(1) The director of the department of water resources shall review all permits issued prior to July 1, 1985, which propose to divert water held in trust by the state of Idaho pursuant to subsection (5) of section 42-203B, Idaho Code, except to the extent a permit has been put to beneficial use prior to July 1, 1985, to determine whether they comply with the provisions of section 42-203C, Idaho Code. If the department finds that the proposed use is allowed under section 42-203C, Idaho Code, then the department shall enter an order continuing the permit. If the department finds that the proposed use is not allowed under section 42-203C, Idaho Code, then the department shall either cancel the permit or impose the conditions required to bring the permit into compliance with section 42-203C, Idaho Code.
(2)  The department shall provide an opportunity for hearing in accordance with section 42-1701A, Idaho Code, and chapter 52, title 67, Idaho Code, for each holder of a permit that is proposed either to be cancelled or made subject to new conditions.