How a Dallas investor's East Texas water grab triggered a statewide battle
Anderson County Judge Carey McKinney was at church the Sunday before Memorial Day when a deacon asked if he’d seen a groundwater permit application recently published in the local newspaper. McKinney, the highest elected official in the rural East Texas county, went home and opened the week-old newspaper still on his kitchen counter.
What he would learn shocked him.
A wealthy Dallas investor named Kyle Bass wanted to pump 10 billion gallons of groundwater a year from the aquifer below the community, roughly three times what Anderson County used annually. Then he planned to pipe it to other parts of the state facing a shortage.
Bass — a hedge fund manager who made a windfall betting against the mortgage market in 2008 — has pitched the project as a way to begin to address the state’s looming water crisis.
But for locals, it has become an existential threat. Groundwater wasn’t on anyone’s radar in Anderson County, McKinney said — they’d always had plenty. Suddenly a rich out-of-towner was intent on taking nearly all of it, and nothing seemed to be standing in his way.
“This community came alive,” McKinney said. “It awakened the sleeping giant.”
The dispute is now before the state Legislature in Austin, where a powerful East Texas lawmaker who opposes Bass’ effort is pushing for the first time a near total overhaul of how Texas regulates groundwater. That includes overturning a 120-year-old doctrine known as rule of capture that gives landowners an almost absolute right to pump groundwater below their property, no matter how that pumping impacts their neighbors.
The outcome could have long-term impacts across the state, including for Houston, which relies on reservoirs fed in part by the Carrizo-Wilcox Aquifer, a prolific aquifer that spans the eastern part of state from Louisiana to Mexico and the source of Bass’s project.
“It's no longer just a rural issue, not just about the groundwater in East Texas,” said state Rep. Cody Harris, a Palestine Republican behind the effort to overhaul the state’s groundwater regulation. “This affects everyone.”
The rule of capture “has always been this loaded gun,” said Vanessa Puig-Williams, the director of the Environmental Defense Fund’s Texas Water Program. The doctrine was originally formulated to protect private property rights. But today, no other Western state still follows it. “Among major groundwater users,” concluded a 2021 report from Rice and Texas State University, “Texas is an outlier.”
Now the rule of capture seemed to be threatening the property rights for locals in Anderson County.
Bass' plans for the water
Bass has a knack for spotting issues that others don’t. “Whether it’s a blessing or a curse, I can identify significant problems before they happen,” he said.
In 2006, he started a hedge fund in Dallas called Hayman Capital and bought credit default swaps on subprime mortgage bonds, eventually earning hundreds of millions on his “big short” as the housing market collapsed.
Fifteen years later, after attending a conservation conference outside of Fort Worth, he read Texas’ state water plan, which projected that even as the state’s population boomed, water consumption would increase only fractionally, largely due to a dependence on conservation as a supply strategy. To Bass, that didn’t seem right.
“When I finished reading it, I said, ‘surely I’m missing something’,” Bass recalled. “We’ve tried really hard to curtail use.” It seemed like the state was on a path to run out of water.
Lawmakers appear to agree and earlier this year carved out $20 billion in state tax revenue over two decades to fund both new water supply projects, like seawater desalination plants, and to repair leaks in aging infrastructure. (Notably, the funding excludes projects that transport fresh groundwater.)
That investment is still a fraction of what experts say is needed to shore up the state’s water supply.
Enter private companies like Bass’ Conservation Equity Management, which he founded in 2021 to conserve and restore large tracts of land, earning mitigation credits that can be sold to developers in order to offset the environmental harm from their operations. The company owns several properties in East Texas, including the two ranches under which the groundwater permit applications were submitted for exploratory wells.
Conservation Equity Management “creates value by developing sustainable water resources,” according to its website.
“What we are aiming to do is go to areas where [groundwater] is prolific and where there is a significant recharge, and help potentially take it to places where there's a desperate need for water,” Bass said.
He hasn’t said who might buy the water he intends to pump, but said it could go “anywhere south of Waco and… north of Dallas-Fort Worth.”
East Texas is one of the biggest sources of untapped water for developers in Central Texas and other parts of the state that have seen rapid growth in recent decades.
The Edwards Aquifer, which spans southwest from Austin and supplies San Antonio with most of its drinking water, is the most heavily regulated aquifer in the state after a lawsuit filed under the Endangered Species Act forced the legislature to enact limits on pumping. So as the I-35 corridor has boomed, developers, businesses, and cities have looked east to the Carrizo-Wilcox for new sources of water.
Their efforts have prompted similar battles as the one unfolding in Anderson County. In 2020, for instance, the San Antonio Water System started pumping nearly 48,000 acre-feet of water – roughly what Bass has applied for – annually from the aquifer in Burleson and Lee counties. Shortly after the 142-mile Vista Ridge pipeline opened, landowners in Lee County had to sink their pumps deeper into the aquifer as water levels fell.
In 2023, the city of Georgetown signed a contract with a private company to pipe at least 39,000 acre-feet of water from the Carrizo-Wilcox, prompting the cities of Bryan and College Station as well as the Texas A&M University System to file suit against the local groundwater district. At least six other pipelines that would transport groundwater from rural areas over the Carrizo-Wilcox to booming cities are currently planned or under consideration.
How much will they pump?
Bass applied for permits from the Neches and Trinity Valley Groundwater Conservation District, one of 98 such districts across the state tasked with permitting groundwater withdrawals.
But while they have the authority to limit withdrawals, many of those districts are hamstrung in their ability to adopt or enforce pumping limits. Largely this is due to a lack of funding – the groundwater conservation district that will consider Bass’ permit applications, for example, has two full-time employees and few resources to fight lawsuits.
“When the legislature created [groundwater conservation districts], if you think of it as a skeletal structure, they gave it everything but the backbone to be able to support itself,” Harris said.
Bass has also proposed test wells in Houston County, a rural area northeast of College Station. It isn’t covered by a groundwater conservation district, so Bass isn’t required to disclose how much water he wants to pump there.
At an 11-hour July hearing focused on the project, lawmakers grilled Bass and his lawyer over precisely how much water the company intended to pump — and how much would be left over for locals if the project moved forward.
Aquifers can hold huge amounts of water across vast stretches of land, but if their levels dip below a certain threshold, they can never recover.
The Texas Water Development Board determines how much groundwater can be pumped from an aquifer every year using a number known as modeled available groundwater, or MAG. That number takes into account 50-year plans adopted by local groundwater districts that can include factors like water level decline or flows from springs.
The anticipated maximum pumping volume included in Bass’ companies’ applications exceeds the modeled available groundwater for the Carrizo-Wilcox Aquifer in Anderson and Henderson counties — it’s 43% more than what’s available in both counties, even before accounting for existing users.
Bass said the figures in those applications are being misinterpreted. “We would never ask for more than the MAG,” he said in an interview. “Do you think that we would have done this and asked for more of the MAG? I think that’s silly.”
His permit applications are for exploratory wells, which would help determine how much water was available to pump. Producing and exporting water require separate permits, which the company hasn’t yet applied for. The company “is taking a conservative, science-based, phased approach to the development of data-based science for the aquifers … to understand and avoid potentially unreasonable impacts to the aquifer,” Bass wrote in a follow-up email.
He emphasized: The company will not take more than what’s available.
Impact on Houston, other communities
Water experts warn that diverting water from the Carrizo-Wilcox could impact downstream users of surface water because the aquifer helps replenish rivers and streams.
“Something I like to say is with groundwater, what goes down must come up,” said Robert Mace, the executive director of the Meadows Center for Water and the Environment at Texas State University. “Whatever is coming in as recharge at some point is coming back up to the surface.”
The Water Development Board determined in 2016 that groundwater contributes an average of 30% of the water flowing in Texas rivers. While property owners have rights to the groundwater below them, surface water is owned by the state.
At the July legislative hearing, Kevin Ward, the general manager of the Trinity River Authority testified that groundwater from the Carrizo-Wilcox supports flow on the Trinity River, which supplies Lake Livingston — and greater Houston — with its water. “We've got permits for that water and it goes to Houston,” he said.
Harris’ bill overturning the rule of capture recognizes the connection between surface and groundwater by creating liability for a landowner who pumps water so that it “causes harm” to a neighbor or to the aquifer; or “has a direct and substantial effect” on surface water.
Harris said he had spoken with Gov. Greg Abbott, who “fully understands … the need to protect our groundwater.” For lawmakers to consider Harris’ bills, Abbott would have to add it to the special session agenda, which has been consumed by fighting over new congressional maps and ends on August 19.
Harris said that if lawmakers get called back to Austin for a second special session, he’ll ask Abbott to add groundwater to the agenda.
Community response
By mid-June, groundwater in Anderson County “was the hottest topic around,” said Dick Swift, a retired lawyer and former Democratic state representative from Palestine. “You couldn't go anywhere without people talking about it.”
That month, hundreds of people showed up to a meeting of the Neches and Trinity Valleys Groundwater Conservation District to protest the permit application. Local landowners pleaded with the district to protect their wells, saying the aquifer was already dropping. A lawyer representing Wayne-Sanderson Farms, a poultry producer that processes millions of birds a week and contracts with hundreds of growers across East Texas, most of whom rely on groundwater, said the permit applications would jeopardize the company’s water supply.
Bass sat in the front row, listening to the four hours of testimony.
“They were woefully uninformed and uneducated on the subject, but they were obviously very emotive and don't want, quote, ‘their water leaving’,” Bass said of the hearing.
In June, Bass requested that the company’s groundwater permit applications be heard by the State Office of Administration Hearings rather than the groundwater district. A few weeks later, Swift helped a group of local landowners incorporate as a nonprofit to raise money for a lawyer to represent them at the hearing, which could happen sometime in the fall.
A personal injury lawyer by training, Swift had taken a groundwater case three decades earlier after he was approached by three landowners in Henderson County. A water bottling company had started pumping so much groundwater that the landowner’s wells had run dry. The landowners not only wanted damages for their wells — they wanted the court to overturn the rule of capture.
The case ended up before the Texas Supreme Court in 1999. The justices agreed that the rule of capture no longer made sense for Texas, but concluded that it was not the court’s role to overturn it, given that “water regulation is essentially a legislative function.”
Justice Nathan Hecht wrote that he anticipated the Texas Legislature would soon modernize the rule, noting it “revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV.”
The rule of capture would remain, Hecht wrote, “for now — but I think only for now.”