Water Rights and Regulatory Risk: Understanding Water Allocation and Management Practices

Feb 8, 2024 1:00 PM ET
Campaign: License to Operate

The water-related business risks that companies face are closely tied to water-related impacts in their region. For example, water scarcity resulting from droughts, poor water management, or other events that reduce the water supply can lead to increasingly strict regulatory requirements that affect water allocation and management. What is important for businesses to understand is that these regulatory requirements and the current water allocation and management practices throughout the United States are structured around the water rights of each state.

Basic Water Rights

In the United States, water allocation and management are generally governed by the individual states with each state maintaining its own regulatory system and little to no federal intervention. This means that water rights and the agencies that enact and enforce water law (Department of Natural Resources, Department of Health, Department of Environmental Quality/Protection, etc.) vary from state to state. Water rights are generally based on one of two basic water laws: riparian rights and the prior appropriation doctrine.

Riparian Rights

Under the system of riparian rights, water is allocated to all landowners whose property adjoins a body of water. These landowners have the right to make reasonable use of it as it flows through or over their properties, as long as that use does not interfere with the reasonable use of another downstream riparian landowner. Reasonable use under the riparian system is determined by comparing the proposed use with the other uses of riparian landowners. Water used for drinking and municipal supply, watering livestock, irrigation, or industry are considered reasonable uses under most states’ laws. If there is not enough water to satisfy all riparian landowners, water is allotted in proportion to how much land from each water user’s property borders the water source. Riparian landowners’ water rights cannot be sold or transferred under the riparian rights system and will never expire or be lost.

Water use is also generally limited to within the watershed of the source water. Surface water cannot be transferred out of the watershed through an inter-basin transfer without due consideration of the rights and impact to reasonable use of downstream riparian landowners. These characteristics of the riparian rights system make it more difficult to allocate water beyond the source watershed and can limit the economical use of water. However, this also makes the riparian rights system more aligned with conservation and water stewardship principles, as there is a built-in mechanism for the consideration of how water uses may impact others that are dependent on the same water source.

Prior Appropriation Rights

The prior appropriation rights system allocates water rights based on timing of use, place of use, and purpose of use. Water that is withdrawn must be put to a beneficial use. Beneficial uses are determined by the state, but could include agriculture, municipal water supply, recreation, industry, mining, or several other options. The beneficial use of water is also not limited to within the watershed of the source water: water can be transferred outside the watershed to be put towards any beneficial use. For example, 90% of the population of Colorado lives east of the continental divide, while 80% of the state’s water resources are west of the divide. To meet the needs of agriculture, public water supply, and industry, water is diverted from the west through the Rocky Mountains to where it is put to beneficial use.

The prior appropriation system is based on priority, which is determined based on when use of a water source began. A common saying used to describe prior appropriation is “first in time, first in right,” meaning that whoever puts water to a beneficial use first has the most senior rights to that water. The most senior appropriator has the highest priority and receives all their allotted water before all other less senior appropriators in times of shortages. The figure below describes the different types of water rights under the prior appropriation system.

Unlike riparianism, there is no requirement that a senior appropriator use less water during times of shortage. In fact, water conservation is actually punished under the prior appropriation system through what is known as the “use it or lose it” principle. Under this principle, an appropriator’s water rights may be forfeited to the next most senior appropriator if the water is not applied to beneficial use. This encourages appropriators to use their full water allotment each year no matter what, even during severe droughts, which encourages excessive water use. In the event of a water shortage, there are clear allocation priorities defined through the priority system. The most senior appropriators’ allotments are fulfilled first while the most junior water appropriators lose their water allotments if there is not enough water for them.

Groundwater Rights 

State groundwater rights often differ from surface water rights and will vary from state to state. Groundwater rights are also made more complicated by the fact that states can use multiple legal doctrines and different combinations of doctrines to allocate groundwater. Four of the most commonly used groundwater rights systems include Absolute Dominion, Correlative Rights, Prior Appropriation, and Reasonable Use.

Absolute Dominion 

Under the Absolute Dominion Rule, a landowner has unlimited access to groundwater under their land and can use as much water as they want regardless of how it might impact neighboring landowners’ groundwater supply. This doctrine creates an incentive to over withdraw due to the lack of concern regarding penalties from a neighboring user.

Correlative Rights 

Under the Correlative Rights Doctrine, landowners each receive an equitable share of the aquifer they are withdrawing from. There are also limits established for how much water each landowner can withdraw to prevent impacts to neighboring users. Withdrawn water can also be used outside of the land overlying the aquifer, similar to an inter-basin transfer.

Prior Appropriation 

The prior appropriation system for groundwater rights is nearly identical to the prior appropriation system for surface water.

Reasonable Use 

The Reasonable Use Rule requires withdrawn water to be put to a reasonable use on the overlying tract of land and does not permit water to be taken to another tract. Reasonable use has been construed broadly, and almost any use is considered reasonable as long as the water is used on the overlying land.

Interstate Water Agreements

While each state is responsible for developing its own system of water rights and laws, there is another regulatory level to consider for rivers and other water bodies that flow between two states or more. Interstate water agreements and compacts are contracts between two or more states creating an agreement on a particular issue, adopting a certain standard, or cooperating on regional or national matters for interstate waters. These agreements help to solve regional water issues related to water supply, quality, natural resource management, and any other disputes related to water. They are the most powerful, durable, and adaptive tools for ensuring cooperative action among the states.

Types of Interstate Water Agreements

There are currently 46 interstate water agreements nationwide that deal with various aspects of water management. Of these 46 agreements, 6 are dedicated to water pollution control, 13 are centered on flood control and water resource management, and 27 are focused on water allocation.

Water pollution control compacts facilitate dialogue between states and lead regional efforts to address impacts from a variety of stressors that affect water quality, including climate change, harmful algal blooms, nutrient impairment of waterways, and intense storm events. Some water pollution control compacts can even set wastewater discharge standards and frameworks for monitoring waterways, such as the Ohio River Valley Water Sanitation Compact. These types of compacts are more common in eastern states.

Water resources and flood control compacts address a wide variety of potential conflicts over interstate waters. Some of these types of compacts manage interstate water diversions, such as in the Susquehanna River Basin Compact and the Delaware River Basin Compact. Others, like the Great Lakes Commission, form non-regulatory commissions or associations that focus on water conservation, water quality, and natural resources management such as fisheries.

Water allocation compacts are by far the most common type of interstate water agreements. These compacts allocate water that flows through two or more states and determine how much water each state receives. Water allocation compacts are generally found in the western United States where water resources are scarcer and water transfers are more common. Two of the most notable water allocation compacts are the Colorado River Compact and the Great Lakes Compact.

CASE STUDY: Colorado River Compact

The Colorado River provides drinking water for over 40 million people throughout the arid American southwest. Due to high water demand and limited water resources in the region, an allocation strategy was necessary for the Colorado River to satisfy all water users. The result was the Colorado River Compact, an agreement for allocating the waters of the Colorado River between the states of Wyoming, Colorado, Utah, New Mexico, Nevada, Arizona, and California. Signed in 1922 by six of the seven states (Arizona did not join until 1944), the Colorado River Compact was the first major interstate water compact developed in the United States. The Compact allocates 16.4 million acre-feet (MAF) per year from the Colorado River to the seven states, a determination that was based on a study of the Colorado River’s annual discharge by Arthur Powell Davis just before the Compact was drafted. However, the annual discharge study that the Compact is based on was made during one of the wettest periods in the American West. The Colorado River has not discharged 16.4 million acre-feet per year since the Compact was signed, resulting in promised water quantities that could not be delivered. As a result, the Colorado River has been overallocated for a century.

The overallocation of the Colorado River is further exacerbated by the prior appropriation rights system in the west which incentivizes farmers (the primary water users in the Colorado River Basin) to use as much water as possible to retain their water rights. The Colorado River flow has been steadily decreasing as a result. The flow of the Colorado River at Lees Ferry, the dividing point of the upper and lower Colorado River basins, has declined from 12 MAF in 1900 to 6.5 MAF in 2022, which is a 60% decrease in flow. Lake Mead and Lake Powell, the largest reservoirs in the Colorado River Basin that make up approximately 92% of the water storage capacity in the Basin, dropped to their lowest levels in history in 2021, causing a water shortage for lower basin states. The state of Arizona has the most junior water rights and was first in line for water cuts during the shortage due to the prior appropriation rights system. Roughly 8% of Arizona’s annual water allocation was cut in 2021, while 21% of the water allocation was cut in 2023.

While many agree that the Colorado River Compact must be modified to conserve water there are many regulatory challenges that stand in the way. The first challenge to overcome is the prior appropriation rights system, which will always encourage excessive water use and will not prioritize conservation. Additionally, any changes to the Compact will require cooperation and agreement among the member states, including a new annual flow determination and new allocation volumes to each state that all seven states would need to agree on. Some states, like Arizona, are far more likely to push for the re-allocation of the Colorado River as junior water users that feel the impacts of water stress more, while senior water user states such as California are less likely to push for re-allocation. Lastly, it is difficult to plan water management in the future while the southwest is still experiencing mega-drought conditions. There are speculations that this mega-drought may be the new normal and water may not ever return in the quantities it once was a century ago.

CASE STUDY: Great Lakes Compact

Similar to the Colorado River, the Great Lakes provide drinking water for over 40 million people. However, the management strategies between the Colorado River and the Great Lakes differ significantly. The Great Lakes hold over 6 quadrillion gallons of water, over 1,120 times as much water as the original Colorado River flow determination of 16.4 MAF. To protect their water from being siphoned outside of the Great Lakes Basin, the eight Great Lakes states of Michigan, Minnesota, Wisconsin, Illinois, Indiana, Ohio, Pennsylvania, and New York along with the two Canadian provinces of Ontario and Quebec, signed a formal agreement in 2008 which established a framework for the states and provinces to manage and protect Great Lakes water and ensure sustainable use.

Under the Great Lakes Compact, water withdrawals from each lake are closely monitored by each state/province. The most important component of the Great Lakes Compact is the ban on the diversion of water out of the Great Lakes Basin, with limited exceptions. Any new diversions outside of the Basin requires the approval of all eight states and two provinces. Any community applying for a diversion must demonstrate that it has exhausted all available options for getting water - a diversion must be a last resort. Only communities that are located partially in the Great Lakes Basin or located within a county that is partially in the Basin may apply for a diversion. This strict ban on diversions prevents excessive water use and diversions to areas outside the Great Lakes Basin that could deplete Great Lakes water.

The Great Lakes Compact comes with several benefits that promote water stewardship and make it a regulatory success. By preventing water from being piped and transferred outside of the Great Lakes Basin, the Compact ensures the sustainability of water resources throughout the region and puts an emphasis on protecting water. The Compact also leverages the shared interests of the states in the region to protect water resources so all member states and provinces can use them.


Water rights and regulatory frameworks are linked to and created around the regional water resources. As water scarcity and quality change, the regulations and rights surrounding water will change as well. While states are responsible for determining water allocation, it is important to remember that input from stakeholders within watersheds is instrumental in shaping water policy.

When it comes to managing water regulatory risks, there are several action items that companies can take to better manage their risks. A regular review of state water agency updates in all the states your company operates in can inform you of upcoming changes that could affect your water use. Every state will be different in how they manage and allocate water, and regular reviews can help you stay up to date on any new water allocation limitations or regulation surrounding water use. It is also important to maintain all necessary water-related permits up to date. Permits may vary by state, but can include water use permits, stormwater permits, and wastewater discharge permits. Lastly, promoting basin-wide water stewardship can help to alleviate water-stress in your watershed and improve the quality and quantity of water resources that your facilities depend on. Promoting water stewardship in your watershed and identifying water vulnerabilities is the best method for mitigating regulatory risks.

To learn more about how you can better understand and address your water risk, download our Water Risk Assessment Methodology.