4

Assessing Water Transfers and Their Effects: An Introduction to the Case Studies

Captain Renaud: What in heaven's name brought you to Casablanca?

Rick: My health; I came to Casablanca for the waters.

Captain Renaud: The waters? What waters? We're in the desert.

Rick: I was misinformed.

From the film Casablanca (1942)

Proposals to alter the way water is allocated in the West must necessarily consider the network of interrelated impacts that such changes might have on public and private interests. The committee elected to study these effects by undertaking a series of case studies; seven areas were selected to reflect a diverse view of the region's experience with water transfers. It was hoped that this in-depth look at specific experiences would provide insights about how to evaluate water transfer proposals in general. In analyzing the case studies, both individually and in the aggregate, the committee attempted to develop and use a systematic evaluation strategy to ensure that the analyses were both thorough and consistent. This treatment of the effects of transfers is modeled on the “four-account” system for evaluation of water projects embodied in Principles and Standards for Planning Water and Related Land Resources (Water Resources Council, 1973, 1980).

The characterization of third party effects will evolve as transfer activity increases. Still, it is the committee's belief that the evaluation strategy outlined here reflects the existing consensus on the range of physical and socioeconomic concerns that must be represented. In addition, it gives attention to intangible concerns that, although difficult to assess, must be considered.

ELEMENTS OF THE EVALUATION SYSTEM

Seven locations investigated in this report were selected to highlight the main issues that arise when transfers are contemplated or



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Water Transfers in the West: Efficiency, Equity, and the Environment 4 Assessing Water Transfers and Their Effects: An Introduction to the Case Studies Captain Renaud: What in heaven's name brought you to Casablanca? Rick: My health; I came to Casablanca for the waters. Captain Renaud: The waters? What waters? We're in the desert. Rick: I was misinformed. From the film Casablanca (1942) Proposals to alter the way water is allocated in the West must necessarily consider the network of interrelated impacts that such changes might have on public and private interests. The committee elected to study these effects by undertaking a series of case studies; seven areas were selected to reflect a diverse view of the region's experience with water transfers. It was hoped that this in-depth look at specific experiences would provide insights about how to evaluate water transfer proposals in general. In analyzing the case studies, both individually and in the aggregate, the committee attempted to develop and use a systematic evaluation strategy to ensure that the analyses were both thorough and consistent. This treatment of the effects of transfers is modeled on the “four-account” system for evaluation of water projects embodied in Principles and Standards for Planning Water and Related Land Resources (Water Resources Council, 1973, 1980). The characterization of third party effects will evolve as transfer activity increases. Still, it is the committee's belief that the evaluation strategy outlined here reflects the existing consensus on the range of physical and socioeconomic concerns that must be represented. In addition, it gives attention to intangible concerns that, although difficult to assess, must be considered. ELEMENTS OF THE EVALUATION SYSTEM Seven locations investigated in this report were selected to highlight the main issues that arise when transfers are contemplated or

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Water Transfers in the West: Efficiency, Equity, and the Environment Planning for Water Resources: The Principles and Standards Approach The question of how to measure the effects of water development and management activities is not new. During the 1960s the merits of federal water resource development projects were measured by conducting benefit-cost analyses that focused on economic impacts. During the past 25 years the federal government has taken the lead in trying to expand the range of impacts considered. The precise structure and weighing of the accounts have varied over time, but the underlying notion of a system of evaluation has endured. The evaluation system was embodied in Principles and Standards for Planning Water and Related Land Resources (P&S) (Water Resources Council, 1973, 1980). The P&S were developed as a basis for evaluating plans involving federal or federally licensed actions. The scale of activity ranged from site-specific problems to multipurpose plans for river basins. Although not designed specifically to look at the effects of water transfers, these guidelines offer insights to help illuminate third party impacts. The P&S approach offered a four-account system designed to represent the range of public interests and concerns that should be considered in water resource decisionmaking. The four accounts are national economic development (NED), regional economic development (RED), environmental quality (EQ), and social well-being (SWB) (later changed to other social effects (OSE)). The latter two categories may prove especially pertinent to the potential impacts of transfers. The NED account is an economic efficiency criterion. Positive contributions to NED are increases in the economic value of the national output of goods and services; adverse effects include the opportunity costs foregone in committing resources to the proposed project or activity. Suggested methods of analysis include assessment of net benefits, cost-effectiveness, benefit-cost, and discounting of future benefits. The RED account records potential effects on income and employment within the region to be affected by the activity. From a national efficiency perspective, RED is an inappropriate criterion because net economic effects favorable to a region may be adverse from the standpoint of the national economy. But since regional development effects have in fact been the bedrock of water development politics, it is useful to examine them when assessing the possibilities and constraints of innovation. The EQ account “identifies beneficial and adverse effects on ecological, aesthetic, and cultural attributes of natural resources.”

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Water Transfers in the West: Efficiency, Equity, and the Environment As surrogates for the economic parameters used in NED and RED accounts, other factors are used to measure EQ resources. These include “institutional recognition,” “public recognition,” environmental “customs and traditions,” and “technical recognition,” meaning the significance as judged based on scientific knowledge or judgment. The OSE account includes three categories of particular interest in terms of water transfer discussions: community impacts, displacement, and long-term productivity. Community impacts include income and employment distribution with particular reference to minorities and low-income households. SOURCE: Water Resources Council (1973, 1980). conducted. Each site was visited either by the full committee or by an assigned subcommittee; the information gathered from the literature and from experts at each site included a brief history of the settlement and water use patterns in the area, a description of the physical and socioeconomic setting, an overview of actual and potential transfer-related activities in the area, and—most importantly—a characterization of the type of transfer and its impacts. The elements of the evaluation strategy fall into three broad categories: transfer characteristics, third party interests, and the nature of third party effects. Transfer Characteristics Transfers can be voluntary or involuntary and involve a number of different state and federal procedures. Water transfers vary in type and impacts—and do not necessarily always cause harm to third parties. For the evaluation system used in this report, there are five key types of transfers under which third party effects may arise: Change in ownership of the water right. In some jurisdictions the change in ownership of a water right or contract entitlement to storage water from a federal reservoir may be treated formally as a transfer. However, a change in ownership alone does not usually lead to third party effects; as long as the water continues to be used for the same purpose at the same location, no third party effects need occur. For example, the purchase of farmland by a city in need of assured water supplies to support future development may or may not entail third party effects. In some cases, the city will hold the

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Water Transfers in the West: Efficiency, Equity, and the Environment rights, but farming will continue, and no immediate impacts will be felt. In other cases, even though the water continues to be used for agriculture, land values in the nearby community may drop. At some future time, when the city decides to use the water acquired through the farmland purchase, other third party effects may arise. Thus, when the type of use and the place of use remain unchanged, transfers of ownership do not necessarily lead to third party effects, although they may. Change in the point of diversion (for a state water right) or change in point of delivery (for federal project water). This type of transfer is fairly common and usually includes informal consideration of the impacts on other parties who hold water rights. A typical change in point of diversion might be caused by the need to relocate a water management structure such as a diversion dam or well. If the needed change is over a considerable distance, the likelihood of third party effects increases. Changes in place, purpose, or period of use. Any change in place, purpose, or timing of water use, such as a change from irrigation use to municipal or industrial use, can entail impacts on third parties. This type of transfer is most commonly associated with market-like exchanges. Change in system operations. This type of de facto transfer usually results from court actions or negotiated arrangements. Such transfers typically result from some modification in the way a project or water supply system is operated. Thus, for example, a reservoir project might be operated by closing the dam at the end of the irrigation season and reopening it only at the beginning of the next season. If, however, project operations are ultimately changed to accommodate migrating fish, and flows are maintained year-round as a consequence, the quantity of water stored at the dam will be reduced, and third party effects may result. Out-of-basin diversions. Interbasin transfers—the diversion of water from one hydrologic basin to another—do not necessarily involve a transfer of water rights. For instance, in some cases, unappropriated water in one basin may simply be moved to another basin. In other cases, however, existing water rights are involved when water is moved. Both types of interbasin transfers may bring third party effects. Third Party Interests The parties or interests affected by water transfers as well as the nature of the effects themselves may be quite varied. For each case

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Water Transfers in the West: Efficiency, Equity, and the Environment study, the committee identified the interests and parties affected and characterized the type of effect. For convenience, the interests and parties were grouped as follows: Other water rights holders. Included in this category are the holders of other water rights whose water supplies could be diminished or qualitatively impaired by a transfer or whose flexibility in using water might be affected. Agriculture. Third parties in this sector include other agricultural water users whose sources of supply may be either quantitatively or qualitatively affected or who are subject to changes (either positive or negative) in the cost of water as a consequence of the transfer. The environment. Transfers have the potential to exert a broad range of impacts on the environment, both positive and negative. Transfers can affect instream flows needed for recreational uses, fish and wildlife habitat, and the potential to generate hydroelectric power. Changes in the structure and health of aquatic ecosystems generally, or with particular effects on endangered species, and changes in water quality that threaten human health or aquatic ecosystems can also result. Urban interests. Third party impacts on the urban sector can include the loss or gain of economic activity; diminution of the tax base, as when water previously used in industrial or agricultural activity is transferred to a public entity, thereby eliminating the taxable private activity and replacing it with a tax-exempt government function; and the loss or gain of recreational opportunities. Ethnic communities and Indian tribes. Affected parties in this sector include ethnic communities that are especially dependent on the availability of water and particular ways of using water; Indians and tribal communities, many of whose water rights have been clearly determined; and residents of other special agricultural and rural communities who may value agricultural and rural lifestyles that could be jeopardized by water transfers. Rural communities. Transfers of water from rural areas can affect residents who are not parties to the transfer or water users as a consequence of erosion in the local tax base resulting from the decline or disappearance of water-based economic activity. These transfers can also have adverse (or, less commonly, beneficial) impacts on communities and businesses that are linked to water-using industries affected by a transfer. Thus, for example, firms that supply feed and fertilizer to irrigated agriculture in a given region could be hurt by large-scale transfers of water out of that region. Rural interests could

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Water Transfers in the West: Efficiency, Equity, and the Environment also be hurt by the loss of their natural resource base occasioned by such a transfer. Federal taxpayers. Federal taxpayers could become third parties to transfers that either enhance or diminish the productivity of the national economy or confer windfall gains on the buyers or sellers at public expense. Similarly, federal taxpayers may be third parties when transfers have impacts on national social or environmental objectives. Nature of Third Party Effects Third party impacts can be divided into economic effects, environmental effects, and social effects. Economic effects include positive or negative contributions to the economic value of the region's or the nation's goods and services and adverse effects stemming from opportunities foregone because of the transfer of water. Economic impacts also include changes in income and employment, the distribution and composition of local or regional populations, and the fiscal condition of state and local government. Environmental impacts include all water-related environmental effects such as the impact of alterations in instream flows on fish and wildlife, or recreation, changes in water quality, and the implications of a water transfer for wetlands and riparian ecosystems. Social impacts include noneconomic (and difficult to measure) effects on the quality of rural communities and municipalities. Intangible impacts include changes in the quality of community life, feelings of “connectedness” to the land, and a sense of control over an area's destiny. The long-term productivity and security of the community are affected when natural resources such as critical watersheds, productive cropland and rangeland, and riparian and aquatic ecosystems are lost. INTRODUCTION TO THE CASE STUDIES To highlight the nature and impacts of water transfer activities, the committee examined seven case studies (see Figure 4.1): Truckee-Carson basins in Nevada (Chapter 5), Colorado Front Range (Chapter 6), northern New Mexico (Chapter 7), Yakima Valley in Washington (Chapter 8), central Arizona (Chapter 9), Central Valley in California (Chapter 10), and Imperial Valley in California (Chapter 11).

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Water Transfers in the West: Efficiency, Equity, and the Environment FIGURE 4.1 Areas studied by the committee. These cases illustrate not only a diversity of participants and effects, but also greatly varying political and social environments. In examining the cases the committee used the evaluation system described earlier in this chapter and summarized in Table 4.1. To gather information and stimulate discussion, the committee met informally at each case study site with representatives selected from a range of interests—agriculture, water agencies, urban planners, environmental groups, local tribal populations, and other minority interests as appropriate (see Appendix B). The committee encouraged its guests to participate in frank discussions about the real and potential effects of water transfers on the people of their states and regions, with the goal of developing an accurate impres

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Water Transfers in the West: Efficiency, Equity, and the Environment TABLE 4.1 Factors to Consider When Assessing Potential Water Transfers Type of Transfer Change in ownership Change in point of diversion Change in use Change in systems operation Out-of-basin diversion Primary Process for Transfer Voluntary Involuntary Primary Market Forces for Transfer Government Local State Executive Legislative Judicial Federal Executive Legislative Judicial Affected Parties Rural communities Support services Erosion of tax base Loss of natural resource base Agriculture Remaining water users Reallocation of rights Ethnic communities and Indian tribes Ethnic communities Indian communities Agricultural maintenance and expansion Other Environment Instream flows Recreation uses Fish and wildlife Hydroelectric power Water quality Damages to water users Human health Ecosystem effects Ecosystem protection Endangered species Wetlands Riparian habitat Estuaries Urban interests Intrastate transfer constraints Tax-exempt status changes Federal taxpayers National economic concerns Windfall profits Other water rights holders Junior rights Senior rights Loss of flexibility Nature of Effects Economic (national/regional) Lost revenue Lost opportunities New revenue Environmental Instream/fish and wildlife Recreation Water quality Wetlands Social Rural communities Municipalities Other sion of the various scenarios. The committee supplemented its interviews with reviews of the appropriate literature and the expertise of individual committee members. The case study approach has both strengths and flaws. Its greatest strength is the honesty of the discussions; its main weakness is a necessary brevity and lack of depth.

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Water Transfers in the West: Efficiency, Equity, and the Environment For greater elaboration the committee refers readers to the sources cited in the chapters. The committee considered two levels of analyses central to its assignment: (1) analyses of individual cases in order to develop a thorough understanding of the site-specific causes and consequences of water management actions and third party effects and (2) analyses of the entire body of case study information and other data sources to formulate and evaluate broad policy and programmatic recommendations addressed to the management of third party effects. In undertaking the analyses of the individual case studies, the objective was not to judge the desirability of actions taken or not taken in a particular case. Rather, the committee used the analyses to help understand the causes and consequences of third party effects. Each third party effect was assessed in terms of its economic, environmental, and social impacts. In so doing, the committee recognized that water managers, political decisionmakers, and citizens will usually assign different weights to the three categories of impacts, depending on their own personal, institutional, and political perspectives. Thus the committee did not attempt to assign weights to different types of impacts or to otherwise rank them in importance. In examining the entire body of case study information the committee sought to characterize the causes and range of third party effects, identify those that were pervasive and those that were unique, identify the incidence of third party effects, and understand the actions available to mitigate or remedy the effects. This information was then used to identify explicit program or policy areas for further analysis and to justify development of the recommendations given in Chapter 12. Where appropriate, supplemental sources of information and studies published in the scientific literature were used to aid the committee in arriving at its final recommendations. CRITICAL ISSUES The case studies were conducted to examine actual and potential water transfers in diverse areas of the American West to understand better the nature, scope, impacts, and institutional setting of water transfers. Every situation is unique, but there are important commonalities. In some places—for example, Nevada's Truckee and Carson basins, central Arizona, and the Front Range of Colorado—the committee found that substantial transfer activity has occurred, sometimes involving an actual change in type or location of water use and other times involving only the transfer of rights. In other places, such as the Central Valley of California, few transfers have occurred despite

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Water Transfers in the West: Efficiency, Equity, and the Environment substantial pressures from prospective buyers. In yet other instances, such as the Yakima Valley of Washington State, transfers have been identified as a potential management option, but there are few incentives to stimulate them. The impacts of the transfers that have occurred also vary: the Imperial Valley case shows substantial benefits with few problems; potential problems were addressed through the lengthy negotiations that preceded the transfer agreement. Many cases, on the other hand, provide illustrations of unresolved third party impacts. The problems and opportunities illustrated in the various case studies are not unique and will arise elsewhere throughout the West. Thus valuable lessons for future federal and state water allocation policy can be drawn from the studies. Three critical issues, in particular, received recurring attention during the course of this study: area-of-origin protection, instream uses, and transaction costs. Area-of-Origin Protection If water transfers are to be used as one mechanism of responsive water management, the equity issues related to area-of-origin impacts will require continued attention. California enacted area-of-origin protection laws in the 1930s partly in response to Los Angeles' controversial efforts to export water from the Owens Valley. But these and other early efforts to protect areas of origin were largely ineffectual. Until recently, when increased public awareness and insistence on protecting environmental values focused renewed attention on the potential area-of-origin impacts of interbasin transfers, there was little interest in strengthening these laws. Impacts on areas of origin are addressed inadequately in most states. Although an individual farmer might benefit from selling water rights to satisfy growing urban demand, rural counties are left trying to protect their tax bases, environments, cultures, and economic futures. The Arizona Ground Water Management Act, as one example of this dilemma, allows water to be transferred from agricultural areas to municipal and industrial uses but has no mechanisms for considering the interests and values of the areas where the water originates. In Colorado, the irrigation ditch companies and municipalities who are the primary parties to transactions moving water from Colorado 's Arkansas River valley to growing cities appear satisfied with the outcome. Still, not all the affected interests were represented and considered. There were no procedures, other than the Colorado water court process, for weighing concerns about water quality or soil

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Water Transfers in the West: Efficiency, Equity, and the Environment erosion, and only limited efforts were made to judge the extent of decline in economic activity or reduced support for community infrastructure that is likely to follow the transfers. The lack of mechanisms outside the court process has frustrated west slope mountain communities in Colorado, who believe that export of their water to the Colorado Front Range will ultimately dry up their present economies—economies now based primarily on water-dependent tourism and outdoor recreation. The communities believe that interbasin transfers foreclose their future options. Subtler concerns are expressed by people in communities where social and cultural values may depend on protecting existing water uses and having water naturally in place. They fear that out-of-basin transfers will undermine the integrity of the communities themselves. In northern New Mexico, for example, the seemingly neutral institutions of adjudication—which can include a public interest review of new appropriations and transfers—do not fully reflect the concerns of the Hispanic community. Lifestyle, community organization, and personal relationships are all intimately related to traditional water uses and allocation arrangements. The state system, however, values water essentially as a commodity; it does not see water as an element of community cohesion, history, and collective aspirations. Instream Uses One of the major issues facing decisionmakers is the balancing of consumptive and nonconsumptive, or instream, uses. Prior appropriation allows private rights to be created in public resources, and throughout the history of the West appropriative water rights were typically held by private parties or public water providers for consumptive uses. (An exception was made for hydropower rights, which could be exercised only by building facilities in the stream to take advantage of flowing water.) However, many of today's demands are for nonconsumptive uses that require flowing water to be left in the stream. With few exceptions (e.g., New Mexico), most western states have enacted programs that legally recognize instream uses. Ordinarily, a public entity holds these rights. In most cases, instream flow rights are junior to existing uses. Several of the case studies illustrate that transfers can be used to help satisfy demands for instream flows with more reliable senior rights. Existing institutions do not encourage transfers for nonconsumptive uses and may in fact inhibit them. The Truckee-Carson experience illustrates the positive potential of agriculture-to-wildlife and wetland transfers. Incentives for transfers in this case included

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Water Transfers in the West: Efficiency, Equity, and the Environment both the threat of a judicially mandated involuntary transfer and the provision of funds to induce water rights sales. Judicial decisions reallocating water to Indian tribes and wildlife protection laws created strong incentives for transfers of water needed to maintain Pyramid Lake and Stillwater National Wildlife Refuge. Federal funds were authorized to facilitate the transactions. Thus, in the Truckee and Carson basins as in the Imperial Valley, transfers occurred because a court-ordered involuntary reallocation was possible and well-funded buyers were available. Voluntary transfers to instream uses have not occurred in other areas, such as the Central Valley and the Yakima Valley, where courts have not intervened or where they have confirmed existing uses. The refusal of courts to expand Indian entitlement in the Yakima basin leaves the status quo firmly in place and provides few, if any, real incentives to support legislative efforts to encourage voluntary transfers. Transaction Costs Public policy has been greatly influenced by the concept of transaction costs. Transaction costs are the costs of negotiating and enforcing transfer agreements and clarifying property rights so that transactions may proceed. The higher the transaction costs, the lower are the profits or economic benefits that accrue to those transferring the water from one use to another, and therefore the lower are the incentives motivating transfers. Some transaction costs are a necessary part of enacting any water transfer. These include costs incurred when the range of parties engaged in the transfer process is expanded to include third parties. Other costs, however, result from ambiguous policies and criteria for transfer approval and from duplicative efforts to provide information about a transfer and its potential impacts. The ability to impose transaction costs on those proposing to transfer water, an ability conferred by state laws governing who may effectively object to a transfer, represents bargaining power in the water allocation process. Market transactions are undertaken for economic gain, based on the perception that water supplies will generate higher returns in their new use. The power to erode this expected gain by imposing transaction costs gives third parties leverage in the water reallocation process. In general, the effects brought by transaction costs can be beneficial when the costs are incurred in empowering and accommodating traditionally underrepresented third party interests. In other words,

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Water Transfers in the West: Efficiency, Equity, and the Environment society agrees to incur costs beyond those basic to the process of buying and selling water in hopes that its values will be more broadly represented and the hidden costs of transfers addressed. As interest in water transfers as a voluntary reallocation tool has increased, there has been a growing call to “streamline” the process so that market transfers are encouraged. The case studies suggest, however, that this goal must be tempered by the reality that some increased transaction costs are necessary if we are to address third party effects adequately. That does not mean there are not opportunities to improve the transfer procedures in use in the West and reduce some costs. However, transferring water is no simple matter; thus no simple and inexpensive process will be able to meet the needs of buyers, sellers, governing bodies, and affected third parties equitably. REFERENCES Water Resources Council. 1973. Principles and Standards for Planning Water and Related Land Resources . Washington, D.C.: U.S. Government Printing Office. Water Resources Council. 1980. Principles and Standards for Planning Water and Related Land Resources . Washington, D.C.: U.S. Government Printing Office.