1

Pressures for Change

The West is defined . . . by inadequate rainfall. . . . We can't create water, or increase the supply. We can only hold back and redistribute what there is.

Wallace Stegner, 1987

The American West faces many challenges, but none is more essential than the wise management of its limited water resources. Many of its river basins are fully allocated, yet the demand for water is increasing in response to continued population growth and the emergence of new social values.

In the West today, the era characterized by the construction of large subsidized water storage facilities and distribution systems has ended, and an era of reallocation and improved management has begun. This policy shift reflects the region's adjustment to changes in society's demands and values. An urbanized West demands water for new municipal and industrial uses as well as water to ensure environmental quality and recreational opportunities. Western water policies are based increasingly on the need to manage water resources better to accommodate a wide range of interests. The trend is to move water from existing uses, primarily irrigation, to growing cities, which can no longer secure additional supplies through surface supply augmentation or ground water pumping, and to a variety of instream uses.

There is an increasing consensus in the western water community that new demands must be met primarily through the reallocation of existing supplies. The use of voluntary water transfers, or water marketing, has been accepted by many members of the western water community —sometimes with great enthusiasm and sometimes with



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment 1 Pressures for Change The West is defined . . . by inadequate rainfall. . . . We can't create water, or increase the supply. We can only hold back and redistribute what there is. Wallace Stegner, 1987 The American West faces many challenges, but none is more essential than the wise management of its limited water resources. Many of its river basins are fully allocated, yet the demand for water is increasing in response to continued population growth and the emergence of new social values. In the West today, the era characterized by the construction of large subsidized water storage facilities and distribution systems has ended, and an era of reallocation and improved management has begun. This policy shift reflects the region's adjustment to changes in society's demands and values. An urbanized West demands water for new municipal and industrial uses as well as water to ensure environmental quality and recreational opportunities. Western water policies are based increasingly on the need to manage water resources better to accommodate a wide range of interests. The trend is to move water from existing uses, primarily irrigation, to growing cities, which can no longer secure additional supplies through surface supply augmentation or ground water pumping, and to a variety of instream uses. There is an increasing consensus in the western water community that new demands must be met primarily through the reallocation of existing supplies. The use of voluntary water transfers, or water marketing, has been accepted by many members of the western water community —sometimes with great enthusiasm and sometimes with

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment resignation—as the best method for reallocating existing supplies to these new uses (Brickson, 1991; Wahl, 1989; Willey, 1985). This report examines the issues that arise out of the western states ' increased interest in water transfer mechanisms for reallocating water in an efficient and fair manner. Water transfers increasingly are seen as an important management option because they present opportunities to meet municipal and industrial demands, bolster environmental and recreational values, and shift water to new uses with minimal disruption to existing rights holders. Reliance on markets as opposed to government subsidy and regulation reflects a general societal belief that markets are a more effective way to allocate scarce resources efficiently and fairly. But many questions about the impacts of water transfers remain unanswered, especially regarding their effects on a wide range of third parties. To date, many discussions have centered on describing transfers and the institutions that govern them. For the past decade the policy focus has been on how states and the federal government can create the necessary incentives to reduce associated transaction costs and to encourage more water transfers. The focus in this report is different. The committee acknowledges that water transfers can produce many benefits, and it documents instances where these benefits appear to have been generated. But the special emphasis here is on the potentially neglected third party effects of transfers—the impacts these changes in water allocation and use can have on the people, communities, and environments that are not typically considered parties in the transfer process. These effects are examined primarily in relation to the transfer of water from one use to another, but the committee also discusses other forms of reallocation that can result from judicial declarations of rights and new management initiatives when these actions relate to water transfers. Third parties are both those who hold vested water rights that may be at risk from a transfer and those who claim a “nonproprietary” stake in the process and represent a range of economic, environmental, and social issues related to the transfer. These third parties—perhaps more correctly called “affected parties”—include areas of origin; Indian tribes; other minority cultures (primarily Hispanic) that want to preserve traditional cooperative land and water use patterns; communities that depend on irrigated agriculture or waterbased recreation; boaters; anglers; and broad segments of the public who care about wetlands, riparian areas, endangered species, instream flows, and other environmental values that might be harmed or enhanced by a change in water use.

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment This report is especially concerned with third parties whose interests are not now adequately represented in the institutions and processes of water allocation. It characterizes the range of existing nonproprietary third party interests and describes ways in which current water allocation institutions accommodate or neglect these interests. In addition to this general analysis of third party effects, the committee has examined seven specific areas in the West where water transfers are occurring or may occur in the foreseeable future. These cases illustrate that water transfers—despite their often positive benefits— also have the potential to impose significant harm on parties outside the transfer process. It is premature to offer a comprehensive assessment of the benefits and costs of water transfers, because transfer theory exceeds transfer practice. Thus the committee does not render definitive judgments about the role that water transfers should play in the future of western water allocation or how specific third party effects should be weighted by decisionmakers. Rather, the committee endorses the merits of water transfers as a mechanism for meeting new demands and recognizes the legitimacy of a wide range of potentially affected third party interests. This committee believes that allocation processes should accord third parties (both those with water rights and those without them) legally cognizable interests in transfer discussions and that state and tribal governments should develop new ways to consider these interests. Western water has never been allocated solely by markets, and market transfers are not an end in and of themselves. Rather, they should be part of an allocation process that serves both private and public interests. Western water law is currently moving in two directions. To encourage transfers, states are trying to reduce the transaction costs incurred when a transfer is proposed and to create greater incentives to conserve and perhaps transfer conserved water. At the same time; much more attention is being paid to new water uses, often in situ, and to the broader consideration of impacts on third party effects. These two trends can have opposing effects on transaction costs. Despite a potential increase in cost, the inclusion of these new voices in water transfers is a logical extension of the western state ' long insistence that water use promote broad societal goals. The range of interests represented at the bargaining table must be broadened if water transfers are to achieve their potential. Otherwise, these third party effects act only as constraints on reallocation and thus further reduce the incentive to use transfers in appropriate situations. The challenge for water regulators and providers is to devise processes that encourage transfers with real benefits and restrain or

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment Why the Committee Focused on Transfers Within States Rather Than Between States Water can be transferred within a state or across state and major river basin boundaries. This report focuses on the simpler of the two scenarios: intrastate water transfers. This type of transfer occurs far more frequently than transfers between states or between interstate basins, and intrastate transfers often raise similar issues for water resource officials throughout the West. Interstate transfers, on the other hand, typically introduce unique political and legal constraints and considerations. Individual states have adopted a number of different legislative strategies in attempts to safeguard their interests in the context of proposals to transfer water out of state. For example, northwestern state delegations have long worried about southwestern designs on the Columbia River and have successfully pushed through Congress a prohibition on federal funding of studies to examine proposals to transfer water from the Columbia basin without the consent of basin governors. Interstate transfers on the same river can be equally controversial because they pit states with uneven growth rates against one another. Proposals to transfer water from the upper Colorado River basin to the lower basin result in substantial controversy about the “law of the river, ” the phrase used to describe the numerous federal laws, court decisions, and interstate compacts dictating allocation of the Colorado River. Because of these unique legal and institutional constraints and the large scale of major interstate, interbasin transfers, such transfers are relatively rare; thus an attempt such as this to draw lessons from our past experiences with water transfers is best focused on intrastate efforts. The applicability of these lessons to interstate transfers may be limited by the factors discussed above. condition those that impose high costs on legitimate third party interests. Each state and Indian tribe will have to decide how to strike this balance. In this report, the committee offers some general principles and suggestions that might help accomplish this objective. Water marketing strategies build on the fact that western water rights have long been classified as property rights that exist independently of land ownership. Much of the West's urban and agricultural development has depended on transfers from one watershed to another, and water rights have long been transferable. However, water rights transfers were historically a secondary means of ensuring

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment adequate supplies, compared to supply augmentation using ambitious construction projects. The legacy this tradition left to western water law is that water rights are transferable property rights, but such transfers can be difficult to accomplish because of the unique nature of water rights. Water rights are more contingent compared to property rights in land. They are dependent on the dedication of water to productive use and they are inherently correlative. A water right is valid only so long as the water is put to a beneficial use and all rights are defined in relation to other users. In short, a water rights holder only acquires the right to use a specific quantity of water under specified conditions. The limited nature of property rights in water is captured by the legal concept that all water rights are usufructuary. A water transfer cannot take place if other water rights holders—even junior rights holders—will be injured. Thus every water transfer is potentially a multiparty transaction. The traditionally protected third parties—water rights holders—no longer represent the entire class of relevant interests with a legitimate stake in transfers. Most western states now have some procedures to protect third parties, but existing water transfer institutions accommodate these nontraditional and new interests with varying degrees of success. Some procedures fit into the basic appropriation scheme. For instance, junior appropriators have standing to object to a transfer, and Indian tribes can assert their generally superior reserved rights. In addition, in Colorado, Idaho, Nevada, and Wyoming, a state agency may hold instream flow appropriations, and most states require that the state engineer consider the public interest in both new appropriations and transfers. However, the committee's case studies illustrate that the list of third party interests that are legally protected is shorter than the list of interests actually affected. Consequently, the task of determining how to assess and accommodate such concerns has just begun. The challenge today is to satisfy existing demands while dealing equitably with rural communities, the environment, Indian tribes, and ethnic communities. In this report, the committee suggests a number of elements that should be considered in evaluating transfers and recommends changes in existing state and federal laws and policies to promote transfers that reallocate water without adverse effects. Tribal governments may also find these ideas useful as they develop water laws and policies for the Indian reservations. The committee also identifies situations where transfers need to be reviewed and either restrained or reworked to mitigate adverse effects.

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment There is no simple answer regarding the size of the negotiating table for water transfers. As Joseph L. Sax, a leading water law scholar, observed to the committee, the West must accept the reality that water transfers will more often resemble diplomatic negotiations than simple market transactions. The committee does, however, endorse the position that in the long run expanded efforts to consider third party interests will promote both more efficient and more equitable allocation of western water. Added short-run costs are a necessary price to pay for the transition from a water policy based on supply augmentation to one based on reallocation. THE HISTORICAL CONTEXT Water transfers are a signal of a change in the culture of western water allocation, and this context defines how the benefits and costs of transfers are judged. Water management is moving from an era of development to an era of reallocation and more intensive management of the resource as competing demands intensify. Since the reclamation era of the late nineteenth and early twentieth centuries—a time characterized by the construction of large water storage and distribution systems—water resource policy in the western United States has been guided by five assumptions: (1) there should be easy private access to public resources, (2) spring runoffs should be captured and impounded for use during the dry growing season, (3) these captured waters should be used for multiple purposes, (4) water rates should be minimal for both agricultural and urban users, and (5) to settle the West and promote regional economic development, water resource development should be federally subsidized. The reclamation era was characterized by the acquisition of private rights in public waters. It was a time when water conservation meant the construction of storage and distribution facilities. This historic policy is now being replaced with a more diverse one (Leopold, 1990) that recognizes the need to accommodate a wide range of consumptive and nonconsumptive water uses, primarily through better employment and reallocation of existing water supplies and pricing standards that reflect the full cost of the use of water. The roots of irrigation go deep in the West, especially in the Southwest. Initial efforts were cooperative: the Hohokam Indians developed a complex communal irrigation society along the lower Gila River in Arizona (Dozier, 1970), and the Anasazi continued the tradition until the fourteenth century, when they abandoned their villages. Spanish colonists in New Mexico and Texas blended their own irrigation culture, a legacy of the Moors (Gibb, 1960), with in-

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment digenous practices. In the nineteenth century, the Protestant missionaries who settled the Pacific Northwest used ditch irrigation. The major irrigation colonizers, however, were the Mormons, who began irrigating immediately after they entered the valley of the Great Salt Lake. Other early pioneers in Colorado and California formed irrigation colonies, which were originally part of the collective utopian movements of nineteenth-century America (Dunbar, 1983). These early irrigation efforts, however, were small. Large-scale western settlement in the nineteenth century required a larger scale of activity, and formal institutions were needed to apply strict priorities among rights to water use to compensate for the seasonal limitations of the climate. These institutions historically adapted to chronic water scarcity and unreliability by seeking outside investment capital to support construction of water management facilities—capital that could be obtained only if the legal rights to the water to be developed were secure. After the mining, open range cattle, and dry farming economies were unable to sustain western settlement and development in the late nineteenth century (Webb, 1931), western promoters turned to irrigation to settle the West. Soon, irrigated agriculture— and the values it promoted—were supported by state laws and federal monies throughout the West, and support for an irrigation-based water ethic continued for the next century. The law responded creatively to the development of a water-dependent society in the West by allowing the easy creation of private rights in public resources. This trend began during the first wave of settlement from the East—the Gold Rush—when the demand for water to work placer claims exceeded dry season streamflows in the booming mining camps (Leshy, 1990). To allow the early miners to reap the fruits of their enterprises, the unique legal doctrine of prior appropriation—providing that the party who first places water to beneficial use has the right to withdraw as much water as he can put to that use, ahead of any other user from the same source—was adopted by the courts and then by state legislatures and implicitly ratified by Congress. Prior appropriation permitted the assignment of exclusive property rights in common resources. The security of these rights, based on priority of use, was later needed by developers of large irrigation systems raising capital to build storage and distribution facilities. Prior appropriation alone could not provide the necessary security for the scale of federal, state, and private investment needed to keep the West wet enough to prosper. Large water storage systems were necessary to overcome annual and seasonal variability in streamflows, and conveyance systems to deliver water to distant points of use

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment followed logically from prior appropriation. The 1868 Powell Survey and subsequent federal water resource surveys contributed the idea that rivers should be impounded for irrigation, flood control, and hydroelectric power generation. “The greater storage of water must come from the construction of great reservoirs in the highlands where lateral valleys may be dammed and the mainstreams conducted into them by canals” (Powell, 1962). Initial western irrigation projects were sometimes poorly financed, and many of them failed. In the early 1890s, there were only 3.5 million acres under irrigation, mostly concentrated in Utah, southern California, and eastern Colorado. Irrigation then became a national crusade, and the West began a period of rapid, sustained growth and prosperity. Between 1890 and 1910 the populations of Idaho and Nevada doubled, mainly because of irrigation. “By 1910, reclamation officials were pointing to the miracles already wrought in the desert— to cities that had sprung from the sagebrush and to a new land of fortune and opportunity that had materialized in the desert at the wave of the magic wand of water” (Athearn, 1986). Together, the prior appropriation doctrine and the water development supported by federal spending produced the irrigation and urban oasis economy that characterizes much of the West today. Rights to use these augmented and more dependable supplies of water were held by public entities (either the United States or special districts) under the prior appropriation doctrine and shared by contract or subcontract with individual users. In this way a system of water allocation originally conceived in terms of private property rights became controlled by government entities. The West's water ethic is now changing, and with it the nature of water demands. The list of principal water uses has expanded beyond irrigation, municipal and industrial supply, and hydroelectric power generation to include recreation and environmental quality. The successful federal effort to settle the West through reclamation is evolving to reflect changing national priorities. We are moving from an era premised on the continual development of new supplies to a reallocation era premised primarily on the better use of existing supplies. WHY WATER TRANSFERS OCCUR IN THE WEST That water is a limited resource in the arid West becomes more apparent as the range of demands increases. Water initially was allocated simply by putting it to a beneficial use, mostly irrigation; the doctrine of prior appropriation was indifferent to the economic value of the use. However, as competition for water has increased,

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment economists and others have argued that water should be transferred “from low-value irrigation use to high-value noncrop use” (National Academy of Sciences, 1968). The classic rationale for all economic activity—gains from trade—motivates most water transfers. Buyers perceive that the cost of purchasing existing water rights and transferring water to new locations, seasons, or purposes of use is less than the cost of alternative means of securing needed supplies. Conversely, sellers—generally farmers—sell when the price offered is greater than the economic value of the crops or livestock they produce. The net result is that the new use generates higher economic returns than the old use. The economic theory of water transfers is simple, but for transfers to occur, two conditions must be met. First, the benefits to buyers must be great enough (or be perceived as great enough) to outweigh the costs of obtaining water by alternative sources or by reduced demand plus all the transaction costs. Second, the costs of buying or leasing water, which can include political costs and legal uncertainties, must be less than the costs of other means of obtaining water— such as contracting for water deliveries from a public water project or a technological approach such as desalinization. Recent studies of western water transfers suggest that more transfers of water are occurring now, and in more areas, than ever before. Data on applications filed for water rights transfers in 17 western states between 1963 and 1982 indicate a substantial increase in transfer applications (MacDonnell, 1990). There are several reasons why the level of interest in water transfers is increasing. With the exceptions of Montana, Wyoming, and the Great Plains states, most western states have experienced rapid rates of population and economic growth since World War II, especially in the last decade. More importantly, regional economies have shifted away from agriculture, livestock, and mining toward a mix of industrial and service jobs similar to that elsewhere in the national economy. Irrigated agriculture remains the predominant water user in the West, but the nonagricultural sectors now provide the majority of jobs and income in most states. The construction, manufacturing, tourism, service, and government sectors of the western states now rival agriculture in economic importance. In addition, the shift in economies and lifestyles that has come with the latest wave of western settlers has fueled increased environmental demands for water to maintain streamflows to protect fisheries, support wildlife, and maintain riparian corridors—all scarce resources in the arid West. Water quality concerns also have gained attention. Finally, the drought years of the late 1980s have prompted

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment many cities to become more aggressive in seeking additional supplies to protect their populations from future shortages. The uncertainties offered by global climate change scenarios reinforce this drive to increase the margin of safety in areas vulnerable to drought. All of these trends encourage water transfers. Continued reliance on supply augmentation would be a difficult way to satisfy these new demands. The federal government has begun to frown on irrigation subsidies. Most streams are fully appropriated, and it is increasingly common for some portion of the flow of streams to be dedicated to instream values. Arizona, Idaho, New Mexico, and some other states have set severe limits on new ground water pumping. The costs of developing new water supplies have risen for several reasons: the best reservoir sites have been used, environmental considerations and conflicting water claims have prompted litigation resulting in project delays and costly impact studies, and the federal government is less willing to subsidize project costs. In short, the appropriation of new water rights and the construction of new storage and distribution facilities are no longer the most likely or the least costly alternatives open to water providers in most cases. These changes make it more likely that the second condition for a water transaction will be satisfied—that a transfer will be a less costly way to satisfy new demands than the alternatives. CHANGING DEMANDS Competition for water has always existed in the West, but this competition was easier to address in the past, when the major competing water interests all held water rights. Agriculture, hydroelectric power, industry, and growing cities have long required water, but all these purposes could be accommodated by the prior appropriation system, and they were able to share available supplies with remarkable harmony. For instance, in many cases hydroelectric generators used the water first and passed it downstream to farmers and cities. Water rights were pooled to support large-scale irrigation. As it became necessary to irrigate larger tracts and to supplement privately financed systems, farmers were willing to subordinate their rights to be used under federally financed projects. Government-subsidized projects also provided most of the West's hydropower. Municipal and industrial growth was based initially on appropriating modest new rights to water in areas where water had not been developed intensely. The increasingly heavy urbanization of the West, however, made it necessary to transport water from distant watersheds where new appropriations were possible. In those streams

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment where most of the water was subject to existing rights, new uses depended on the transfer of existing senior irrigation rights. Agricultural water rights moved to municipal uses in spite of legal impediments and often high transaction costs. Transfers were not, however, the major means of meeting new demands. Municipal water providers were motivated by restrictions and the political unpopularity of agricultural transfers to pursue the even more costly alternative of transbasin diversions. Irrigated agriculture is stable at best in some places in the West and is under stress or in decline in others (Solley et al., 1988). Cities and industries continue to grow, and they are willing to pay high prices for water. They seek to build major storage facilities and acquire rights from farmers whose uses command lower economic value. These changes require sales and leases of existing rights and often entail the transport of water from one region, typically out of a watershed, to another. As a result, communities dependent on existing uses sometimes decline in relation to those that gain the new use of water. The most remarkable new demand is for water in place. Recreation has become a leading industry in the West, now rivaling or surpassing agriculture or mining in economic importance in nearly all western states. Boating, fishing, hunting, and other outdoor enjoyment all require abundant good-quality water in place. Although techniques to assess the economic contributions of in-place water are imprecise, in many instances the value is considerable. Apart from the substantial economic value derived from water in place, there is a growing public demand for maintenance of ecological integrity. This new view is based on a better understanding of natural systems, and it is bolstered by esthetic and emotional values. Changing water uses from consumptive off-stream uses to instream uses is possible under the laws of some states but difficult economically and politically. It is politically difficult because the diverse proponents of instream flow tend not to be organized into coalitions with the political power or funds to negotiate the transfers of senior rights. Public agencies and officials have focused most studies to date on the efficacy of western water law as a device for facilitating transfers of water. Recommendations are typically aimed at removing obstacles to the marketability of water rights. But as the attractiveness of water transfers becomes more widely understood, inadequacies in the laws and policies regulating transfers also become more obvious. Existing law in some states still tends to impede desirable transfers, although these impediments are being removed. The great-

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment est problem, however, is that there are interests that deserve protection from the negative effects of transfers but that water law was designed primarily to protect water rights holders, not other interests that might be affected. SOME RECENT TRANSFERS The motivations for transfers can vary. Interest in transfers was stimulated during the energy boom of the 1970s. Studies predicted that water scarcity would inhibit mineral extraction and power production, and energy companies and utilities began purchasing water rights from all available sources. The predictions were largely wrong; nonetheless, many farm-to-industry sales occurred around the West. During occasional downturns in the agricultural economy, some farmers found that they could make more money by selling their water rights than by raising irrigated crops. Buyers have been primarily urban developers and municipalities who need additional supplies for growth. Environmental interests are also purchasing water to transfer to instream flows to restore fisheries and wetlands and to develop or maintain recreation-oriented local economies. Some investors have speculated that the price of water rights would rise, and several groups have bought water rights in recent years. Sometimes buyers lease the water back to the irrigators who sold it, which lets farming continue until the water is actually needed to accommodate new urban growth. So far, however, there has been little market demand for these pooled rights held by investors. Mining interests, energy companies, and other industries are not currently major water buyers, owing to slow growth in these sectors, but they could enter the market again if energy and mineral prices rise or the federal government takes new initiatives to reduce our dependency on imported oil. New vitality in these sectors would stimulate additional interest in water transfers. Tens of millions of dollars were spent on western water rights during the 1980s, primarily in the Southwest. (The prices reported in the next few paragraphs refer to the purchase of water rights—perpetual access to a specific quantity of water—except where the text specifically notes that the transaction is a lease of water or an arrangement for a one-time use of water.) In Colorado, cities and developers along the Front Range (Denver, Colorado Springs, and Fort Collins) have purchased agricultural water rights to meet growing water demands. Prices in the late 1980s ranged from $1,000 per acre-foot ($810 per megaliter (ML)) of water rights to more than $5,000 per acre-foot ($4,050 per ML) in some areas that have few alternative

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment Water as an Investment Investors have been active in western water markets for a number of years. Investors purchase water rights—like other commodities—in the expectation that they eventually will be able to sell them to cities, industries, and private developers at a profit. This activity increased in the late 1980s, especially when a dramatic stock market decline in 1987 pushed investors to analyze alternative investments while widespread drought focused national attention on the long-term value of reliable water supplies. A number of popular publications, including Newsweek, Business Week, the Wall Street Journal, and the New York Times, ran articles on water marketing and investing in water rights. Groups of investors pooled money to purchase a diverse portfolio of water rights. Such portfolios strive to acquire ground water entitlements, surface rights, irrigation district shares, reservoir stock, and other water entitlements that appear to be secure water rights and that are expected to appreciate in value. Several investment funds also have been created to acquire water rights. Prudential Bache formed a limited partnership to raise $20 million for water rights investments, offering shares at $50,000 a piece to qualified investors with a 10-year investment period. Another investment fund, Western Water Rights Management, Inc. (WWRM, Inc.), raised $35 million to invest in water rights, based on funds provided largely by East Coast and foreign investors. The water acquisitions can be resold to developers and municipalities who seek to lock in reliable water supplies to accommodate development projects and population growth over the next decade. WWRM, Inc., acquired numerous water rights in Colorado's rapidly growing Front Range and is analyzing acquisitions in several other areas. The Resource Conservation Group, Inc., was formed to promote transfers of underused water in Colorado, Utah, and Wyoming to rapidly growing areas in California, Arizona, and Nevada. The investors have retained four former governors of southwestern states to facilitate proposed interstate water sales. Western Water Development, Inc., based in the Reno area, and American Water Development, Inc., based in the Denver area, are two other multimillion dollar funds specifically designed for water rights investment. Although investment groups such as these have supported the price of water rights in the West through their acquisitions of inventories, they have engaged in very few profitable sales as yet.

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment supplies. 1 In Arizona, water rights sold for more than $1,500 per acre-foot ($1,210 per ML) in the Phoenix and Tucson areas. “Water ranches”—agricultural lands purchased solely for the associated water entitlement—total tens of thousands of acres. Investors and cities who have bought water ranches eventually plan to move the water from its present uses to provide for urban growth (Colby, 1990b). *Matheson, S. M. 1991. Future Water Issues: Confrontation or Compromise? Journal of Soil and Water Conservation 46:96-97. The Truckee and Carson river basins, near Reno in western Nevada, also have an active market in water rights. Senior irrigation rights sold in the 1980s for between $2,000 and $3,000 per acre-foot (between $1,610 and $2,430 per ML) to developers and municipal water providers and, most recently, to environmental groups wanting to restore fragile wetlands. Water rights prices are lower in central Utah, where urban growth and the need for new supplies are not so great. More than 100,000 acre-feet (123,400 ML) of water rights were purchased in the late 1980s in the Salt Lake City area at prices between $160 and $250 per acre-foot ($130 and $200 per ML). For water rights around Albuquerque, New Mexico, where urban growth has stimulated an active market, market prices are more than $1,000 per acre-foot ($810 per ML) (Colby, 1990b). In contrast to the Southwest and intermountain states, few water rights have been sold in the Pacific Northwest and the northern Great Plains states. In general, water supplies far exceed demand during normal flow years in these areas, although demand for instream uses —especially to restore fisheries and support white water rafting—is increasing. Cities or businesses needing additional water can usually appropriate additional water rights under state law or can lease long-term supplies from a reservoir owner with surplus quantities. California is the only rapidly growing arid state that has not had many water rights sales until recently (for reasons explored in Chapter 10 and Chapter 11), even though some parts of the state face significant long-term water shortages. In California, there are hundreds of privately owned surface and ground water rights that could be marketed. 1   Water users and water managers in the West have a long history of measuring water in acre-feet, which is thus the primary unit used to describe water volume in this report (1 acre-foot is the volume of water required to cover 1 acre of land to a depth of 1 ft). The corresponding international system unit would typically be cubic meters (1 acre-foot equals 1,233.5 m3). This report elects to use a less common metric unit—the megaliter (ML), where 1 ML equals 1,000 m3—because the resulting conversions are more similar in scale to acre-feet. For instance, 100 acre-feet of water equals 123 ML (versus 123,350 m3).

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment Still, much of the state's water supply is “locked in,” delivered under long-term contracts with state and federal water projects. Many different parties have to agree before these contracts can be changed, so transfers of water are hard to implement. However, high demand for more water by California cities has led to water leases and innovative exchange arrangements that circumvent these difficulties. TYPES OF WATER TRANSFER OPPORTUNITIES Several different types of transactions—including water leases, water banks, dry year option arrangements, and transfers of salvaged water—may be used to transfer water use from one party to another. Water rights may be sold or leased, and the transfer may be permanent or temporary. Water Leases A water lease occurs when a water rights owner and a new user negotiate an agreement to use a fixed quantity of water over a specific period of time, instead of purchasing a permanent right. Leases often occur during dry years, when some farmers or cities run low on water supplies in storage and need a temporary way to endure short-term drought. For example, junior rights irrigators with orchards and other high-value perennial crops sometimes lease water on a one-time basis for their late summer irrigations from neighboring seasonal crop growers who hold more senior rights. Orchard crop owners are willing to pay more for this water than it was worth to irrigate field crops because they face the danger of losing their long-term investment if their trees die. Water lease prices in various areas of the West cover a broad range. For example, in 1988 the Bureau of Reclamation offered to lease water from its Green Mountain Reservoir in western Colorado at $6 per acre-foot ($4.85 per ML) for agricultural use, $10 per acre-foot ($8.10 per ML) for municipal use, and up to $80 per acre-foot ($65 per ML) for industrial use. In the same year, the bureau's central Arizona project office leased surplus water to Phoenix-area customers at prices ranging from $35 to $82 per acre-foot ($28.40 to $66.50 per ML) (Water Market Update, 1988). In another lease arrangement in the late 1980s, the Montana Fish, Wildlife and Parks Department paid $20,000 for a release of 10,000 acre-feet (12,335 ML) from Painted Rocks Reservoir into the Bitterroot River to preserve downstream fisheries (Colby, 1990a).

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment Water Banks Water banks are another transfer-related option. A water bank is a formal mechanism for pooling surplus water rights for rental to other users. In Idaho, for example, farmers with surplus entitlements from federal projects sell more than 100,000 acre-feet (123,400 ML) annually through water banks that are sanctioned by the state. Water bank leases generally result in changes in point of diversion of storage water or changes in place or purpose of use. Several tests must be met before reallocation through a water bank is approved, such as whether the lease would cause the use of water to be expanded beyond that authorized under the water right or whether it would conflict with the local public interest. Idaho water bank prices in the late 1980s ranged from $2.75 to $5.50 per acre-foot ($2.23 to $4.45 per ML) for one-time use of the water during the irrigation season. Part of the fees collected goes to the entity supplying the water to the rental pool; part goes to the water district to cover administrative costs. Prices are set by the water banks' governing boards and are actually well below the real market value of the water. Figure 1.1 illustrates the quantities of water banked and used for irrigation and power production in Idaho's Upper Snake River Water Bank since the bank was established in 1979. FIGURE 1.1 Summary of Idaho's Upper Snake River Water Bank activities (1979 to 1989).

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment In 1991, California responded to a 5-year drought by establishing a water bank to facilitate market-like transfers of water. The arrangement provides for the state to buy water from voluntary sellers and distribute it at cost to urban and agricultural users with critical needs, urgent fish and wildlife protection needs, and carryover storage to guard against a sixth dry year (Vaux, 1991). Dry Year Option Arrangements Many water users have enough water to meet their needs in most years but not in the driest years. As a result, users sometimes attempt to negotiate an option agreement with senior rights holders to use the senior water during dry years only. Dry year option arrangements allow the senior rights holders to continue to use the water (in most cases for farming) in normal years and give the option holder (often a municipal user) a cost-effective way to make its supply more reliable during dry years. For example, a dry year option agreement has been implemented by a Utah city and a nearby irrigator. The city paid the irrigator $25,000 for entering the option arrangement for a 25-year period; during those dry years in which the city takes water, it pays the farmer a set sum plus the quantity of hay the farmer might have grown. The farmer benefited from the cash payments and the guarantee of hay for his livestock; the city was assured more reliable supplies. On a larger scale, the Metropolitan Water District (MWD) of southern California has proposed a dry year option arrangement to farmers in the Palo Verde Irrigation District. The MWD offered cash payments for each acre placed in the program and additional payments each time it asserts its option to transfer the water during dry years. The irrigators declined that offer, but negotiations continue. It is inevitable that more such agreements will be negotiated in the future. In northern California during the summer of 1988, the East Bay Municipal Utility District (EBMUD) offered irrigators a dry year option based on a payment for the water of $50 per acre-foot ($40.50 per ML). However, the irrigators felt the price was too low, and no agreement was reached (Water Market Update, 1988). Transfers of Salvaged Water Transfers of salvaged water also occur. This is a variation of a water sale, in which a city or business that needs additional supplies finances irrigation improvements in exchange for rights to use the water that is conserved. In Wyoming, the city of Casper paid for

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment upgrading irrigation systems in the Alcova Irrigation District in order to salvage several thousand acre-feet of water from the district for new municipal use. In California in 1989, after years of negotiations, MWD and the Imperial Irrigation District (IID) reached an agreement calling for MWD to pay for irrigation system improvements within IID in exchange for rights to use the water conserved. The IID is at the lower end of the river system, and there are no opportunities to reuse return flows, so the return flow is considered “wasted.” In California, MWD has begun a closely watched pilot program with the Coachella Valley Water District to salvage Colorado River water imported to southern California via leaky canals. Through a multimillion dollar canal-lining project, MWD hopes to salvage up to 30,000 acre-feet (37,000 ML) annually for municipal use. Additional transfer arrangements involving water conservation are under serious consideration elsewhere in California. Other Types of Exchanges Water transfers also include exchanges in which one user trades some water or combination of water and money for another user's supply because the timing, guarantee of availability, or quality makes that supply more attractive to the first user. This type of exchange is relatively common in Colorado, where cities buy water rights in adjacent basins and exchange them for water that can be piped through existing conveyance systems. California droughts have spurred exploration of water exchanges. To protect the quality of supplies for urban customers during the anticipated 1989 to 1990 drought, EBMUD, in the San Francisco region, wanted to trade low-quality water to local irrigators in exchange for an equivalent amount of their entitlement to higher-quality mountain runoff from the Mokelumne River, EBMUD's normal source of supply. Again, this proposal was rejected by local irrigators. Another bank-like type of exchange that has occurred in California and could be used elsewhere involves trading surplus surface waters in wet years for accumulated ground water supplies during droughts. The MWD of Southern California has had a policy of storing imported water in ground water aquifers since 1931 (MWD, 1989). The MWD and other water users in California are recharging and stabilizing ground water aquifers by putting surplus surface water into the ground water in both adjudicated and unadjudicated basins. This activity could be extended to irrigation districts. Surplus surface water would be stored during wet years in exchange for use of local irrigation rights during droughts. During dry years, MWD

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment would use the farmers' surface water rights for municipal use; the farmers would then pump the water that MWD has previously recharged into the ground water beneath their lands. THE CASE FOR TRANSFERS The demand for water by irrigated agriculture is likely to continue its decline relative to other water uses because of a combination of market forces and a fundamental shift in values (Figure 1.2). Lower agricultural commodity prices, comparatively higher energy costs, and the rising opportunity costs of capital all hinder the development of major water projects for agriculture. Environmental concerns about dewatering and irrigation-related water quality problems are increasingly evident. Federal and state policymakers need to ensure that water allocation laws can respond to all water use demands —old and new—in an efficient and fair manner. Changes in laws and policies will be required to encourage better water management among all users. Many environmentalists, water experts, and urban suppliers have endorsed water marketing as a desirable reallocation policy. Water marketing can help promote both efficiency and fairness. Markets respond to price signals and move resources from lower- to higher-valued uses. They also respect existing property entitlements and thus allow water rights holders both to set the pace of transition and FIGURE 1.2 The area of land irrigated reached its zenith in the 1970s and is now declining in each of the regions of the West. The greatest decrease has occurred in the high plains of Texas because of declining water table levels, decreasing well yields, increasing pumping costs, and low farm commodity prices.

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment to receive compensation when water is transferred. For these reasons, water markets will probably be a keystone of water policy in the next century. Nevertheless, they should be seen in the context of the full range of water management techniques, for the issue is not promoting transfers per se but promoting better water management. Federal agencies have a large and potentially positive role to play in water transfers. The Bureau of Reclamation stores and distributes large blocks of water used primarily for irrigated agriculture but that could be a source of transfers to environmental and urban uses. In basins such as the Upper Missouri River, the Army Corps of Engineers controls a great deal of water that could be the source of similar transfers. The basin case for the transfer of federally supplied water is to correct inefficiencies that are the result of a long history of subsidized irrigation water. Many students of reclamation policy have reached the conclusion articulated in a recent study (Wahl, 1989): “Rather than attempting to reduce the subsidies embodied in existing contracts, federal policymakers should seek to make the current property interests in federally supplied water more secure and to allow voluntary market trading of the resource among water users.” Many federal project beneficiaries do not agree with this conclusion, but it seems clear that transfer policy will play a central role in the debate about the Bureau of Reclamation's future. The issue is not just whether water markets can reallocate water when the gains are positive and discourage reallocation when the costs are high but whether the institutional setting is sufficient to bring all relevant third parties into the deliberations. This issue is not often raised with respect to markets because it is typically assumed that markets provide an accurate measure of the relevant values of a resource. But markets are not always efficient (Livingston and Ruttan, 1990), and they may not reflect the full range of non-economic values. The diverse and strongly held economic and cultural values associated with water suggest that we need an expanded set of criteria to evaluate transfers. Accordingly, in preparing this report the committee recognized the relevance of both economic techniques, which can be used to measure the value of water and the costs of transfers, and other, more subjective methods that permit subtle and intangible values to be considered. In evaluating third party effects, the Committee on Western Water Management assumed that reallocation of water among uses will be a principal feature in a new era of western water management, and increased conserva-

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment tion, increased use efficiency, and improved reservoir operation will also be important features; the general direction of reallocation will be from agricultural to municipal, industrial, recreational, and environmental uses; water markets involving willing buyer-seller transaction opportunities will continue to expand; and new formal and informal constraints on water transfers and third party effects of Water transfers will be established to ensure that reallocation processes include the consideration of all relevant interests. The committee approached its examination with an optimistic sense of the role water transfers can play in a new era of more efficient use and more evenhanded response to diverse values, but with the important caveat that transfers need to be more closely monitored than they have been in the past. Judicious intervention in water transfer processes will be necessary to avoid or to ameliorate the adverse effects of some transfers. This report, like others before it (Driver, 1986; Smith, 1988), sees great potential benefits in reform of the law and administrative procedures guiding water transfer activity in the western states. REFERENCES Athearn, T. G. 1986. P. 35 in The Mythic West in Twentieth-Century America. Lawrence: University of Kansas Press. Brickson, B. 1991. Water farming in the West: The impacts and implications of long-term, rural-urban ground water transfers in four western states. In Western Water. Sacramento, Calif.: Water Education Foundation (September-October). Colby, B. G. 1990a. Enhancing instream flow values in an era of water marketing. Water Resources Research 26(6):1113-1120. Colby, B. 1990b. Sources of water: Agriculture—The deep pool? In L. MacDonnell, ed., Moving the West's Water to New Uses: Winners and Losers. Boulder: University of Colorado, Natural Resources Law Center. Dozier, E. P. 1970. The Pueblo Indians of North America. New York: Holt, Rinehart and Winston. Driver, B. 1986. Western Water: Turning the System. A report to the Western Governors' Association from the Water Efficiency Task Force. Denver: Western Governor's Association. Dunbar, R. 1983. Pp. 9-35 in Forging New Rights in Western Waters. Lincoln: University of Nebraska Press. Gibb, H. A. R., ed. 1960. P. 492 in The Encyclopedia of Islam. Vol. 1. Leiden, Netherlands: E. J. Brill/Lozac and Company, London, England. Leopold, L. 1990. Ethos, equity and the water resource. Environment 32(2):17-20, 37. Leshy, J. 1990. The prior appropriation doctrine of water law: An emperor with few clothes. Journal of the West 29(3):5-13. Livingston, M. L., and V. W. Ruttan. 1990. Efficiency and equity in institutional

OCR for page 16
Water Transfers in the West: Efficiency, Equity, and the Environment development: A perspective on water resources in the arid west. Rivers 1(3): 218-226. MacDonnell, L. 1990. Shifting the uses of water in the west: An overview. In L. MacDonnell ed., Moving the West's Water to New Uses: Winners and Losers. Boulder: University of Colorado, Natural Resources Law Center. Metropolitan Water District (MWD). 1989. Programs to Expand Groundwater Conjunctive Use in Southern California . Los Angeles, Calif. National Academy of Sciences (NAS). 1968. Water and Choice in the Colorado Basin: An Example of Alternatives in Water Management. Washington, D.C. Powell, J. W. 1962. Report on the Lands of the Arid Region of the United States. P. 23 in W. Stegner, ed. Cambridge, Mass.: Belknap Press of Harvard University. Smith, R. T. 1988. Trading Water: An Economic and Legal Framework for Water Marketing . Washington, D.C.: The Council of State Policy and Planning Agencies. Solley, W. B., C. F. Merk, and R. R. Pierce. 1988. Estimated use of water in the United States in 1985. U.S. Geological Circular 1004. 64 pp. Stegner, W. 1987. P. 6 in The American West as Living Space. Ann Arbor: University of Michigan Press. Vaux, H. J. 1991. The California drought: 1987-? Water Science and Technology Board Newsletter 8(2), April. Wahl, R.W. 1989. Markets for Federal Water: Subsidies, Property Rights, and the Bureau of Reclamation. Washington, D.C.: Resources for the Future. Water Market Update. 1988. Stephen Shupe ed., Market strategies pursued by East Bay MUD, 2(9):13. Santa Fe: Shupe and Associates. September. Webb, W. P. 1931. Pp. 237-238 in The Great Plains. New York: Grosett & Dunlap. Willey, Z. 1985. Economic Development and Environmental Quality in California's Water System. Berkeley: Institute of Governmental Studies, University of California.