Complex Legal Issues Surround A&B's Taking of East Maui Water

The term of the first water license granted to Alexander and Baldwin was 20 years. Now, more than a century after that first license expired in 1896, A&B and its subsidiary, East Maui Irrigation Company, Ltd., take water from the East Maui watershed under four short-term, year-to-year revocable permits issued by the Board of Land and Natural Resources.

Each June, when the permits are up for renewal, the Land Board approves a trade of the permits, so that A&B and EMI hold the permits on alternating years. (By an accident of history, three of the permits -covering lands in the ahupua’a of Honomanu, Huelo, and Ke’anae – are held by one of the two entities in any given year. The permit covering Nahiku is held by the other.)

The BLNR’s consideration of the trade-off has now become an annual ritual, with board members giving the matter only perfunctory review before approving it. The casual nature of the board’s review belies the complex legal issues surrounding the taking of water from the East Maui watershed.

The First Lease

The first license granted to A&B and their partners in the Hamakua Ditch Company to take water from East Maui lasted until September 30, 1898 – 20 years past the completion date of the first ditch.

Claus Spreckels soon began working on the second ditch in 1879, but apparently he was not given a license to take water from it until 1881. In that year, thirteen residents of Ke’anae learned of the proposal to grant water rights to Spreckels and protested in a letter to Henry A.P. Carter and J.S. Walker, commissioners of crown lands.

“We, the committee, whose names are below, request of your kindness not to dispose any of the water rights of the Crown Lands, that is from Honomanu, Ke’anae, Wailua, to the millionaire (Claus Spreckels), of Kamaomao. Because, if any of the water rights of the above-described Crown Lands are disposed of, then the king’s subjects, living on said lands, will be in trouble. Because, what the millionaire has done with the waters of other lands is well known, and on account of this trouble which is known, that is why we make this application. It is not proper to come for the water of the lands above described.”¹

Despite the concerns, Spreckels obtained a 30-year license to take water from East Maui. During that period, his company, Hawaiian Commercial & Sugar, was absorbed into what became known as Alexander & Baldwin.

For a period of some four years after the first water license expired, A&B and the government of the territory of Hawai’i appear to have negotiated terms of its renewal.

By February 1902, the government appeared prepared to renew the licenses through issuance of a lease at public auction (although no bidders were expected other than A&B). Once more, residents of the area learned of the plan and protested vigorously. On February 21,27 residents of Nahiku signed a petition to Governor Sanford B. Dole asking him to stop the auction. They noted that they had “at great expense and much hardship undertaken to develop this previously uncultivated tract and to make homes for ourselves.” The sale of a lease of all government lands adjoining their lots, they said, would give “the highest bidder the control of all the water which should belong to this district.”

Their petition was forwarded to the governor by one of the signatories, W.L. Hardy, and was received in Honolulu on February 24, 1902. Despite the appeal, the auction went forward and, on February 26, 1902, Henry P. Baldwin signed a series of agreements with the territory giving him continued rights to take water from the East Maui watershed. A clause common to all agreements provides that the rights granted are subject to “all vested interests in water of land-owners in Ke’anae and Wailuanui and of all other third parties.”

In 1938, the territory of Hawai’i and East Maui Irrigation Company entered into an agreement intended to set the stage for competitive bidding when the existing water licenses expired. “In the agreement, both parties granted easements to each other for portions of the aqueduct facilities that crossed land owned by each respective party,” Land Board Chairman Jim Ferry was later to write. He continued: “This agreement allows competitive bidding on each of the four water leases since any prospective state lessee has the right to convey his proportionate share of water over the jointly owned systems and at the same time ensures that the EMI Co. will have the same privilege of conveying water over the systems even if they themselves were not the lessees on any one of the leased areas.”²

(Another aspect of the agreement set for the manner in which the state was to charge for water collected. The amount charged was to be in inverse relation to the distance between the source and the delivery point. In other words, the further the distance, the less the amount paid. The reasoning being this approach was that the value of the water to the lessee declined as the cost of conveying the water rose. Thus, the government received less for Nahiku water, which had to travel the greatest distance to Central Maui fields, than it did for water taken from the Huelo license area, which was the closest of the four areas.)

Making Waves

For most of this century, A&B enjoyed the use of water from the East Maui watershed with a minimum of controversy. However, the desirability or the ultimate outcome – continued rights to East Maui water – seems not to have been subject to meaningful challenge.

The first sign of trouble appears to have come in 1965, when the Legislature amended the law relating to sales of water rights. Under the new language, leases granting water rights had to be sold at public auction or, in the case of” temporary use,” could be granted on a month-to-month basis … subject to a maximum term of one year.” (This language appears in Section 171-58, Hawaii Revised Statutes.)

The change did not affect existing leases, but was invoked 11 years later, in 1976.

On July 8 of that year, Anthony N. Hodges, executive director of Life of the Land, and Brian Chikowski, the group’s legal researcher, wrote to the Board of Land and Natural Resources. Their purpose was to object to a staff recommendation that the board grant A&B a one-year holdover tenancy on the Nahiku license, which expired June30 of that year. Specifically, Hodges and Chikowski objected to the difference between the price paid to the state by A&B for water collected in the Nahiku license area and the price paid to A&B by the Maui County Department of Water Supply for the same water. “For at least the past 15 years,” they wrote, “this license has enabled EMI to profit grossly from the sale of state-owned water to the county of Maui. Under the lease EMI pays to the state 0.0018 cent per thousand gallons of water and sells this same water to the County of Maui at a rate of 6 cents per thousand gallons. This constitutes a ‘mark-up’ of 3300 percent.

The changes to state law approved in 1965, they continued, were undertaken “with the intent of halting the commercial exploitation of state water leases when the water is resold by the lessee for a public purpose.

Calculations accompanying their letter suggested that sale of water to the county from the Nahiku license area resulted in a net profit of $21,445.54 to EMI.

Only in a postscript to the letter was the question raised about the legality under this same law of awarding a revocable permit, year after year, to the same party. “Our review of your files indicates that the Ke’anae lease for a water license expired in 1972, and that EMI is presently on a revocable permit for use of the waters from that area,” Hodges and Chikowski wrote. “In light of the fact that MRS §171-58 limits a permit upon expiration of the lease to one year, the present permit is illegal. A public auction of anew lease is long overdue. We request that an immediate public auction of these waters be held.”

The board decided to grant a 30-day extension of the Nahiku license, during which time staff was instructed to investigate the allegations of Life of the Land. In a July 13, 1976, letter to Phil Scott, then vice president and manager of EMI, DLNR Land Management Administrator James Detor asked for comments, if any, that EMI had on Life of the Land’s concerns. At the same time, the state’s attorney general was asked for advice on the subject of the proposed holdover tenancy.

Insufficient Water

On July 28, 1976, both EMI and the Department of Attorney General conveyed to the Land Board their respective responses.

EMI’s Scott replied with a lengthy description of the governing agreement his company had carved out with the county Board of Water Supply concerning the collection, storage and delivery of water from East Maui to the county’s system. “Most of the water that has been delivered by EMI to BWS comes from the Waikamoi watershed area, not the Nahiku license area,” Scott wrote. “Indeed, EMI measurements show that the Wailoa Ditch system, which includes the Nahiku license area, constitutes only 14.5 percent of the total volume of water delivered to BWS by EMI. Further, the total volume of water collected from private lands in the Wailoa Ditch system in 1975 greatly exceeded the volume of water delivered by EMI from the Wailoa Ditch system to BWS in 1975. EMI has not in any way made a $21,000 profit from the delivery of water collected in the Nahiku license area.”

In any case, Scott continued, the expense of fulfilling EMI’s obligations to provide the county with water, under terms of a 1973 agreement, outweighed any revenues. “For example,” he wrote, “over $170,000 has been spent to date by EMI to improve the Waikamoi systems. In order to assure that the t6 million gallons from the Wailoa Ditch system can be delivered to BWS without damaging agricultural production, EMI will have to construct a pumping station at Hanawi at an estimated cost in excess of $1,500,000.”

Nor, he went on, did EMI have a surplus of water that could be allocated under terms of HRS §171-58. “We suggest that HRS §171-58 grants discretionary power to the board to require any lessees of surface water rights to sell the lessee’s surplus waters,” Scott wrote, adding that, “during the past 40 years, at least, there has not been enough water during the summer months for agricultural production, even without any diversion of water to BWS.”

“EMI has entered into an arms-length agreement with BWS,” Scott concluded. “The agreement is the result of long, difficult and hard negotiations. EMI firmly believes that the agreement is more than fair to BWS. EMI believes that it is in the public interest for this board to respect the terms of the agreement and allow it to continue without amendment.”

The response from deputy Attorney General Eric Y. Marn was far briefer. The holdover was allowed by state law, Marn wrote, “for a period not exceeding one year.” Otherwise, it could grant a revocable permit “under such conditions which will best serve the interests of the state, for a maximum term of one year as authorized under Section 171-58, HRS.”

Marn’s comments were restricted to the Nahiku license. He did not address the Ke’anae license, which by then was in its sixth year of a revocable permit.

In the end, on August 27, 1976, the Land Board approved a one-year holdover tenancy to the Nahiku license, which was then converted to a revocable permit. As the other leases expired, they, too, were turned into revocable permits.

By alternating the name on the permits from year to year, one source close to the issue has recalled, A&B would benefit from having lower property taxes, since tenures of a year or less were granted more favorable taxes than those of longer duration. It was later determined that this same arrangement would work to get around the letter, if not the spirit, of the law limiting such permits to a maximum term of one year.

Another element of the permits is that A&B is charged a fixed rate for the water, rather than paying a rate based on the volume of water taken. In addition, because the permits are short term, the state’s appraiser has discounted the rental to be charged by 25 percent. Altogether, the state collects about $160,000 a year on the four permits.

Language in the permits allows the state to take water from the area, “subject to not less than one-year advance written notice” this despite the fact that, according to another term in the permits, the permits themselves are cancelable by the state “for any reason whatsoever” on 30 days’ notice.

A Long-Term Lease?

Everyone involved in the issue agrees on the idea that the revocable permits should, eventually, give way to one or more long-term leases. However, over and above the threat of competitive bidding at public auction, there are additional complications.

For the last quarter century, the legal right of water users to transfer water from streams to areas that were traditionally dry has been hanging under a cloud known as McBryde v. Robinson. The lawsuit, filed originally in 1973, pitted the McBryde Sugar Company against Gay and Robinson Sugar Company, which was, McBryde argued, diminishing McBryde’s source of water by taking water from high in Hanapepe Valley and transporting it out of the watershed.

After years of litigation, including an appeal to the U.S. Supreme Court (denied), the decision of the Hawai’i Supreme Court in McBryde remains the law of the land. That decision found in favor of McBryde, to the extent that the court held that Gay and Robinson had no vested right to transfer its share of the water out of the watershed. The McBryde decision has not been decided with any finality, however, since the matter at issue was determined to be unripe for litigation.

Finally, it would seem clear that the Legislature, in enacting the state Water Code, desired that significant water disputes would be heard and decided by the state Commission on Water Resource Management. Under the present system of allocating water – as a license granted by the Board of Land and Natural Resources – the Water Commission is out of the loop.

If any of the East Maui parties were to petition for an amendment to the interim instream flow standards, the Water Com-mission would become involved. Similarly, if the use to which A&B put the water changed substantially – as happened with Amfac and the Waiahole Ditch on O’ahu – the Water Commission also would step into the fray.

Barring any action on the legal front, however, it would appear as though the annual changing of the names on the revocable permits will continue to be a June ritual for the Board of Land and Natural Resources.

Volume 8, Number 2 August 1997