place, that the terms and conditions necessary to operate the plan as required by the decree have been met, and that the augmented uses and augmentation have been initiated. For any storage tanks to be used for augmentation, the notice shall include an as-built stage capacity table, an estimate of the active capacity of the storage tank, a pro?le of the storage tank showing the elevation of the inlet and outlet structures, and confirmation that an operable and lockable low level outlet structure has been installed. Response: The proposed language regarding the outlet structure has been modi?ed because a low level outlet would serve no functional purposes as the replacement water will be pumped from the storage tanks, as opposed to released by gravity. Subject to that one modi?cation, Applicant has included the requested term and condition in Paragraph 41A. of the November 13, 2015 Proposed Ruling. Respectfully submitted this 13th day of November, 2015' - EAZIL, P.C. By: ii if Rhonww/ Attorneysfe pplicant In re: the Application of High Valley Farms, LLC Case No. 14CW3095 RESPONSE TO DIVISION CONSULATION REPORT Page 12 of 12 CERTIFICATE OF SERVICE I HEREBY CERTIFY that on the 13th day of November, 2015, I caused a true and correct copy of the foregoing RESPONSE TO DIVISION CONSULATION REPORT to be ?led and served via ICCES on the following: Jason M. Groves, Esq. Scott C. Miller, Esq. Patrick, Miller, Kropf and Noto, PC. [Roaring Fork Club] Division 5 Water Engineer Colorado Division of Water Resources State Engineer Colorado Division of Water Resources Bv: