U.S. Megadrought Brings Private Water Brokers Into Focus

For the first two decades of the 21st century, not even a once-in-a-millennium drought could deter real estate developers from building vast suburban tracts on the wild edges of Western U.S. cities. But in 2021, a reckoning appeared on the horizon. The Colorado River sank to historic lows, winter rains never arrived, and communities from California to Texas found their groundwater wells going dry after decades of overuse.

Western officials had seldom let questions about water availability get in the way of population growth, but suddenly they seemed to have no other choice. Faced with an unprecedented shortage, many local governments tried to pump the brakes on new developments. A small town in Utah halted all new housing permits, fearful that more homes would sap a local river. A suburb of Colorado Springs, Colorado, told developers that it could no longer allow new subdivisions to connect to the city’s water system. Most significantly, the state of Arizona has all but paused new housing in some Phoenix suburbs, citing a shortage of groundwater.

This pivot to conservation was bad news for D.R. Horton, the nation’s largest homebuilding company. Buoyed by pandemic-induced demand for cheap, spacious housing across the U.S. West, Horton netted US$6 billion constructing more than 80,000 homes last year alone. The company had long been able to assume that if it built a development, someone else would provide water for it—usually a local government eager for tax revenue. All of a sudden, Horton had to find the water itself.

Luckily, there was a third party who could help.

In April of last year, Horton acquired Vidler Water Company, a tiny outfit whose dozen employees worked out of an unassuming faux-Mediterranean office park in Carson City, Nevada. Though Vidler’s annual revenue was less than a tenth of a percent of Horton’s, the real estate titan spent big to snap it up: The price tag on the acquisition was an eye-popping $291 million.

Vidler is an unusual company. It doesn’t actually deliver water to people, nor does its own any facilities for water treatment or desalination. Instead, the company functions as a broker for water rights, finding untapped water in rural communities and marketing it to developers and corporations in fast-growing cities and suburbs. For 20 years, the company has bought up remote farmland and drilled wells in bone-dry valleys to amass an enormous private water portfolio, then made tens of millions of dollars by selling that portfolio one piece at a time.

‘Finding and Flipping Water’

This kind of business inevitably involves some guesswork, and often that guesswork looks like classic real estate speculation: You can make money by bringing water to places where people already want it, but you can make even more money bringing it to places where people will want it in the future. This is exactly what Vidler has tried to do, and it has led the company’s critics to contend that its business model violates the anti-speculation spirit of water law in the Western U.S.

Indeed, suspicions that Vidler is profiteering off a vulnerable public resource have made the company more than its share of enemies over the years: Top officials have been pilloried in courtrooms and threatened by rural residents, and an early executive once had to jump out a window to escape an angry crowd at a public meeting.

Horton’s purchase of Vidler has no real precedent, but it is a clear indication of where the West is headed. The region has grown twice as fast as the rest of the United States since the 1950s, and national builders like Horton are relying on it to fuel future profits. If these companies want to capitalize on migration to the booming suburbs of Phoenix and Las Vegas, they’ll need to find creative new water supplies that will allow them to keep building even as regulators try to clamp down on unsustainable growth.

In this regard, Vidler is a pioneer. The company was the first in the West to make a business model out of finding and flipping water. In the past few years, a new crop of upstarts has sought to mimic this model, buying up water rights in rural areas and marketing them to developers and suburbs that need them for future growth.These companies include Water Asset Management, which has bought up agricultural land in Colorado to secure water rights, and the investment firm Greenstone, which organized a first-of-its-kind deal to move Colorado River water from farms in western Arizona to a city near Phoenix. Both companies boast former Vidler executives in top leadership positions.

Vidler still stands at the front of the pack, tapping water in hard-to-reach aquifers and pursuing aggressive litigation to push new construction forward. If the company’s tactics become more common, the effects will be far-reaching in the U.S.—not only could rural areas and desert ecosystems see their precious water siphoned off, but thousands of people will buy and occupy homes fed by water sources that may turn out to be unreliable. A major part of Vidler’s strategy has been to pump water from small underground aquifers, squeezing every available drop from finite water banks that may someday run dry, especially as climate change contributes to the long-term aridification of the West.

Kevin Brown is the manager of a water utility in the southern Nevada city of Mesquite, where Vidler has been trying for years to build a pipeline that could bring new water to the city. The company has proposed tapping a virgin aquifer and using the water to supply new housing developments on the edge of town, but Brown doubts the pipeline is a good idea. Instead he has focused on reducing water usage across the city and recycling water where he can.

“In the world we live in, and the market we live in, if you put enough money against it, someone will make it happen,” Brown told Grist. “If these developers aren’t building homes, then they’re going out of business. But at some point, somebody needs to say, ‘You know what, we can’t grow anymore. It’s not sustainable.’”

In most Western states, water is public property regardless of whose land it flows through or sits under. Private entities can only own the right to use that water for a specific purpose. Individuals and companies can apply to use any unclaimed water source, but they have to convince the state government that they plan to put the water to a productive use. By the same token, owners can sell or lease their existing water rights to each other as long as the buyers keep using the water for something.

In this arrangement, the new breed of water brokers has found an opportunity to accumulate assets and generate profits. But the law requires them to tread cautiously.

Protecting a Public Good

At the turn of the 20th century, a Transcontinental Mining executive named Rees Vidler tried to dig a tunnel through the heart of the Colorado Rockies. It was supposed to link the mineral-rich mountain towns around Breckenridge with the young Denver metro area, but Vidler never completed the project. The shaft sat unused until an engineer bought it in the 1950s and repurposed it to move water rather than ore. He acquired the rights to river water on the Breckinridge side of the tunnel, built a water pipeline through the shaft, and proposed to sell the river water to people in the fast-growing cities around Denver. The engineer didn’t have any confirmed buyers for the water, but he could store it in a reservoir until he made a sale.

In 1979, the Colorado Supreme Court dealt a blow to that scheme. A judge ruled that the engineer’s water purchases were “grounded on no interest beyond a desire to obtain water for sale.” If Colorado allowed such purchases, it would “encourage those with vast monetary resources to monopolize [water] for personal profit rather than beneficial use,” the court wrote. In other words, speculating on water was unacceptable. Judges in other states soon adopted similar rulings, creating a precedent that some legal scholars have called “the Vidler doctrine.”

About 15 years later, the Vidler tunnel and its water rights fell into the possession of one John Hart, a swashbuckling financier who was beginning a decades-long corporate takeover spree. Hart and his business partner had just taken over the Physicians Insurance Company of Ohio, or PICO. They transformed the moribund Midwestern insurance company into an umbrella corporation for buying and flipping distressed assets, including a Swiss railway operator, an Australian oil company, a million acres of rural land in Nevada, and a canola feed crushing facility.

The Vidler tunnel’s history gave Hart an idea. He lived near San Diego, which relies in part on the Colorado River, and he could see that water was only going to get more valuable across the region, especially if real estate kept booming. Many farmers who had fallen on hard times were selling their irrigated land to developers, who repurposed irrigation water to supply new homes and golf courses. Hart wanted to profit from this slow transition away from agriculture, and he thought he saw a way to do it: Buy up water rights in the driest states, wait for the rights to rise in value, and sell them later on to developers that needed them for new housing. As long as the population of the West continued to increase, the price of water would increase as well—and with it PICO’s investment profits.

Shutting Down Farmland, Selling Water Rights

By acting as a broker for water rights, the PICO subsidiary that Hart called Vidler Water Company could get around the anti-speculation doctrine invoked in its very name. The tunnel engineer had sought to hold onto his water rights and make money by selling water to people who needed it. Vidler would just buy and sell the water rights themselves. This amounted to an elegant form of arbitrage: If a water right was worth more to a developer than it was to a farmer, Vidler could profit by flipping the right from the latter to the former.

The only problem was that Hart didn’t know very much about the nitty-gritty details of water law, and he knew even less about the science of hydrology. In order for his plan to work, he had to find someone who could handle both. That someone was Dorothy Timian-Palmer, an engineer who had been Carson City’s municipal utilities director for around a decade before Hart poached her in 1997. Timian-Palmer declined to speak with Grist, but several sources who worked with and against Vidler described her as one of the nation’s foremost water experts.

“She is the most knowledgeable person about water in the country,” insisted Hart in an interview. He recalled how he and Timian-Palmer used to attend investment conferences where skeptical audiences heard the legendary oil tycoon T. Boone Pickens talk in vague and confused terms about his water investments. But when Timian-Palmer took the stage, introduced herself as a water engineer, and started rattling off facts about hydrology and hydraulics, all the attendees perked up and started taking notes.

“She’s very smart, very shrewd, and very tough,” said Paul Hultin, a lawyer who sued Vidler over one of its later projects in New Mexico.

Armed with an infusion of cash from PICO, Timian-Palmer and a small group of Nevada-based lawyers and engineers set about flipping water. They bought agricultural water rights along a river in Colorado and sold them to Denver-area developers. They bought tens of thousands of acres of farm- and ranchland in Arizona, Idaho, Nevada, and New Mexico and either sold the water rights to urban utilities, leased them back to farmers, or sold the land to developers. In one case the company made a fivefold profit after six years.

When developers wanted to use the water they’d just acquired on former farmland, they could fallow the irrigated fields and start pumping water into their subdivisions and power plants, fueling further housing expansion. Marc Reisner, the journalist who wrote that “water flows uphill towards money” in his seminal book Cadillac Desert, also joined Vidler for a few years as a part-time political consultant, believing the company’s projects could enable growth while avoiding the construction of harmful new reservoirs and dams.

In other cases, Vidler chose to sit on the water it acquired until its value went up. In California and Arizona, the company bought and stored water in so-called “underground storage facilities,” artificial aquifers that serve as subterranean reservoirs. The cities and farmers who typically use these kinds of water banks are usually trying to squirrel away water for use during dry years, but Vidler’s goal was to profit on the gradual increase in water prices.

In California’s agriculture-heavy Central Valley, for instance, the company took partial ownership of an artificial aquifer, then flipped its share to real estate developers and water utilities, making $25 million off the transaction in just a few years. In Arizona, meanwhile, the company built its own large storage facility west of Phoenix and filled it with more than 250,000 acre-feet of water from the Colorado River. (An acre-foot is equivalent to around 326,000 gallons, or roughly enough water to supply two homes for a year.) Vidler executives wrote in a 2004 financial statement that “continued growth of the municipalities surrounding Phoenix” and “the low level of Lake Mead,” the largest Colorado River reservoir, were both “likely to increase demand” for the water.

No one has ever accused the company of breaking the law with these transactions, but its strategy clashed with the legal principles established in the 1979 ruling against the original Vidler tunnel scheme. In order for Vidler to secure new water rights, it had to identify a “beneficial use” for each water source it wanted to claim. The company would tell state regulators that it wanted to use each given water right to supply a power plant, or a suburban development, or a farm. In its own financial statements, though, the company made it clear that using water was merely incidental to the company’s mission.

“Vidler seeks to acquire water rights at prices consistent with their current use, with the expectation of an increase in value if the water right can be converted to a higher use,” the company said in a 2001 annual report. “Vidler’s priority is to develop recurring cash flow from these assets.”

Kyle Roerink, a water conservation advocate who runs the non-profit Great Basin Water Network, told Grist he’s observed Vidler trying to find ways around the “beneficial use” doctrine for almost a decade.

Pushing the Boundaries

“It’s a model where you’re trying to squeeze blood, profits, and water from stone, and they’ve been pretty successful at it,” he said. “[They’re] pushing the boundaries and testing the limits of what the foundational principles of Western water law are. It’s among the most dangerous elements of capitalism at play here.”

Indeed, Vidler’s loose regard for beneficial use requirements has sometimes landed the company in hot water.

In 1999, Vidler asked Nevada officials for permission to pump around 2,000 acre-feet of groundwater in Sandy Valley, a remote community of trailers and tumbleweeds about an hour southwest of Las Vegas. Vidler claimed to be applying for the water on behalf of a real estate company in Primm, a casino town on the California border. It laid out a far-fetched plan to build a pipeline that would move Sandy Valley’s water down to Primm across 25 miles of mountains, allowing developers to build housing and a theme park. The state government gave Vidler only some of the rights it asked for — but it amounted to almost as much water as the entire town of Sandy Valley used at the time.

When Sandy Valley residents heard about the project, they were furious. The area’s aquifer was already overdrawn thanks to a number of irrigated farms nearby. Residents depended on shallow household wells for their water, and they were terrified that those wells would go dry if the state let Vidler take its share.

“Vidler is a four-letter word here in Sandy Valley,” Al Marquis told me when I visited the town in February. A retired real estate lawyer who sued to stop Vidler on behalf of his town, Marquis is a quintessential Sandy Valley personality: He wears a ten-gallon-hat, flies amateur planes, and writes books of what he calls “cowboy poetry.” He recalled that a Vidler representative who showed up at a public meeting about the application found himself greeted by shouts and death threats from angry residents, who reminded him in no uncertain terms that nearly everyone in the valley owned a firearm.

In 2006, a judge overturned the state government’s decision to grant Vidler’s application, ruling that the company hadn’t proven it could put Sandy Valley’s water to beneficial use. Vidler claimed that the Primm real estate company needed the water to build apartments and a theme park, but the company couldn’t demonstrate that any of that development was really going to happen—the main evidence it had was a one-page wish list drafted by the real estate company itself. In the absence of a clear beneficial use, the judge wrote, Vidler had no claim to Sandy Valley’s water, and the state had erred in giving the company permission to pump.

“It appears to me that the company was formed for the sole purpose of speculating in and the hoarding of a public resource,” Marquis told Grist. He hypothesized that Vidler never wanted the water for Primm at all, and instead just wanted to flip it to someone else later on. “I gotta give them credit, in that they had foresight.”

Timian-Palmer and her fellow executives saw that the West didn’t have enough water, and they knew that was good news for Vidler: As drought got worse, the company’s assets would only get more valuable.

This post is excerpted from a more complete story that originally appeared on Grist and is part of Covering Climate Now, a global journalism collaboration strengthening coverage of the climate story.