“We have to find a way forward somehow. Sometimes that way forward is very messy,” said state Board of Land and Natural Resources chair Suzanne Case as the board met on October 22.
At that meeting, the board narrowly rejected a contested case hearing request from Department of Hawaiian Home Lands director William Aila — himself a former Department of Land and Natural Resources director and Land Board chair — on a proposal from the DLNR’s Land Division on how appraisers should determine the value of water leases.
A number of individuals and entities that have been diverting water under revocable permits for years, or even decades, have fulfilled their environmental review requirements and are ready to secure long-term water leases.
In September, the Land Board approved the final environmental impact statement Alexander & Baldwin and East Maui Irrigation Company had prepared for the long-term water license they have been seeking for two decades. Other water permittees seeking long-term leases include the Kaua‘i Island Utility Cooperative, the Hawai‘i Electric Light Co., Kaua’i resident Jeffrey Linder, and farmers and ranchers in the Ka‘u district of Hawai‘i island.
While the Legislature expected their leases to be issued years ago, the DLNR has never before issued such a lease and is struggling to meet the requirements of the current legal framework.
For some of the old water leases for sugarcane production, issued before statehood, rent was tied to the price of sugarcane. Today, state law requires water leases to be disposed of via a public auction, with the upset rent determined by an appraisal.
Given that many of these permittees will likely be the only bidders for their respective water leases, the DLNR tried this year and last year to get the law changed to allow the Land Board to issue leases through direct negotiation. In the same bills, the department also tried to establish a list of several factors that must be considered by appraisers when determining fair market rent.
“[T]he most significant challenge encountered by staff has been the valuation of the upset rent for the use of water,” a Land Division report to the board states.
The requirement to charge fair market rent, it continues, “has created an incongruity when considering the nature of water in Hawaiʻi, which is a public trust resource. Unlike other markets in the country where water can be held and disposed as other private property interests, water rights in Hawaiʻi are held by the state for the benefit of the public. This has posed a challenge for appraisers to determine a market value of an interest for which there is no market.”
All of the bills that would have allowed for direct negotiation and established some guidance to appraisers failed. Hence, the Land Division’s proposal to the Land Board.
“We have a number of water lease applicants that are quite anxious to proceed with their leases. We did not want to put them off for another legislative session … in case that route turns out not to be the way to go,” Land Division administrator Russell Tsuji told the board.
He added that the appraisers his staff have talked to say they simply would not take on the job of determining market rent for these leases, at least not without further direction from the state.
And so on October 22, the division sought board approval of guidance to appraisers of water leases. It included the same seven factors for consideration that were included in the failed bills before the Legislature:
- The amount of water diverted and its proposed use;
- The amount of water diverted in proportion to what’s available from the diversion source;
- Water delivery costs, including maintenance and upgrades to prevent system losses;
- The avoided cost of getting the water from practicable alternative sources;
- The net economic benefit to the licensee;
- The value contributed by the licensee for watershed management; and
- The public benefit provided from the use of water, such as “domestic uses, traditional and customary practices such as taro cultivation, aquaculture uses, irrigation and other agricultural uses, power development, and commercial and industrial uses.”
The division proposed that appraisers use the current revocable permit rent as a starting point, and adjust the lease value up or down depending on the seven factors.
Opposition
The Office of Hawaiian Affairs, the Sierra Club of Hawaiʻi, the Native Hawaiian Legal Corporation, Earthjustice, and the DHHL testified against both procedural and substantial aspects of the Land Divisions proposal.
They all scorned the use of the current revocable permit rent as a valuation starting point and argued in favor of using the avoided cost of obtaining water from another source as an equal or more logical starting value for applying the adjustment factors proposed by staff.
“I’m not sure permit rent should have anything to do with these appraisals,” Sierra Club executive director Wayne Tanaka said. He added that, in many cases, the permit rents are based on historical agreements that were directly negotiated, which the Land Division acknowledges “were not necessarily consistent with the law or public trust. So starting with permit rent is like building your house on sand.”
In response to the arguments against using the permit rents as a starting point, the Land Division’s Ian Hirokawa explained to the board, “You need a number to work upward or downward. The RP was the best we had for now. I don’t know if we want to start at zero.”
With regard to the factors appraisers would have to consider, Tanaka said it makes no sense to allow deductions for maintenance costs “when the board had years and years to hold these water permit holders accountable for the water waste that was going on in their systems.”
“When these permit holders and potential lessees had decades to prevent the waste of millions of gallons of water a day, to appraise lower based on the cost of maintenance, you’re basically rewarding neglect,” he added.
In written testimony, NHLC attorney Ashley Obrey echoed Tanaka’s sentiments about discounts for system maintenance. She also objected to allowing “public benefit” discounts, arguing that it “invites arbitrary and highly subjective adjustments in appraisal value that may in fact conflict with public’s actual interest as well as the board’s trust duties to Native Hawaiians, public lands trust, and the Hawaiian home lands trust, especially when certain lessees carry political favor.”
Tanaka, OHA, the NHLC, and Earthjustice also argued that the overall proposal meets the definition of a rule and cannot not simply be adopted by the board without going through the rule-making process.
“This matter does require rule-making by law. It’s not a choice if you want to follow the law,” said Tanaka, an attorney and former legal fellow for the DLNR. The Sierra Club also submitted a petition for rule-making that included some draft language.
Earthjustice attorneys Leināʻala Ley and Isaac Moriwake argued in written testimony that rule-making, which requires public hearings, would allow the DLNR to “consider these issues through a more comprehensive, deliberate, and transparent process that provides the opportunity for public comment and input than can inform the valuation methodology adopted by this board. Absent the opportunity for public notice and comment, individual leases are vulnerable to legal challenge for failure to comply with [Hawaiʻi Revised Statutes] Chapter 91 with regard to the lease value.”
Hirokawa countered that what his division was proposing was merely “conceptual guidance for the appraiser to start their work.”
He said rule-making would be inappropriate right now because the DLNR wants to try again to get the Legislature to adopt this guidance into statute. “Rule-making at this point is premature until we get an answer from the Legislature,” he said.
“Given that this is fairly new and we’re kind of heading into uncharted territory, we need to test this out,” he continued. “We need to really work with some appraiser and test this out … before even considering putting it into a rule.”
DHHL director Aila said his department agreed with the DLNR that the valuation and public auction process needs improving. However, he added, “What’s before the board gives a little too much discretion and not enough guide posts, in our opinion.”
He expressed his concern that this discretion could lead to the leases being under-valued, which would have a direct impact on his department. His department, which also testified against the DLNR”s bills and even offered a competing bill, favors tying the value of the lease to the avoided cost of developing alternatives.
He recounted how a condition of statehood was accepting the kuleana of the Hawaiian Homes trust. Under the Hawaiian Homes Commission Act, 30 percent of all water licenses must be transferred into the native Hawaiian rehabilitation fund.
He said the Land Division’s proposal “continues to ignore and forget the commitment made as a condition of statehood. … This will likely result in a breach of trust action. We will be speaking with the Department of the Interior. This action clearly reduces benefits to beneficiaries, which is a breach of that trust that was agreed to by becoming a state.”
After Aila requested a contested case hearing, the board met in executive session to discuss the matter. Upon returning to the regular meeting, the board voted to deny, with board members Sam Gon, Kaiwi Yoon, and Doreen Canto abstaining.
“We will consider our options at this point,” Aila said after the board’s denial.
Board Discussion
“Here we are trying to give guidance and we’re being challenged with one lawsuit over guidance. Who knows what else is coming down the pike? We’re doing this to help the appraiser come up with a value. I’m just not sure how much we’re helping with these factors,” board member Chris Yuen said after hearing the public’s testimony and the DLNR’s responses.
He shared the NHLC’s concerns about “public benefit” discounts. “Don’t get me wrong, public benefit has to be part of our decision to do these leases in the first place … but I’m concerned about telling an appraiser to factor in public benefit when their role is to come up with fair market value. Is the appraiser supposed to say, ‘We like diversified ag so we’re going to cut the appraisal amount,’ versus, I don’t know, a residential development? … I’m not sure we should give them the task of determining what is public benefit and discounting an appraisal based on their ideas of public benefit,” he said.
He floated the idea of a deferral.
“I’m just wondering if we’re causing a problem, and I’m wondering if we have an appraiser that thinks they can appraise this without any guidelines.”
“I’m not sure we do,” Case replied.
“But I’m not sure we don’t,” Yuen said.
Tsuji chimed in that the appraisers have asked for even stronger guidance than what was being proposed.
“If we defer it, then we’re not going to try anything out. We could defer it and not give any guidance and see if we can get an appraiser to try this…. We’ve been working on this for several years already and we’re stuck,” Case said.
Case noted that the board’s approval would not prejudice the Sierra Club’s petition for rule-making, and that the Legislature may decide to adopt something else. In any case, the guidance, is “not set in stone,” she said.
“I’m more likely to move forward today knowing we’re trying to forge guidance … eventually through rules or laws,” board member Sam Gon said.
“I guess I wouldn’t say it eventually will. I would say there are procedures in the future that may alter this path,” Case replied.
When Case ultimately called for board members to make a motion, she was initially met with silence. Board member Vernon Char eventually made a motion to approve, and with amendments proposed by Yuen, board member Doreen Canto provided a second.
Yuen proposed nixing the use of the revocable permit rent as the starting point for valuation, and instead making it one of the factors to consider. He also said the factor regarding public benefit discounts should be deleted.
Char’s motion passed, with members Yoon and Tommy Oi voting in opposition.
Hirokawa said that with the board’s approval, his division would likely hire an appraiser to evaluate a potential lease for one of the existing permittees.
“I don’t necessarily mean Mahi Pono,” — who co-owns EMI with A&B and would be the largest water user, by far — “maybe a smaller one, run this around the block and see how this works,” he said. His division would then come to the board with something short of a full appraisal report that includes a discussion of the proposed upset rent, “so the public is well aware of how we got to this number,” he said.
— Teresa Dawson
For Further Reading
- “Board Talk: Water Permits For A&B, KIUC, and Others,” November 2019;
- “Land Board Delays Action on Plan To Move Forward with Water Permits,” May 2019;
- “Board Directs Land Division To Help Permittees, DHHL Meet Water Needs,” April 2018;
- “Board Talk: Wind Farm, Water Holdovers,” December 2016.
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