More Money, More Problems: Cannabis Faces California’s Gauntlet of Water and Environmental Laws

April 12, 2017

For decades California’s cannabis industry operated in the proverbial shadows, but the State’s recent  enactment of comprehensive legislative schemes for both medical and recreational cannabis heralds the advent of an entirely state-legal regime. Stepping forward into the sunshine, however, carries with it regulatory compliance issues applicable to other agricultural industries. Indeed, one of the policy reasons behind California’s legalization efforts has been to attain compliance with environmental and water laws so that adverse impacts are mitigated or avoided. This article discusses environmental and water laws, some old and some new, with which cannabis operators in California must now comply.

Introduction

Since enactment of the Medical Cannabis Regulation and Safety Act (“MCRSA”)[1] and the people’s election day passage of the Adult Use of Marijuana Act (“AUMA”)[2], much of the industry’s focus is on business matters such as corporate formation, investing, taxation, and banking. [3]  However, those wishing to tap this new market should not ignore California’s water and environmental laws, laws already notorious for being among the most stringent in the nation, and which California has directly aimed at cannabis. As the ones directly working the land, cultivators will be among the most affected, and they will need to scrupulously comply. Failure to adhere to any rule, regulation, or requirement for protection of natural resources, stream flows, or water quality could result in denial or loss of a cultivation license.[4]

Overview of California Water Rights

Cultivators need water and California water rights are, to put it bluntly, complex. Many doctrines and principles were forged in the early days of California’s history, when gold miners squabbled over water sources. It is therefore fitting, perhaps, that California’s new “green rush” will also be heavily influenced by water.

Surface Water

California operates under a “dual” or hybrid system of water rights that recognizes two distinct doctrines: riparian and appropriation. The riparian rights doctrine originated under English common law. It confers upon owners of land adjacent to a waterbody the right to divert natural water flowing by the land for use upon the land, without regard to when such use was initiated or how much is used.[5]  In times of shortage all riparians must reduce their usage proportionately and share the available water under a theory called “correlative rights.”[6]

As mining increased, water was diverted for use on distant nonriparian lands, requiring that California establish and incorporate a new doctrine: the doctrine of appropriation.[7]  Unlike riparians, appropriators need not own land contiguous to a watercourse to use water from it, but their rights are subordinate to riparians so that in times of shortage riparians are entitled to fulfill their needs first.[8]  Between appropriators, the rule is “first in time, first in right,” meaning during shortage that the earlier (i.e., senior) appropriator is entitled to fulfill his needs before later-arriving (i.e., junior) appropriators.[9]

Before 1914, appropriative water rights were generally acquired filing notice with the county clerk. Since 1914, however, a statutory scheme has provided the exclusive method of acquiring appropriative water rights.[10]  Applications must now be made to the State Water Resources Control Board (SWRCB) for a permit or license authorizing the taking and use of a specified quantity of water, during a specified period, at a particular rate.[11]  Riparian rights still require no such permit, but there is enforcement risk if a riparian right is claimed without proper documentation.

Over time, these somewhat simple principles for surface water rights have become muddied by many additional legal principles and exceptions. Appropriative rights can be lost (i.e., forfeited) through five consecutive years of nonuse, a troublesome prospect for a person claiming a pre-1914 right unless use has been consistent and good documentation of that historical use is available. Similarly, subdivision of larger riparian lands into smaller parcels no longer adjacent to water can severe (i.e., eliminate) the riparian rights that once existed. Analysis of title documents is often required to verify a claimed riparian right.

Groundwater

The three main groundwater rights are overlying, appropriative, and prescriptive.[12]  An overlying right is analogous to a riparian right in surface water; the land owner has a right to take water from the ground underneath for use on the land above. As between overlying owners, the rights, like those of riparians, are correlative (i.e., each may use only his reasonable share when water is insufficient to meet all overliers). Any water not needed by those having overlying rights is surplus and may be pumped and used on other lands – even outside the basin – as appropriative groundwater rights. Between groundwater appropriators, the one first in time is first in right. Generally, therefore, overlying rights trump appropriative groundwater rights, except that an appropriator may acquire rights against overliers or more senior appropriators through prescription, which is established by continued groundwater pumping while a basin is in overdraft.

Groundwater has generally been encumbered by fewer State and local regulations, and disputes were traditionally settled by the courts. However, California recently enacted the Sustainable Groundwater Management Act, which may bring significant new rules and regulations regarding measurement, reporting, fees, and pumping.[13]

Other General Water Law Principles and Requirement

Some rules apply broadly to most uses of water in California. Water use is subject to the reasonable use and the public trust doctrines. Both are malleable concepts allowing the State to essentially regulate water rights and water use on a changing and subjective basis for aesthetic, recreational, and environmental purposes, among others, according to the needs and priorities of society.[14]  California’s recent drought has spurred additional legislation requiring increased monitoring and reporting to requirements for water users, and increased penalties for noncompliance.

Water and Environmental Laws in MCRSA and AUMA

Documenting Water Rights

To obtain a recreational cultivation license, the AUMA requires that applications include detailed descriptions of the source of water, “including a certification that the applicant may use that water legally under state law.”[15]  This will require surface water users to present documentation of water permits or licenses from SWRCB, if the claimed right post-dates 1914. For riparians and pre-1914 appropriators, certification will be more complex and is best performed by a water lawyer.

Applications for medical cultivation licenses to be issued before January 1, 2020, must include either:

  • A registration, permit, or license issued by SWRCB.
  • A statement of water diversion and use, filed before July 1, 2017.
  • A pending application for a permit to appropriate water, filed before July 1, 2017.
  • Documentation, submitted to SWRCB before July 1, 2017, establishing the diversion is a small spring, an adjudicated right, or specific water use Water Code § 4999 et seq.
  • Documentation, submitted to SWRCB before July 1, 2017, establishing the diversion is authorized under a riparian right that was not exercised between January 1, 2010 and January 1, 2017.[16]

In sum, if the source of water is surface water, not groundwater, then unless a cultivation applicant already has a SWRCB permit or license to use surface water, they likely must take steps to confirm or apply for a water right before July 2017, or risk several years delay in obtaining a cultivation license.

Protecting Streams, Fish, and Wildlife

Under both MCSRA and AUMA, SWRCB must consult with the California Department of Fish & Wildlife (DFW) and the California Department of Food & Agriculture (CDFA) to “ensure that individual and cumulative effects of water diversion and discharge associated with cultivation of cannabis do not affect the instream flows needed for fish spawning, migration, and rearing, and the flows needed to maintain natural flow variability.”[17]  SWRCB must then adopt “principles and guidelines for diversion and use of water for cannabis cultivation in areas where cannabis cultivation may have the potential to substantially affect instream flows,” which may include instream flow objectives, limits on diversions, and requirements for screening of diversions and elimination of barriers to fish passage.[18]  In some cases, these regulations may apply to groundwater extractions.[19]  They also may extend to protect “springs, wetlands, and aquatic habitats from negative impacts of cannabis cultivation.”[20]  Both medical and recreational cultivators will have to comply.[21]

Medical cultivation licenses will also not be effective “until the licensee has complied with Section 1602 of the Fish and Game Code or receives written verification from the Department of Fish and Wildlife that a streambed alteration agreement is not required.”[22]  Section 1602 requires those substantially diverting surface waters to contact DFW to ensure their diversions are not “substantial” and will not affect fish and wildlife, or alternatively obtain a Lake and Streambed Alteration agreement (LSA). Recreational cultivators will likely face the same requirement.[23]  Some diversions might be insubstantial, but the determination is very fact specific and best left to DFW; those that do not contact DFW are taking a huge risk.[24]

Cultivators must also comply with State and Federal water quality laws intended to prevent adverse effects from earth moving activities and water discharges. These will be administered through California’s Regional Water Quality Boards (RWQCB). So far, the North Coast and Central Valley Regional Boards have adopted orders and a regulatory system to permit cannabis cultivators.[25]  Other regions are sure to follow. These orders require site mitigation, implementation of best management practices, and annual monitoring and reporting requirements.

Applicability of the California Environmental Quality Act

No discussion of California environmental laws would be complete without CEQA.[26]  CEQA requires an analysis and disclosure of the potential environmental effects of any discretionary government action that could affect the environment. Granting licenses for cultivation fits the bill (as do others). The scope of the CEQA effort depends on the nature and severity of potential impacts. Currently, CDFA is currently preparing a Programmatic Environmental Impact Report (EIR) on its proposed cannabis cultivation permitting program to provide the public, state, and local agencies with information on the potential environmental effects associated with the adoption of a statewide medical cannabis cultivation program.[27]  CDFA should complete this effort by mid-2017. MCRSA requires that medical cultivation licenses include mitigation requirements identified in the EIR, and the same likely will apply to recreational permits.[28]  Other State and local agencies issuing permits will also likely have to comply with CEQA.

Implementing Other Environmental Requirements

Depending on location, a cultivation project may be subject to many other State or local laws. For example, most local jurisdictions require a host of other grading and site permits for cultivation as well as building inspections, pesticide registrations, and approvals from water and power utilities. Full compliance with these other State and local laws for both indoor and outdoor cultivators is required.[29]  While many pertain to outdoor cultivators, indoor growers too could face many permitting and regulatory challenges. For instance, urban retailers might charge cultivators more and they could require more significant water use cutbacks during drought as opposed to other residential customers. Similar issues could arise for electrical use if indoor grows become ubiquitous in urban areas.

Federal Water Not Available For Cannabis

Finally, it is important to note that the Federal government plays a significant role in California water operations and policy through its ownership and administration of several  large-scale water projects (e.g., Colorado River Project, Central Valley Project, Klamath Project), which annually deliver water to hundreds of water districts or other entities in many parts of the State. It is therefore significant that because of the continued Federal illegality of cannabis, the U.S. Bureau of Reclamation has adopted an official policy that it “will not approve use of reclamation facilities or water in the cultivation of marijuana.”[30]  This prevents lands or persons that are served exclusively with water from Federal water projects from growing cannabis. This policy may not have an immediate impact on the emerging state-compliant industry while it remains relatively small and diffuse, but it could be an impediment to large-scale cultivation activities in some of the State’s agricultural regions  that are primarily served by federal water projects.

Conclusion

Cultivators are the foundation of the entire industry, and the success of State-legal and regulated cannabis in California will be closely linked to the ability of cultivators to navigate and comply with California’s water and environmental laws. Any cultivator’s business plan should therefore ensure legally valid and documented water rights and also provide for satisfying (and paying for) compliance with the numerous other environmental laws and procedures required to obtain State and local licenses.



[1] Bus. & Prof § 19300 et seq.

[2] California Proposition 64 (2016) adding Bus. & Prof. § 26000 et seq., among others.

[3] At the time of writing, California has enacted two parallel statutory schemes separately addressing medical and recreational cannabis.

[4] See e.g., Bus. & Prof. § 26057(b)(1).

[5] Miller & Lux v. Enterprise C. etc. Co. (1915) 169 Cal. 415.

[6] Prather v. Hoberg (1944) 24 Cal.2d 549, 559-560.

[7] Irwin v. Phillips (1855) 5 Cal. 140.

[8] Meridian, Ltd. v. San Francisco (1939) 13 Cal.2d 424, 445-447.

[9] U.S. v. State Water Resources Control Board (1986) 182 Cal.App.3d 82, 102.

[10] People v. Shirokow (1980) 26 Cal.3d 301, 308.

[11] Water Code § 1201 et seq.

[12] See City of Barstow v. Mojave Water Agency (2000) 23 Cal.4th 1224, 1240.

[13] Water Code § 10720 et seq.

[14] See e.g., Cal. Constitution Art. 10 § 2; Nat. Audubon Society v. Sup. Court (1983) 33 Cal.3d 419.

[15] Bus. & Prof. Code sec. 26056(c)(6).

[16] Bus. & Prof. Code § 19332.2 (b)(1)-(5).

[17] Bus. & Prof. Code § 19332(d); Bus. & Prof. Code § 26067(c)(1).

[18] Water Code  13149(a)(1)(A).

[19] Id.

[20] Water Code § 13149(a)(2); Bus. & Prof. Code § 26067(c)(1)(B).

[21] Bus. & Prof. Code § 19332.2(d); Bus. & Prof. § 26060(c).

[22] Bus. & Prof. Code § 19332.2(f).

[23] Bus. & Prof. § 26056.5.

[24] Rutherford v. California (1987) 188 Cal.App.3d 1267, 1279-80.

[25] North Coast RWQCB Order R1-2015-0023; Central Valley RWQCB Order R5-2015-0113.

[26] Pub. Res. Code § 21000 et seq.

[28] Bus. & Prof. Code § 19332.2(e).

[29] Bus. & Prof. Code § 26066.

[30] Reclamation Manual Policy PEC TRMR-63.