Sandy Valley Showdown

— Perhaps because it started as Physicians Insurance Company of Ohio and still reports to shareholders as an insurance business, PICO Holdings of La Jolla doesn't like to answer questions about water-resources development. The firm refers inquiries to its website and to its Nevada subsidiary, Vidler Water Company. But spokesman Rich Sharpe does say that PICO, now a diversified investment company, may eventually be able to assist San Diego with its water procurement problems. And the company's chairman, Australian Ron Langley, states on the company's website, "I have been attracted to water assets as an asset class for many years. One of my first investments in North America was a water utility in the northeast.... It is obvious that there is a looming crisis in meeting water demand in the western states."

Key to PICO's strategy in entering the water-resources-development business is "reasonable and beneficial use," a concept from western water law that also figures prominently in San Diego's dispute with Imperial County over use of water from the Colorado River. Though Imperial County can claim seniority in water rights on a first-come, first-served basis, officials from San Diego, among other counties, are criticizing Imperial Valley farmers for wasting water through inefficient agricultural practices. And that hardly qualifies as beneficial use. The argument runs that the water should go to where it is needed most, the large metropolitan areas.

PICO acquired Vidler Water in 1995. In the past several months, Vidler has turned up as the bully in a David-and-Goliath showdown making headlines in the Arizona Republic, the Las Vegas Review Journal, and the Los Angeles Times. Its diminutive but combative opponent in the story has been the community of Sandy Valley, Nevada, population 2275, located on the California border 40 miles southwest of Las Vegas. Aspects of the story parallel the water dispute between San Diego and Imperial Counties.

The conflict started nearly four years ago when Vidler applied to the Nevada state engineer for permission to pump 2000 acre-feet of the water underneath Sandy Valley to nearby Primm, Nevada, on Interstate 15 leading into Las Vegas and also on the state border. ("Acre-foot" means a unit of volume equal to 325,853 gallons: one foot's depth over one acre). Primm wants the water so that it can go ahead with development plans that include a new casino.

In response to an administrative hearing deciding the matter in June of last year, both sides in the dispute have gone to district court in Las Vegas to reverse state engineer Hugh Ricci's ruling that Vidler could take 415 acre feet of water underneath Sandy Valley. On January 22, each side submitted briefs for the trial, which has yet to be scheduled, and had one additional month to reply to the brief of its opponent.

Crucial to the issue is the amount of water deemed available for the taking. Vidler vice president Steve Hartmann says only that supplies are "ample" for what his company wants to do. But Tom Buqo, the consulting hydrologist for Sandy Valley, disagrees. In the administrative hearing, according to Buqo, Vidler used results from a test drill to try "to portray that [the aquifer] they hit is part of this vast regional system. And that is simply not true. Sandy Valley is located in the upper reaches of one portion of that system. The only water that they have in Sandy Valley is derived from the mountains immediately to the east."

Buqo also says that Vidler is "erroneously" claiming that the California residents who inhabit the same basin as Sandy Valley residents "are pumping from a different aquifer. And that is not the case. The aquifers are interconnected, so that the people in Sandy Valley, Nevada, and the people on the California side use the same water as what Vidler intercepted in their well.

"The farmers on the California side of the basin," says Buqo, "are using greater quantities of water than the perennial yield, and that's why we've had a continual water-level decline in that basin. To verify it, I used the information from the U.S. Geological Survey and also from the California Water Resources Department, and both data sets show a continual decline in water levels in Sandy Valley since about 1960.

"Vidler is trying to portray things in a manner that would come out favorable to them," Buqo continues. "In so doing, they did some unusual things in their procedure. The thing that I had the most problem with is that they spent all this money to go out and drill a well, and then they didn't bother to analyze the data. As I pointed out in a protest hearing, why in the world would somebody do that unless they didn't like the answer? I analyzed the data, and I came up with the answer using accepted techniques, and I can see why Vidler wouldn't like the answer."

In its appeal of the results of the administrative hearing, Vidler is arguing that it should have access to some of the water underneath Sandy Valley that is not being used. Says Steve Hartmann, "We believe that there were a number of old permits that had essentially been abandoned in that area. Those should have been available. Under Nevada law, when you don't use that water, then those who want to put it to use should be entitled to do so. The law of the state is that the water belongs to the people of Nevada, subject to the beneficial use by individuals."

But Sandy Valley's attorney, Byron Mills, claims that the Vidler approach to acquiring unused water "would be a violation of the due process rights" of individual valley residents. "We do have a statute that says that five years of nonuse results in a forfeiture. But the state engineer has procedures he's supposed to follow. They have hearings. They're supposed to send out a one-year notice prior to any forfeiture of water rights. It's not an automatic, 'Oh, it looks like you haven't used for five years, your water's gone, we can give it to Vidler.' But that's what Vidler would like.

"We presented an opening brief as well," says Mills. "It was based on the fact that the state engineer ignored the evidence that was presented at the administrative hearing. Sandy Valley sits on the border of California and Nevada, and the California side is two counties, Inyo and San Bernardino. Both counties ended up becoming interested parties and testifying at the hearing."

(The California counties side with Sandy Valley in not wanting Vidler to pump any water out of the basin they share.)

"The majority of the farming in this little basin takes place on the California side," Mills continues. "And, in his decision, the state engineer acknowledged that the California side uses about 8000 acre-feet, and the Nevada side, obviously, a lot less than that. He then determined, however, that the recharge, the water coming into the basin, is 2200 acre-feet. And even though he acknowledges that this shows a huge deficit in the water, he said, 'I'm not even going to pay attention to the California side,' and granted Vidler the 415 acre-feet.

"We feel that it was an abuse of his discretion to ignore the use on the California side. It's all coming out of this tiny basin. To allow more water to leave the basin, in my opinion, is irresponsible and can result in severe damage to these residents. They have no other source of water but from this little basin and from their wells, and if these wells are dried up or polluted -- a big area of saltwater is there, too; that could flow in if the water table drops too low -- what's going to be the value of their homes when they have no water?"

In addition, Mills says, "Prior to an interbasin transfer, one of our statutes requires that they prove need for that water. Our allegation is that they did not prove there was a need for water. At the time of the hearing, they had over 300 acre-feet unused water in the Primm Valley already. All they did is claim that in the future they have these big projects planned. They're just projections of things that may or may never happen. Also, the Las Vegas Water District has a plan eventually to bring water down to Primm Valley, so they may never need additional water."

Joy Hyde Fiore is a resident of Sandy Valley. She complains that, in its appeal, Vidler protests the state engineer's "allowing water to be set aside for our future growth. I think that's mean-spirited. The state engineer would be required by law to do that. I guess what they're telling us is that we don't matter, and all that matters is that they make the money from sending water over the hill to Primm for its future development.

"Some of us believe that, in the law, the idea of beneficial use should not be applied to somebody making money off of selling water. They take public waters, they privatize them, and they sell them back to the public. They're public waters. I would like personally to see that no public water is awarded to a company or individual whose sole intention is to sell it for profit and not put it to beneficial use, such as irrigation or taking care of housing. I personally do not think a theme park on I-15 on the way into town is a truly beneficial use. It will make money for the person who owns it, but it's not a beneficial use of water in the desert."

In its own dispute with Imperial Valley, San Diego's large population constitutes a much stronger case for beneficial use. "The whole theory of water law," says Vidler's Hartmann, "particularly in the West, was to try to encourage the use of that water and put it to beneficial use for developing the economic base of the West as it grew. That theory is still the same today. You don't see much difference in any of the western states as to that."

Hartmann acknowledges the strong feelings many people have today against the "commodification" of water. "But the issue ultimately becomes the question of risk. Do you have the public government take the risk, or do you push that onto the private sector that then wants a return on their investment in finding and developing resources?

"Vidler Water Company is a resource-development company. We don't go out and speculate on water. We develop resources for folks that come to us and have a need."

Byron Mills is skeptical. "Water in our state is gold. What Vidler is trying to do is obtain these water rights and then sell them right back to Las Vegas Water District at a premium price. They have been doing that all over the state. They're obtaining water everywhere they can, any way they can, hoping to hold it and resell it, because Las Vegas is growing incredibly and will need way more water."

The water issues in tiny Sandy Valley and behemoth San Diego both remain unresolved. But for PICO Holdings, business looks promising. On its website, the company brags in reference to another deal, saying, "On March 19, 2001, Vidler announced its first major water the Harquahala ground water basin in Arizona.... This transaction added $9.4 million to revenues and $2.4 million to segment income in the first quarter of 2001; however, we paid only $4.4 million in cash for the assets which were sold, resulting in a $5 million cash surplus.... The cash pre-tax internal rate of return on the investment was almost 140 percent."

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