State could wade into water deal

By Robert Elder Jr.
Sunday, August 17, 2003

DELL CITY -- Big business is wading into water deals -- and it wants the state to come along.

Denver billionaire Philip Anschutz and Woody Hunt, an El Paso construction magnate, are discussing a plan to ship water from the West Texas desert to El Paso. The partnership could include the state's General Land Office, which says it could buy the water rights needed to start the deal, some of whose profits could be funneled to Texas public education.

If an agreement were reached, it would be one of the largest privately brokered water deals in the United States. In addition to the probable $125 million-plus cost of land, the parties would have to spend $300 million to build a pipeline and a desalinization plant to treat the water they pump.

At this stage, "it's just a 'maybe' opportunity for the land office," says Ted Houghton, an El Paso financial services executive who serves on the board of the School Land Board, an adjunct of the General Land Office.

But the possibilities are enticing. Water, Houghton says, "is the next great mineral play for the land office."

The state's land holdings have traditionally produced a fortune from oil and natural gas royalties and leases for ranching; the land office's money from royalties flows into public education. Water would be a new way to wring educational value out of land.

"I think it's a great opportunity, whether it's in El Paso or San Antonio or Dallas or the Panhandle -- the Land Office getting into it," Houghton says.

The West Texas deal would dwarf anything the state has done in the water business with private partners. The University Lands Office in Midland -- which earns money from state lands for higher education -- has sold water for 60 years, currently to public water systems in Midland and Andrews. But the amounts are small compared with the billions of gallons that could ultimately flow to El Paso each year from aquifers in West Texas.

No one denies the need for a more developed water market. Texas' recent string of droughts has sent cities hustling to acquire more water -- particularly ground water, which is relatively cheap and more loosely regulated than rivers and lakes.

"Anybody who thinks water bills are going down" doesn't realize what the state is facing, Land Commissioner Jerry Patterson says. "Water is going to cost a lot more for everybody."

In the deal under discussion, water would flow to El Paso from the Chihuahuan desert town of Dell City. Just 90 miles from downtown El Paso, Dell City has become a prime target for the state's emerging business of water marketing.

The farming and ranching town of 500 people has abundant water, thanks to the Bone Spring-Victorio Peak Aquifer that lies underneath the northern part of Hudspeth County.

That ready supply has set off a scramble for water rights in the Dell City area. In recent years, the city of El Paso, local farmers and landowners, Anschutz and Hunt have maneuvered to preserve their water rights -- whether for continued agricultural use or for sale to urban markets.

Some, like Hunt, have publicly lobbied for a deal that would pipe water to El Paso to help ensure the city's growth. He is chief executive and chairman of Hunt Building Corp., the nation's No. 1 builder of military housing, and one of El Paso's largest private landowners. He's also vice chairman of the University of Texas Board of Regents.

But his potential partnership with Anschutz and the land office is a new development. Anschutz made his early fortune in oil and went on to found Qwest Communications International and invest in movie theater chains and pro basketball, hockey and soccer. He is worth $4.9 billion, according to Forbes magazine.

Anschutz has been farming in Dell City since 1977, when he bought 32,000 acres from a local landowner; Dell City is just part of Anschutz's agriculture business. He owns CL Machinery Co., an agricultural company in Dell City, and currently grows alfalfa and grapes for the Llano Estacado winery in Lubbock and chiles .

CL Machinery holds the most water rights available for sale.

El Paso, meantime, added to its collection of "water ranches" earlier this year when it bought a 9,300-acre farm on the Hudspeth-Culberson county line. The farm lies just outside Dell City and could supply water to El Paso if a pipeline were built.

A federal compact limits the amount of water El Paso can take from the Rio Grande, so the city has been looking at importing water.

The early outline of a potential deal, written by Hunt Building executive Ron Glover, is circulating in Dell City. It describes a July 16 meeting in El Paso with the school land board's Houghton, El Paso Mayor Joe Wardy, members of the General Land Office staff, and El Paso Water Utilities General Manager Ed Archuleta. They talked about how to finance a deal to bring water from the Dell City area.

Options include the state buying enough Hudspeth County land with water rights to supply El Paso. The city could then sign a contract with the state for the water. The outline proposes that Hunt and Anschutz evenly split the costs of establishing a water partnership, which would include legal fees to fend off expected legal challenges and establishing the complex corporate framework for any deal.

In addition, Hunt and Anschutz would make a commission of 4 percent on the sale of any water and evenly split the profit from running the partnership. Texas could reap cash for public schools in a number of ways, depending on how the partnership is set up.

There was little discussion at the meeting of who would finance or construct the pipeline or the desalinization plant needed to make the brackish water drinkable.

The land office has the financial muscle needed for a deal. A 1999 state law allows the agency to temporarily hold money in an investment fund that used to flow directly to the Permanent School Fund. The escrow fund contained $196.8 million as of July 1.

To be sure, the deal-making talk is just getting under way. At this point, Commissioner Patterson says, "I've got more questions than I've got answers."

One stems from the uncertain nature of water rights in Texas. The state in 1997 gave local ground water districts broad authority to regulate water use within their boundaries, but many districts are struggling over the fairest way allocate rights to water.

"This is not like oil and gas, where the law is well settled," Patterson says. "We're all dancing around this: `How can we make this work?' It makes you want to be a little more cautious."

The water authority for Dell City is itself in flux, in part because of stealth lobbying in the final days of the regular legislative session.

Brian Sledge, an Austin lobbyist for Anschutz, won approval of an amendment that triples the size of the Hudspeth ground water district, to 577,000 acres. (The district's full name is the Hudspeth County Underground Water Conservation District No. 1.)

The bill, which takes effect Sept. 1, gives the district control over landowners whose land was previously outside its boundaries and who before could pump as much underground water as they wanted. The expansion stops these landowners from competing with Anschutz and other large landowners in the district who have substantial water rights.

The district is also in litigation with Phil Guitar, an Abilene rancher, oil man and investor whose family owns 38,000 acres in Hudspeth County through an entity called the Guitar Trust. He has sued the district in state district court in Hudspeth County, contending that the district's rules discriminate against landowners who haven't used significant amounts of water in recent years.

District rules favor landowners who have irrigated farmland during a 10-year period that ended in 2002. The Guitar trust land has been used for ranching, which requires little water compared with farming.

Besides shutting the Guitar Trust out of the water-export business, the rules also unfairly restrict new uses of water for crops such as alfalfa to feed cattle, rendering the land of little value, Guitar contends. Talk of the deal between the state and El Paso makes his lawsuit even more critical, Guitar says: "Our family is as determined as ever to fight this."

The district says the rules balance the interests of farmers, ranchers and those who want to export water.

Archuleta, El Paso's water utilities manager, says the political hornets' nest surrounding the Hudspeth water district makes it a particularly tricky place to do a deal.

Nonetheless, he says, "This is a real possibility. I hope we get a chance to talk about it" further.; 445-3671; 445-3620