From Water Wiki
Unlike in the eastern United States where water rights are tied to the land through riparian rights, much water allocation in the western United States follows the doctrine of "prior appropriation", which is based on a "first in time, first in right" principle. There are also places where "reasonable use" doctrines still apply, as well as places where systems of "correlative rights" have emerged.
Prior appropriation dictates that the first individual user to withdraw water from a source for a beneficial use has the right to the same amount of water for perpetuity, as long as he/she continues to use the water for the same purpose. Seniority is protected under this method, as new users are only allowed to use the remaining water as long as it does not affect the previous users. After determining the capacity of the shared water source for a given year, the appropriators receive their full appropriation of water, in order of seniority based on the priority date, until the capacity of the source is exhausted. When water becomes scarce, junior appropriators may find themselves without any allotment of water. Water rights from prior appropriation are not connected to land ownership, and therefore are transferable between users. The transferability of the water rights has opened doors to water markets in some of the western States.
Determining who has what priority (and thus who has what in water rights) can be a long, expensive and formal process. In New Mexico, for example, surface waters must be allocated through a formal lawsuit brought by the state in which evidence of past use is introduced and adjudicated. There are cases that have taken decades and millions of dollars in legal fees to resolve.
The prior appropriation system is overlaid on other, older systems of water allocation in some places in the western United States. In northern New Mexico, for example, the spanish-influenced acequia system of irrigation ditch maintenance has determined who gets the irrigation water for hundreds of years. The practice has been documented in popular books such as Stanley Crawford's Mayordomo: Chronicle of an Acequia in Northern New Mexico, and William DeBuys' River of Traps: A Village Life (photos by Alex Harris). The acequia system has also been studied and documented as it is still carried out in Spain by Elinor Ostrom of Indiana University as part of her encyclopedic studies of human attempts to regulate common pool resources.
Examples of innovative policies in States that use prior appropriation: