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<br />ro:; <br />V., <br />&J) <br />C! <br />"-) <br /> <br />(-} <br /> <br />27,000 acres of water contracts had been issued, it was apparent <br />that the water supply was inadequate. The water contracts called <br />for delivery of 1.5 acre-feet of water per acre to the farmer in <br />his lateral. The company gradually reduced the number of outstand- <br />ing water contracts: however, in 1927 the water users organized <br />and prepared to bring suit against the Water company for breach of <br />contract. Unfortunately, the water users were too slow. Before <br />they could institute their suit, the Development Company brought <br />suit in the U. S. District Court for Colorado against the Water <br />Company for failure to redeem bonds which it had issued to the <br />Development Company. The Water Company was put into receivership <br />and Malcolm Lindsey was appointed receiver. This matter was not <br />settled until after the costilla Creek Compact was completed. <br /> <br />In 1914, a promising development was begun in the Jaroso <br />area. Irrigation water was to come from both the Culebra Creek <br />through Sanchez Reservoir and Lateral No.2, shown in attachment 1. <br />and costilla Creek through company-owned direct flow rights. <br />Culebra Creek did not provide much water to the Jaroso area because <br />of the previously mentioned difficulties and excessive conveyance <br />losses. So, for a few years, the company's direct flow decrees <br />provided the water for the colony. <br /> <br />In order to develop additional water, the Water Company <br />constructed the costilla Reservoir and the Cerro Canal. The <br />costilla Reservoir, which was completed in 1920, was constructed <br />in New Mexico high in the costilla Canyon about 10 miles upstream <br />from the community of costilla. The Cerro Canal, which is shown <br />in attachment 1, was completed in 1922. Water could be released <br />from costilla Reservoir and diverted into the Cerro Canal near <br />costilla. Although the permits for the costilla Reservoir and the <br />Cerro Canal issued by the New Mexico State Engineer called for <br />these projects to be used to irrigate New Mexico lands, the Water <br />Company used the projects to deliver water to the Jaroso area in <br />Colorado. <br /> <br />The Water Company operated the costilla Reservoir <br />project in this manner until 1940, when the New Mexico State <br />Engineer issued an order prohibiting further use of the costilla <br />Reservoir water in Colorado. The State Engineer reasoned that he <br />had allowed "temporary" use of the reservoir water in Colorado to <br />give time for the development of New Mexico lands. The Water <br />Company argued that it had, in effect, transferred its direct flow <br />rights in the Acequia Madre and the Manzanares and Madriles Ditches <br />to the Cerro headgate, and it had transferred water storage from <br /> <br />-6- <br />