12

Conclusions and Recommendations

The West's water needs are changing. Rapidly increasing economic and population growth in urban areas has generated corresponding increases in demand for augmentation of water supplies. Irrigation, by far the largest water use, remains a mainstay of some local and state economies. Perhaps the most rapidly escalating call for water is motivated by concern for environmental and recreational values, values not protected by law or public advocacy in the early evolution of western water allocation. These increasing and shifting patterns of demand are being exerted on a resource already fully appropriated in most of the region.

The committee believes that voluntary water transfers are the single most significant tool available for responding to these new and changing water needs. It is nevertheless the case that transfers sometimes are proposed without proper regard for third party interests. Based on its review of the potentially adverse impacts of water transfers, this committee concludes that third party interests deserve greater consideration when transfers are proposed. While seeking ways to promote transfers, state and tribal governments should also devise ways to improve their laws and procedures to protect third parties. Federal agencies involved in water allocation and management should also promote transfers and protect third party interests in the process. Each sovereign must devise its own specific approach, suited to its own objectives, but the committee offers recommendations to aid decisionmakers in designing these approaches. The rec-



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Water Transfers in the West: Efficiency, Equity, and the Environment 12 Conclusions and Recommendations The West's water needs are changing. Rapidly increasing economic and population growth in urban areas has generated corresponding increases in demand for augmentation of water supplies. Irrigation, by far the largest water use, remains a mainstay of some local and state economies. Perhaps the most rapidly escalating call for water is motivated by concern for environmental and recreational values, values not protected by law or public advocacy in the early evolution of western water allocation. These increasing and shifting patterns of demand are being exerted on a resource already fully appropriated in most of the region. The committee believes that voluntary water transfers are the single most significant tool available for responding to these new and changing water needs. It is nevertheless the case that transfers sometimes are proposed without proper regard for third party interests. Based on its review of the potentially adverse impacts of water transfers, this committee concludes that third party interests deserve greater consideration when transfers are proposed. While seeking ways to promote transfers, state and tribal governments should also devise ways to improve their laws and procedures to protect third parties. Federal agencies involved in water allocation and management should also promote transfers and protect third party interests in the process. Each sovereign must devise its own specific approach, suited to its own objectives, but the committee offers recommendations to aid decisionmakers in designing these approaches. The rec-

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Water Transfers in the West: Efficiency, Equity, and the Environment ommendations are based on the fundamental premise that transfers should meet the needs of a changing West while causing a minimum of adverse impacts. The committee examined 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. The committee believes that 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. CRITICAL ISSUES Three critical issues received recurring attention during the course of this study—area-of-origin protection, instream uses, and transaction costs—and should be considered key areas of concern for federal, state, and tribal governments committed to improving their water transfer processes. Area-of-Origin Protection If water transfers are to be used to facilitate more responsive water management, the equity issues related to area-of-origin impacts will require continued attention. Although an individual farmer might benefit from selling water rights to satisfy growing urban demand, rural counties are left with the problem of trying to protect their tax bases, environments, cultures, and economic futures. The Arizona Ground Water Management Act, as enacted in 1980, is one example of this dilemma. It allowed water to be transferred from agricultural areas to municipal and industrial use, but it has no mechanisms for considering the interests and values of the areas where the water originates. Changes enacted in 1991 do provide some area-of-origin protection. Similar concerns are expressed by people in communities where social and cultural values may depend on protecting existing water uses and keeping water in natural water courses and wetlands. 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

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Water Transfers in the West: Efficiency, Equity, and the Environment New Mexico state system, however, like most western states, regards water essentially as a property right and a commodity; it does not see water as an element of community cohesion, history, and collective aspirations. Instream Uses It is also clear that one of the major issues for 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 West's history, 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), virtually all western states have enacted programs that legally recognize instream uses. However, because water in most western streams is fully appropriated, such mechanisms face significant constraints. In most cases, a public entity holds such rights and they are relatively junior in priority. Several of the case studies illustrate that transfers can be used to help satisfy demands for instream flows with more reliable senior rights. However, existing institutions generally 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 both the threat of a judicially mandated involuntary transfer and the provision of funds to induce water rights sales. 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. Transaction Costs The potential for increased transaction costs caused by greater consideration of third party effects must be addressed. Public policy has been greatly influenced by the concept of transaction costs and the need to minimize them. 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

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Water Transfers in the West: Efficiency, Equity, and the Environment 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. Others, however, result from ambiguous policies or criteria for transfer approval, and from costly and duplicative efforts to provide information about a transfer and its potential impacts. Additional costs are incurred when the range of parties engaged in the transfer process is expanded to include third parties. In general, transaction costs that are incurred in empowering and accommodating traditionally underrepresented third party interests are beneficial. In other words, society agrees to incur costs beyond those basic to the process of buying and selling water in the hope 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 to encourage market transfers. The case studies reviewed in this report 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. Although substantial opportunities exist to improve the transfer procedures in use in the West and reduce some costs, 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. CONCLUSIONS AND RECOMMENDATIONS Conclusion 1: Water transfers can promote the efficient reallocation of water while protecting other water-dependent values recognized by society. Changes in the use of water—whether in the point of diversion, location of use, or type of use, and whether or not accompanied by changes in ownership of water rights —are necessary and desirable in a dynamic society. Changes in use often are driven by changes in the perceived economic value of a particular water use. For most of the West's history since settlement, diversions have been from natural watercourses and instream uses to storage and off-stream use, initially for mining, later for agricultural and municipal purposes. These demands led to the construction of major storage and conveyance facilities, including systems for interbasin transfers within and among states. Economic reality and environmental concerns limit the construc-

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Water Transfers in the West: Efficiency, Equity, and the Environment tion of additional water development projects designed to increase supplies. As demand approaches the limits of available supplies, the movement of currently available water from relatively low-valued to relatively high-valued uses becomes an increasingly attractive alternative. Furthermore, the water transfer agenda now includes acquisition of water rights and changes in water project operations to restore and protect instream flows and associated values that were degraded by past patterns of water development and use. The committee supports water transfers as one component of efficient water management, provided that such transfers are accomplished equitably. One problem is that existing laws, policies, and procedures concerning water market transactions and other transfers often fail to ensure either that third parties are protected from negative effects or that they share the benefits. Affected parties can include existing rights holders, rural communities, unique cultures, the environment, and other interests beyond the willing seller and willing buyer. The impacts can be obvious—increased per capita costs for irrigation system maintenance and operation, and loss of county tax revenues —or subtle—the diminished viability of rural economies, a loss of confidence in the community's future, and the erosion of unique cultural values of water-dependent communities. Examples of possible environmental impacts include instream flow losses and water quality alterations affecting fish and wildlife; changes in aquatic and riparian habitats, stream channel integrity, and esthetic values; and the loss of recreational uses. The “no injury” rule that historically has governed water transfers under the prior appropriation doctrine in most western states is the foundation for third party protection, but it generally is not adequate to protect the full array of affected interests. Although many states have adopted a public interest review requirement for proposed transfers, others still rely exclusively on a no injury test that protects only other water rights holders. Further, public interest requirements in some states are not clearly defined, leaving state administrators with little guidance on how to apply the policy. Many changes in state and federal laws, policies, and procedures are needed to provide appropriate protection for the full range of water uses and users, natural environments, basins of origin, unique cultures, and communities. RECOMMENDATION: All levels of government should recognize the potential usefulness of water transfers as a means of responding to changing de-

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Water Transfers in the West: Efficiency, Equity, and the Environment mands for use of water resources and should facilitate voluntary water transfers as a component of policies for overall water allocation and management, subject to processes designed to protect well-defined third party interests. Conclusion 2: State and tribal governments have primary authority and responsibility for enabling and regulating water transfers, including identification and appropriate mitigation of third party effects. States historically have had primary authority in the administration of water rights, except on Indian lands where tribal governments are the administrative authority. Thus the administration of water transfers is the responsibility of the state or tribal governments. These governments are capable of assessing transfers in the context of the region's water management needs and of providing accessible mechanisms for revealing and addressing third party impacts. This authority is extensive, including transfers of federal project water. Federal intervention may be necessary, however, when there is an overriding national interest such as interstate relations, navigation, or endangered species. State and tribal governments should design administrative processes so that the scale of regulation reflects the scale of effects. For example, transfers of water rights within a basin involving no change in use and no change in point of diversion should be processed with minimal delays and procedures while still meeting baseline public notice, protest, and hearing requirements. The most straightforward transfers—those involving minor and noncontroversial changes of use within a basin—could be treated as presumptively approvable as long as direct third party effects are identified and reasonable mitigation measures are presented in the transfer application. The burden of proof for disapproval would fall on regulators and opponents. Large or complex transfers within basins, most interbasin transfers, and interstate transfers need additional scrutiny. These should be evaluated against public interest criteria defined by the state, with consideration of biological, physical, and economic efficiencies, and of significant economic, environmental, and social effects on third parties. The burden of ensuring that third party impacts are revealed and considered in the review process should be shared by the transferring parties and state and tribal governments. Recognition of rights to instream flows is one way of preserving environmental interests within state and tribal water law systems.

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Water Transfers in the West: Efficiency, Equity, and the Environment State laws regarding the acquisition of water rights for instream flow purposes vary. Some states allow any party to acquire and hold rights for instream flow purposes, whereas others require such rights to be held by a designated state agency. Given the importance of instream flows to a variety of third parties, authority to acquire and hold water rights for instream flow purposes should be a feature of water law and administrative practice in all states. RECOMMENDATIONS: State and tribal administrators should develop and publish clear criteria and guidelines for evaluating water transfer proposals and addressing potential third party effects. State and tribal administrative processes should provide for public and broad third party representation in the review of water transfer proposals. In addition to normal actions such as notices of proceedings, public hearings, and protest opportunities, programs should include affirmative review of potential third party effects in cases likely to involve significant effects. State and tribal processes should seek to regulate water rights transfers in ways appropriate to the scale of effects with the dual objectives of avoiding excessive transaction costs and providing meaningful consideration of third party interests. State laws should allow governmental entities to acquire water rights for instream flow purposes with the same priority and protection against injury enjoyed by rights held for other uses. Affirmative state policies may be necessary and appropriate to acquire sufficient instream flow rights to mitigate the effects of historic diminutions of streamflow. States should provide leadership in exercising their water administration and planning responsibilities to identify opportunities for water transfers that might serve as instruments for achieving a wide range of water management objectives. Conclusion 3: Water transfer law and policies should be designed to consider the interests of the trading partners, third parties, and the environment in a cost-effective manner. In designing transfer policies, decisionmakers face serious trade-offs between the desire to preserve the direct private or public gains from water transfers and the desire to protect third party interests. Such policies significantly affect the relative benefits and costs of

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Water Transfers in the West: Efficiency, Equity, and the Environment proposed transfers and the distribution of these benefits and costs. As a general rule, regulatory processes and requirements that attempt to protect against all third party impacts regardless of the nature or magnitude of the effect or the standing of the party result in high transactions cost and discourage desirable transfers. Conversely, procedures and processes that ignore third party interests altogether allow transfers to impose inequitably large losses on third parties. Either result is inefficient and inequitable. Regulatory processes and requirements can distinguish between large or pervasive third party effects and small or ephemeral impacts. In many instances the costs of accommodating or mitigating third party impacts can be defrayed from the economic benefits that the transfer generates. Transaction costs can be reduced by taking steps to improve the information base that is used to evaluate a transfer, encouraging negotiated resolutions to conflicts, and establishing streamlined procedures for estimating transferable quantities based on consumptive use for various categories of use. Many disputes between transfer applicants and objectors involve the quantity of water that should be transferable. Policies that presume a transferable quantity per irrigated acre may help reduce transfer costs. New Mexico, for instance, sets a standard quantity of water that may be transferred per unit of irrigated land retired. Parties who disagree with this quantity bear the cost of proving that some other amount is appropriate. This system, however, requires third parties to take on a potentially difficult and expensive task—quantifying the amount of water that can be transferred. In contrast, the Colorado transfer review process requires the transfer applicant and all objectors to provide evidence on transferable quantity, thus possibly incurring higher cumulative costs for engineering and legal studies but providing more protection. Each state can consider ways to reduce the informational costs of assessing transfer impacts as well as the costs created by ambiguous criteria. Litigation often is inevitable to resolve water use conflicts, but adversarial proceedings are not a good forum to explore a wide range of options affecting multiple interests. Nonjudicial conflict resolution processes might be valuable for providing comprehensive evaluation of transfer proposals. There is a need to allow others besides attorneys and technical experts to share in framing the issues, as well as a need to share the information among all interested parties. Transaction costs incurred to address third party concerns serve a beneficial role when they give affected third parties a voice in the review process. However, there are many opportunities to reduce unnecessary transaction costs by clarifying state policies and by en-

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Water Transfers in the West: Efficiency, Equity, and the Environment couraging actions to lower the costs of gathering information on potential impacts. RECOMMENDATIONS: The costs of mitigating third party effects should be internalized as a cost of the transfer—that is, the beneficiaries or proponents of the transfer should bear the mitigation costs as a matter of law and equity. Therefore the cost of the transfer should include sufficient funds to help mitigate third party effects, in the form of water, money, or other compensation. To help reduce costs, policies might be designed so that, in general, transfers of acquired rights are limited to consumptive uses. This may entail setting state, river basin, or regional standards for the consumptive use of water per irrigated acre based on crop type, historic water availability, and other local variables. Such standards should be flexible enough to account for variations in water availability and local conditions. Third parties should not have to develop data on the transferable quantity; data should be developed by the buyer or seller. Regulatory requirements should be designed to encourage negotiated resolutions of conflicts. Consideration should be given to processes other than judicial proceedings (e.g., a state water court) to provide the initial evaluation of transfer proposals. Conclusion 4: Water transfers between basins should be evaluated to determine and account for the special impacts on interests in the areas of origin. Water is not merely a commodity in the normal sense of the word but rather a resource held in common for all citizens, and this should be recognized in the processes used to evaluate water transfers. The interests of communities, local governments, individuals, and the environment in the areas from which water is proposed to be exported are not now adequately represented in the laws and policies of many western states. Communities hold strong values that support maintaining water within its natural watershed. For some, water is the basis of present and future economic vitality and environmental amenities; these values often are augmented by water-related social and cultural concerns and traditions. Among the cases studied, the threat to cultural values is illustrated dramatically in the case of the acequias of northern New Mexico.

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Water Transfers in the West: Efficiency, Equity, and the Environment State laws and policies often fail to recognize that when water is removed from its natural watershed a variety of economic, social, and environmental harms can occur. Prior appropriation law has never limited the use of water to the watershed in which it originates, and the committee does not recommend that water be constrained to its watershed of origin. However, states do need to ensure that the special problems caused the public by transbasin export are fully addressed before such transfers are permitted. Although basin-of-origin interests should not have veto power over transfers, their interests should be represented in the evaluation process, to the extent that those interests are important to society. State tax laws often provide incentives for transfers because local taxing jurisdictions cannot impose taxes or in lieu payments, and these incentives could be revised to address the equities of reallocation. Municipalities and certain quasi-public water utilities that purchase or lease water supplies or build and operate works to use water supplies from outside their service areas ordinarily pay no property taxes to local governments in areas of origin because of intergovernmental immunity from taxation. In addition, western states usually provide by law that private entities may be taxed on the value of water facilities only by the county where the water is used. The inability to tax facilities that dewater areas of origin compounds the disadvantages to the communities in these areas. For instance, states could revise their tax laws to make exporting entities bear a larger portion of the costs of mitigating the third party effects of transfers. Exporters could be subject to local property or other taxes. States might consider developing a transaction tax for water rights transfers. This transaction tax would be analogous to a severance tax and would be used to mitigate adverse environmental effects caused by transfers (interbasin as well as others). Setting the level of such a tax would require careful analysis so that desirable transfers are not discouraged but adequate revenues for mitigation are collected. RECOMMENDATIONS: States and tribal governments should develop specific policies to guide water transfer approval processes regarding the community and environmental consequences of transferring water from one basin to another, because such transfers may have serious long-term consequences. Water transfer processes should formally recognize interests within basins of origin that are of statewide and regional importance, and these interests should be weighed when transbasin exports are being considered.

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Water Transfers in the West: Efficiency, Equity, and the Environment Although each state or tribe should select the approach that suits its needs best, area-of-origin protection generally would include impact assessment, opportunities for all affected interests to be heard, regulatory mechanisms to help avoid adverse effects, compensation (e.g., financial payments or mitigation), and authority to deny a proposed transfer or water use involving a transbasin export if the effects are judged unacceptable. States should revise laws that now exempt water facilities from taxation by the county of origin either because the exporter is a public entity or because of provisions that make such facilities taxable only in the county where the water is used. Mechanisms to compensate communities for transfer-related losses of tax base, such as an annual payment in lieu of taxes, may be needed. Conclusion 5: Public interest considerations should be included among the third party issues and legal provisions for permitting. conditioning, and denying water transfers. The committee recognizes the difficulties inherent in representing and quantifying public interest values in state and tribal forums. Many state laws, for example, direct administrators to consider the public interest as they review proposed transfers, but few provide real guidance as to what constitutes the public interest or offer specific procedures to ensure probable effects and adequate representation of the public interest. Legal inadequacies and uncertainties often restrict or hinder economically efficient and environmentally desirable water rights transfers. These uncertainties and problems also often interfere with effective actions on behalf of third party interests, including factors usually referred to as “public interest” and “public trust.” Although this report makes a modest attempt to suggest some elements critical to any definition of the public interest, state and tribal governments ultimately must provide such guidance for their water administrators. This guidance must include criteria to be considered in a public interest review and also procedures to provide for adequate representation of the interests. RECOMMENDATIONS: To protect third parties in water rights transfers, public interest language in western states' water laws should be reviewed, clarified, and, where appropriate, more vigorously applied. States should develop definitions and criteria for assessing what constitutes the

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Water Transfers in the West: Efficiency, Equity, and the Environment public interest, perhaps benefiting from the legislative and judicial initiatives developed by the states of Idaho and Alaska. Such definitions should embrace existing water rights holders, environmental water needs for ecosystem protection, and social and cultural values in basins of origin. To the extent that public trust concepts and values cannot be represented dependably under existing laws and policies, states should develop new laws, institutions, and administrative tools for doing so. Key elements of public trust administration might include comprehensive planning at the river basin level, including the identification of existing social and environmental values dependent on water, clearly defined procedures to guide applicants seeking water transfer approval, and institutional arrangements for holding and managing water for instream and environmental uses. Conclusion 6: Environmental impacts can and should be considered by state, tribal, and federal agencies when potential water transfers are evaluated. Transfers of water may have significant effects on natural ecosystems, ranging from loss of aquatic and riparian habitats associated with dewatering streams to water quality effects arising because of increasing concentrations of pollutants. Direct impacts on plants and animals also are caused by the construction and operation of physical conveyance systems used in support of water transfers. Those states (such as Colorado) that rely solely or primarily on the prior appropriation system and a test of no injury to other water rights holders do not adequately assess injury to natural ecosystems. Environmental protection should be part of the basis for impact assessment and mitigation relating to proposed transfers. Current law requires significant environmental studies when new structural water projects are undertaken, including reservoirs, channelization, power generation, and diversion projects. However, little effort is made to quantify or characterize the local and regional environmental impacts caused by water transfers and related conveyance systems. This inequity will need attention as water transfers become an increasing component of water management. RECOMMENDATIONS: Federal, state, and tribal water transfer policies and laws should ensure consideration of ecological values affected by transfers, for

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Water Transfers in the West: Efficiency, Equity, and the Environment example, the goals of protecting riparian and wetland habitats and the water needs of endangered species. Adjustment of water laws, administrative practices, and water supply strategies may be necessary to achieve this end. States should develop inventories of wetland and riparian systems that depend on surface water systems likely to be sought for transfers so that transfers can then be evaluated in light of ecosystem protection and restoration goals. When water is transferred to new uses in new areas, there is an opportunity to promote overall efficiency by dedicating some of the newly available supply to public uses such as environmental protection. Congress should consider using a share of the receipts gained from marketing federal project water to acquire water to protect western biota and habitats. The federal Land and Water Conservation Fund Act might be amended to permit both state and local grant recipients and federal agency participants to use fund money to acquire water rights for environmental protection and mitigation. Conclusion 7: Traditional Indian and Hispanic communities have unique interests relating to water transfer policies, and these interests merit special consideration when proposed transfers are evaluated. In many water transfers, traditional Indian and Hispanic communities find themselves in a classic third party role. Such communities view water rights administrative processes—including rights filings, adjudications, and transfers—as a threat to their historical uses of water. Also, they often view the prior appropriation doctrine as serving individual interests at the expense of community interests and as hostile toward communal social values. Many Indian and Hispanic communities had well-established water use and allocation systems that preceded state systems. When states adopt the prior appropriation system and apply it to these communities, they can cause considerable disruption of longstanding water management processes. For example, in the acequias of northern New Mexico, prior appropriation adjudications imposed a system of individual priorities for the first time on a tradition that called for communal sharing of surpluses and shortages. The new priority system fractured longstanding and important communal structures. It is important to note that traditional Indian and Hispanic communities were not adequately represented in state water adjudications because members lacked not only knowledge of the importance

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Water Transfers in the West: Efficiency, Equity, and the Environment of the adjudications but also the resources to assert their interests fully. As a result, in many instances, individuals within the community were decreed no water or less water than had been used historically. Moreover, during the era of federal investment in Bureau of Reclamation water infrastructure and delivery systems, traditional communities typically were ignored. As a consequence, water supplies for these communities were limited. Thus, in evaluating proposed water transfers, states should consider options to supplement existing decrees that do not adequately address the historical water uses of Indian and Hispanic communities. RECOMMENDATIONS: States should carefully scrutinize any proposed water transfer that could adversely affect water supplies for Indian and Hispanic communities. States should consider enacting legislation that permits the establishment of historical or cultural zones as a means of insulating Indian and Hispanic communities from further injury. Transfers that would have adverse impacts on these zones would receive strict scrutiny. Conclusion 8: Tribal governments should consider special factors in approving and administering water transfers on their reservations. Indian tribal governments play a dual role when water transfers involve reservation water. As proprietors, tribes typically have senior water rights within a state appropriation system; as sovereigns, tribes have authority to administer members', and often nonmembers', water use on the reservation. Senior reserved Indian water rights were essentially ignored during the era of federal investment in large irrigation storage and water delivery systems. As a consequence, Indian communities generally lack the facilities to use much of their water entitlement and often lack the capital to develop such facilities. In the meantime, non-Indian appropriators, often with the assistance of federal reclamation projects, have used water from the streams where Indian rights exist. Tribal governments have on-reservation authority for administering water transfers. Setting tribal water transfer policies and administering them present special challenges. Tribes desire some flexibility to adjust their senior water rights use to current economic conditions. Water use transfers are an important means for achiev

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Water Transfers in the West: Efficiency, Equity, and the Environment ing the highest and best use of water. Tribes, however, should not ignore the needs of third parties in tribal water transfers. Notably, as tribal water codes are being drafted, they need to consider these and other third party impacts. Tribal consideration of transfers of water to off-reservation uses raises additional questions. Foremost among these questions is what law applies to the tribal water when it leaves the reservation. States have very strict rules to protect existing and even junior water uses from injury as a result of a senior water right transfer. State law, however, does not apply to Indians' use of their water on their reservations. Federal and tribal laws governing Indian tribes' use of their water are still evolving but are beginning to conflict with state attempts to extend its water laws into Indian country. This fact, along with the specter of non-Indians having to compete and pay for water they used historically for free, is causing state and tribal tensions. Indian reservations suffer the highest rates of poverty and attendant social ills of any region in this country. Tribal governments therefore must find ways to develop healthy economies and employment. With declining federal funding, tribal water marketing can generate critically needed capital for development. Leasing opportunities exist both on and off reservations, and several recent settlements include provisions for off-reservation leasing of tribal water. RECOMMENDATIONS: When Indian water rights are transferred or applied to off-reservation uses, tribal governments should establish procedures to evaluate third party effects. State and federal governments should cooperate with tribes in evaluating and implementing mutually beneficial transfers. Conclusion 9: Water laws should be enacted to promote water conservation and salvage while protecting third party interests. Water is a scarce resource in the West, and all intentional and nonintentional uses of water that prohibit reuse merit careful attention. Interest in water conservation and salvage operations has been aroused by the Imperial Irrigation District to Metropolitan Water District transfer described in Chapter 11. Although it may be difficult to duplicate the success of this transfer, countless smaller salvage projects could be undertaken. In addition, some states—particularly Arizona—are looking to agricultural water conservation to make water

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Water Transfers in the West: Efficiency, Equity, and the Environment available for other uses and have enacted policies to encourage or mandate agricultural conservation. Technology is available to reduce much water waste. Because much of the water in the West is used by irrigated agriculture, however, the feasibility of applying the technology is limited by the economic condition of agriculture. The feasibility of applying technology to reduce evaporation losses from water surfaces, reduce transpiration from unwanted plants, and reduce loss of water to areas where it is not recoverable is limited by economics. Salvage is further complicated by legal uncertainties concerning who owns or controls the conserved water; state laws that prohibit the transfer, sale, or reuse of conserved water; and the difficulties of maintaining the timing and quantity of return flows on which downstream rights holders depend. If widespread water conservation and salvage are to take place throughout the West, the return flow problem must first be overcome. The principal reason the Imperial Irrigation District/Metropolitan Water District salvage project succeeded is because there are no downstream senior water rights that depend on the return flows, with the exception of environmental third parties (e.g., the Salton Sea). If legal disincentives to water conservation and salvage are removed and unnecessary procedural requirements are relaxed, the cost of converting wasted water to productive uses could be reduced. Some controls are necessary, of course, such as existing laws that prevent a would-be salvager from depriving another water user of a water supply by consuming more water than the amount historically used or allowed by an existing water right. But states should act to remove the threat that salvaged water will be declared abandoned. They may want to liberalize the standard of proof that water is truly conserved or salvaged and not being taken from others. Water is, after all, the property of the public, and a public service is provided by those whose conservation and salvage efforts make more water available in a stream. The great potential of water salvage notwithstanding, laws that facilitate salvage should not ignore the potential for disruption of natural systems, environmental amenities, and the expectations of future water users. Improvements in irrigation efficiency can dry up a wetland. Streams valuable for river rafting can be reduced to unsuitable levels. These interests should be weighed in an established state transfer process that includes procedures for considering effects on the public interest. To the extent that these matters are generically addressed in the allocation and transfer process, no special treat

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Water Transfers in the West: Efficiency, Equity, and the Environment ment is necessary for a transfer or reuse of conserved or salvaged water. A state, however, may wish to use the transfer of conserved or salvaged water as an opportunity to further public purposes. For instance, Oregon has integrated the goals of its instream flow protection program with a conservation and salvage law enacted in the late 1980s. It requires that 25 percent of the water conserved be allocated to the state to maintain instream flow. Thus far, however, the committee is not aware of any transfers that have occurred under Oregon's new law. RECOMMENDATIONS: States, tribal governments, and federal agencies should establish programs to reduce the uncertainties and costs involved in water conservation and salvage, facilitating and providing incentives to encourage conservation and reuse of water. State, tribal, and federal water transfer review processes should take full account of the third party effects of a transfer of conserved or salvaged water, just as with any other transfer. Conclusion 10: Water transfer reviews should consider the interrelationships between water quality and water quantity and also between surface and ground water resources. Where water is scarce, it is particularly important to recognize the relationships between quantity and quality and between surface water and ground water supplies. As population growth and economic development continue in the West, the increased demand for water is likely to highlight these relationships. For instance, both sewage effluent and irrigation return flows are potential causes of water quality degradation, depending on the degree to which they are diluted with higher-quality water. Uncertainty about the water rights status of sewage effluent in some states (e.g., Arizona) restricts water use changes that would allow use of effluent for replacement purposes or to meet downstream senior water rights. Growth in the urban and industrial sectors also can bring increased pollution, and polluted supplies in effect reduce the quantity of water available for use. Effects on ground water and surface water quality may arise from transfers to new locations and uses, and from the diminished assimilative capacity of the water bodies from which the transfers are made.

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Water Transfers in the West: Efficiency, Equity, and the Environment RECOMMENDATIONS: States and tribes should accelerate the development of laws, policies, and administrative procedures to ensure consideration of water quality changes that might result from transfers involving the use of municipal effluent and other waters of impaired quality. States and tribes should encourage conjunctive management of surface and ground water, based on knowledge of hydrologic connections and a full consideration of the related water quality issues and other potential third party effects. States and tribes should require agencies to develop technical capabilities for evaluating and monitoring surface and ground water quality as part of the transfer evaluation process. Conclusion 11: Federal legislative and administrative policies should more clearly support federal water transfers while addressing third party effects and the distribution of benefits from transfers involving federal project water. Current policies of the Congress and the U.S. Department of the Interior regarding the transfer of entitlements to federal project waters are vague. Although they represent a positive step to separate project entitlements from the original beneficiaries, the policies provide no guidance on how to identify and evaluate third party impacts when entitlements to use federal project water are transferred. Attitudes toward transfers vary considerably within federal water agencies; some regional offices promote transfers aggressively, whereas others generally take a hands-off attitude or actually restrict transfers. Neither Congress nor federal project administrators has been clear as to which third party effects should warrant denial of federal project transfers and which need to be mitigated before transfers are allowed to proceed. For example, Congress has not spoken on the crucial issue of the resale of federal waters at a profit—the “windfall” issue. Congress could decide to recapture some of the federal (i.e., taxpayer) investment in federal projects, either in the form of financial contributions or in the form of water that might be reallocated to new purposes such as environmental protection or mitigation. These uncertainties are an impediment to changes in the use and location of use of federal project water and provide sharp contrast to the orderly review processes that exist in some states (e.g., Idaho).

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Water Transfers in the West: Efficiency, Equity, and the Environment These uncertainties can lead to inefficient and sometimes environmentally and socially damaging solutions to western water problems. Federal policies on voluntary water transfers generally defer to state law and administrative practice in determining how the third party effects of proposed water transfers are to be assessed and accommodated. Nevertheless, some federal project consistency should be encouraged in this critical area of concern. Some third party effects are so serious that they may warrant federal denial of proposed water transfers. Others may not warrant denial but may require that substantial mitigation measures be taken. RECOMMENDATIONS: The Secretary of the Interior should develop a formal process for assessing transfers of federal project water. This process should identify the role of those agencies of the Department of the Interior responsible for natural resource stewardship, and allow for consultation with tribal governments, states, and the interested public, to ensure that major third party effects are assessed and mitigated. Congress should set clear policy for the distribution of profits from the resale of federal project water, and this policy should provide a portion of the economic value in federal project water to be recaptured for public use. The Secretary of the Interior should require greater consistency in applying the department's general policy supporting voluntary transfers and should specify that there is authority to transfer water among as well as within project service areas. Careful attention must be paid to third party effects.

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