Senator Eliot Shapleigh - El Paso, Texas

DELL CITY, Texas -- Mike Lynch once farmed alfalfa and chili peppers here, but shortly before he died, he made a deal to sell something much more valuable -- a treasure trove of water beneath the family's 25,000-acre ranch.

The 74-year-old rancher signed an option to sell millions of gallons of water to the nearby city of El Paso, for up to $10 million. Two months after his death, the deal was torpedoed. A change in the local water district's rules stripped the Lynch family of most rights to water underneath their property, and gave the rights to neighboring landowners, including a company run by Denver billionaire Philip Anschutz.

Until recently, the West's water wars have been largely about who gets how much from rivers snaking down from the mountain snow packs. Now, battles are breaking out over who gets to control a newly emerging source: water stored underground that hadn't been economical to pull out of the earth and pipe to cities in the past.

While there are underground basins throughout the country, the issue has come to the forefront in the Southwest, where water is especially scarce. With rivers overtaxed by numerous competing interests, Las Cruces, N.M., and Midland and San Antonio in Texas have shown great interest in tapping underground resources. The city of El Paso has been negotiating with some of the new rights-holders to buy as much as $130 million of water.

Other fracases have broken out in Texas. One is over a proposal by investor T. Boone Pickens to transport underground water from the Texas Panhandle to cities such as Dallas and San Antonio via pipelines and the Brazos River. Critics contend the plan could further deplete groundwater supplies in the Panhandle, where farms already siphon off a lot of water. In Kinney County in southwestern Texas, the local water district adopted rules that have disrupted plans by some landowners to sell their water to San Antonio, over concerns the sale might deplete local supplies.

"There is no substitute for water and when survival is at stake, people will go to extremes to secure it," says Gary White, executive director of WaterPartners International, a nonprofit group based in Kansas City, Mo., which helps improve water supplies around the world.

The outcome of the fight in Dell Valley has implications all over the West. The problem is that underground water doesn't follow the neat boundary lines drawn up on land. A person could potentially pump out water from underneath his own property as well as his neighbors' land. The case could serve as a precedent in conflicts pitting landowners against each other when shipping underground water from rural areas to cities.

In the far western corner of Texas, water is vital to the economic future of fast-growing El Paso and its neighboring city in Mexico, Ciudad Juarez. The cities, home to more than two million people combined, have relied mostly on water from the Rio Grande and an aquifer known as the Hueco Bolson. But drought has crippled river flows across the Southwest the past few years. El Paso officials say the Hueco Bolson is being so heavily used its long-term reliability is in question. That's prompted them, like others in the Southwest, to scour the desert for new sources.

One of the most promising is here beneath the Dell Valley, 90 miles east of El Paso along the state line with New Mexico. On first glance, this doesn't look like a water-rich area. The two-lane highway leading here crosses the same broken country of creosote bushes and cactus that Old West stagecoaches rumbled through. But atop a rise, verdant farms come into view, irrigated by a more-than-100-square-mile underground lake fed by runoff from the mountains about 50 miles north.

In 1947, oil prospectors struck a gusher of water, setting off an agricultural boom that lured Mike Lynch, his brothers, Jim and Jack, and their Irish immigrant father, James Sr., from California. The Lynches planted cotton, alfalfa and other water-intensive crops irrigated by wells they dug. Jack Lynch, now 83, recalls drilling through hundreds of feet of rock to reach water.

By the 1960s, Dell City was thriving, with six cotton gins and a John Deere dealership. But in the 1970s, the local cotton industry was wiped out by crop disease and competition from both within the U.S. and abroad. Soaring energy prices made it tougher to farm chili peppers and other alternate crops.

Lifeline

Facing a cash crunch, the Lynch family was thrown a lifeline in 1977 by Mr. Anschutz, already wealthy from ranching and real estate. He paid about $16 million to buy majority interest in a Lynch farming business that owned about 33,000 of their 60,000 acres of farm and ranch land.

In 1980, Mr. Anschutz bought all of the interest in the Lynch's farming business. Jack Lynch says the family's remaining land was put mostly into ranching, mining and other nonfarming uses which use little water. Ranching requires only enough water to sustain a few hundred head of cattle, whereas farming needs tens of thousands of gallons of water to irrigate crops.

"At the end of the day, they sold and did not get back into farming," says Bill Miller, president of Mr. Anschutz's CL Machinery Co., a Denver-based concern that runs the Dell Valley farm today. "But we kept farming," he adds. Mr. Anschutz's farm is one of the largest in the western part of Texas, known for its alfalfa, chili peppers and even a vineyard. Among other ventures, Mr. Anschutz co-founded Qwest Communications International Inc., a telecommunications giant with more than $14 billion in annual revenue. Mr. Anschutz declined to be interviewed for this article.

The Lynches' move out of farming would later turn out to have a fateful impact on their water rights.

By 2000, speculators had their eyes on the groundwater in West Texas as a new source for Southwestern cities. In the early 1990s, for example, El Paso had purchased ranches in the vicinity solely for their rights to small aquifers at the base of desert mountains. Woody Hunt, an El Paso developer, says his firm bought 2,000 acres of farmland in Dell Valley for its water rights.

Helping to fuel all the activity was an unusual Texas law known as "rule of capture." Under the law, land owners essentially get to pump as much of the water under it as they want -- unless the properties fall within a government-designated groundwater district. "This means whoever sucks it out first, it's their water" -- even if that means there isn't enough left for others, says Al Blair, an Austin-based engineer for the Hudspeth County Underground Water Conservation District.

Although El Paso had two ranches about 100 miles east of the city in its water bank, there wasn't enough water there to justify building a pipeline to transport it back over the desert, says Ed Archuleta, general manager of the city's Water Utilities Public Service Board. So the city began looking in Dell Valley, too, he says.

According to a report by the Hudspeth County water district, the aquifer under Dell Valley has enough water to ship about 20 billion gallons annually -- roughly enough for 300,000 homes. Large-scale farming probably couldn't continue if El Paso were to take all this water, local industry officials say.

Mike Lynch and his brothers began negotiating with El Paso in August 2001 for their water deal. When news got out early the next year that the Lynches had signed an option for El Paso to buy their groundwater rights, it shocked many in the valley.
The biggest concern: that the agreement would allow the city of El Paso to suck the valley dry.

In all, the Lynches had rights to some 30 billion gallons of water annually -- or more than the whole valley uses each year for farming. "They made a deal with El Paso that basically sold out everybody in the valley," says Mr. Miller, who runs Mr. Anschutz's farming operation.

Neighbors' Wrath

Mike Lynch's death on April 9, 2002 -- shortly after the option agreement was signed -- left his sons, Mick, James and Bill, to face the wrath of their neighbors. "Had their deal gone through, it would have broken us folks still farming," says 50-year-old John Navar, whose family grows alfalfa and oats on a 680-acre spread here in the valley.

The Lynches say El Paso would have gotten only a portion of their water, not enough to hurt the rest of the valley.

But district officials had a surprise of their own. On May 31, 2002, they changed their rules to allow only landowners who conducted irrigated farming in the previous 10 years to take more than a token amount of water from under the ground in the district. That shut down the Lynches' control of most of their water, as they had stopped farming more than two decades earlier.

The rule change cut out more than a dozen of the Lynches' neighbors, too, including small farmers like 51-year-old Lanny Wallace and his elderly parents, who hadn't farmed in recent years for health reasons. Mr. Wallace says he'll "go to war" if a court doesn't return the rights to water under their 90-acre farm.

Phil Guitar, whose family owns about 39,000 acres of land, says that even though his land had been used mostly for ranching, he doesn't think it's fair that he gets less water rights than farming neighbors. "I've slept on that land in a bedroll in blizzards, and I've worked cattle in the middle of sand storms," he says.

Water-district officials say they picked the 10-year farming period to give preference to the people who were using the water and had invested in irrigation equipment. "You're not going to get everybody to agree on every point," says Robert Carpenter, a district board member and himself a farmer who received water rights. "But we had to do something quickly."

District officials say they held public hearings on the rule change over many months, as part of a plan aimed at setting a process for water transfers. They say the Lynches shouldn't have been surprised by the change. Mick Lynch, who works in El Paso for a wind-power company and helps manage the family's property, says the 10-year farming restriction wasn't well advertised. He adds that one reason his family wasn't farming was that it put more than 3,000 acres into a federal conservation program, designed to give land a rest from agriculture.

Meanwhile, the Lynches say they also discovered their family's longtime law firm, El Paso-based Kemp Smith LLP, had been representing Mr. Hunt, the real-estate developer, in his quest to eventually market water to the city of El Paso. The Lynches filed suit alleging conflict of interest by Kemp Smith, as did Mr. Guitar and his family, who were also represented by the firm. Attorneys for Kemp Smith deny any wrongdoing. The case is pending in state court in Austin.

Some of the Lynches' property was outside the government-designated water district. The family had virtually unrestricted rights to pump out as much water as it could from beneath property that wasn't within the district. But last year, a piece of state legislation, backed by Mr. Anschutz's company, expanded the Hudspeth County water district almost threefold -- including all of the Lynch family's property. That expansion meant they, and others, lost most of their water rights.

State Sen. Frank Madla, who carried the legislation, later said he thought the measure would merely reconcile a minor boundary dispute. "In fact, I didn't know what I was doing," the senator testified before the state Senate panel on water issues in February. "I'll be very honest with you, because we were misled and unfortunately it has created the current problems in Hudspeth County. I'll take the blame for it, because I carried that amendment."

In an e-mail yesterday, Sen. Madla said "this is a very sensitive issue, and I am not certain repealing the boundary change is in the best interest of the majority of the citizens and landowners in Dell City." He said he would "continue to listen to the people in Dell City and take direction from them."

Brian Sledge, the lobbyist for Mr. Anschutz who recommended the legislation, said at a public hearing in August that he had been "a bit underhanded" in not disclosing more to legislators about exactly what the bill would do. Still, he defends the measure as necessary to prevent "that entire agricultural community from potentially being sucked dry."

The Lynches contend the water district's expansion and rule change requiring farming took away their water rights and gave them to others. "This was like, 'Tick tock, the game is locked, and no one else can play,' " says Mick Lynch.

In October 2003, El Paso dropped its option to buy the Lynches' water, citing legal uncertainty. Instead, it has been negotiating with Messrs. Hunt and Anschutz and a group of 39 other farmers, for a water-transfer deal that El Paso Mayor Joe Wardy says could be valued at as much as $130 million. Although those talks recently broke off, Mr. Miller says he remains confident a deal eventually will be reached.