Water rights in Colorado are unique when compared to other parts of the United States. The use of water in this state is governed by what is known as the "Prior Appropriation System". This system of water allocation controls who uses how much water, the types of uses allowed, and when those waters can be used.
A simplified way to explain this system is often referred to as "first in time, first in right." An appropriation is made when an individual physically takes water from a stream (or underground aquifer) and places that water to some type of beneficial use. The first person to appropriate water and apply that water to use has the first right to use that water within a particular stream system. This person (after receiving a court decree verifying their priority status) then becomes the senior water right holder on the stream, and that water right must be satisfied before any other water rights can be fulfilled.
For example, assume three water-users exist on a stream system with adjudicated (court-approved) water rights totaling 5 cfs (cubic feet per second). The user with the earliest priority date has a decree for 2 cfs, the second priority has a decree for 2 cfs, and the third priority right has a decree for 1 cfs of water. When the stream is carrying 5 cfs of water or more, all of the rights on this stream can be fulfilled. However, if the stream is carrying only 3 cfs of water, its priority number 3 will not receive any water, with priority number 2 receiving only half of its 2 cfs right. Priority number 1 will receive its full amount of 2 cfs under this scenario. This process of allocating water to various water users is traditionally referred to as "Water Rights Administration," and is the responsibility of the Division of Water Resources.
Of course, the appropriation system is much more complicated than this. Some priorities on major stream systems in the state date back to the 1850's, and most of the stream systems have been over-appropriated ("over-appropriated" means that at some or all times of the year, a call for water by a senior appropriator is not being satisfied) since the 1890's. The preceeding example above does, however, describe the basic theory behind the system.
How does this affect you? Practically speaking, it means that in most river drainages a person cannot obtain an underground water right without a plan for augmentation that replaces the depletions associated with that diversion. (Surface water appropriations may still be allowed if they can be shut off when a senior water right is calling for water. Domestic surface water rights are discouraged in over-appropriated basins without augmentation so the domestic supply does not have to be shut down). For the most part, only small residential and livestock wells (exempt from water rights administration and meet strict criteria set forth by the legislature) are allowed to be drilled without providing for protection to senior water rights.