New Mexico's water law is derived from the mixture of Spanish and Mexican law with the West's traditional rule of first in time, first in right. While New Mexico is clearly a prior appropriation state, New Mexico's water law also accommodates historic pueblo rights and reserved Indian rights.

Unlike other Western states, New Mexico applies the doctrine of prior appropriation to both surface water (§ 72-5-1 et seq.) and to groundwater (§ 72-12-1 et seq.). New Mexico uses a permit system to regulate new appropriations of water. For surface water, the State Engineer should grant a permit if the State Engineer finds that: (1) there is unappropriated water available for beneficial use; (2) the proposed appropriation is not contrary to water conservation; and (3) the proposed appropriation is not contrary to the public welfare.

Two organizations manage and regulate New Mexico's water resources. The Office of the State Engineer is responsible for water rights administration and conducting technical investigations regarding the state's waters. The Interstate Stream Commission has broad powers to protect, conserve and develop the stream systems of the state. The Commission administers interstate compacts, funds water development projects, and conducts regional water planning.

A permit is required for all new withdrawals from "Declared Underground Basins." Roughly 75 percent of the state is located in a declared basin. Small livestock and domestic groundwater users must submit a permit application, but are otherwise exempt from the permitting process. All other appropriators of groundwater in designated basins must prove to the State Engineer that they meet the same criteria as surface water appropriators.

When the availability of surface or ground water to fulfill water rights is in dispute, the state, federal government or an interested party may initiate a suit to adjudicate the water rights of a particular stream system. (§ 72-4-13 et seq). Adjudications occur in two phases. First, the State Engineer drafts a hydrographic survey for the stream system identifying all water users and the history of water use. The State Engineer drafts "offers of judgment" based on the hydrographic survey that are sent to water users. Second, the case is heard in the New Mexico District Court. Once in court, a water right holder may challenge the State Engineer's offer of judgment and/or the water rights of other appropriators. The adjudication ends with the issuance of a decree for the stream system.