2

Third Party Impacts and Opportunities

Sooner or later in life, we all sit down to a banquet of consequences.

Robert Louis Stevenson

A water buyer and seller are the two primary parties in a water transfer, each of whom must be satisfied with the results of the negotiations for a transfer to be consummated. These primary parties negotiate in their own best interests and exercise control over whether a transfer will occur. Consequently, their interests are not typically a central concern of public policies governing water transfers. Instead, public policies must be concerned with the interests of so-called third parties, that is, those who stand to be affected by the transfer but are not represented in the negotiations and lack control over or input into the processes by which transfer proposals are evaluated and implemented.

The impacts of transfers and the parties affected are many, diverse, and potentially substantial. Third parties are described in detail in Chapter 4; they can include

  • other water rights holders;

  • agriculture (including farmers and agricultural businesses in the area of origin);

  • the environment (including instream flows, wetlands and other ecosystems, water quality, and other interests affected by environmental changes);

  • urban interests;

  • ethnic communities and Indian tribes;

  • rural communities; and

  • federal taxpayers.



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Water Transfers in the West: Efficiency, Equity, and the Environment 2 Third Party Impacts and Opportunities Sooner or later in life, we all sit down to a banquet of consequences. Robert Louis Stevenson A water buyer and seller are the two primary parties in a water transfer, each of whom must be satisfied with the results of the negotiations for a transfer to be consummated. These primary parties negotiate in their own best interests and exercise control over whether a transfer will occur. Consequently, their interests are not typically a central concern of public policies governing water transfers. Instead, public policies must be concerned with the interests of so-called third parties, that is, those who stand to be affected by the transfer but are not represented in the negotiations and lack control over or input into the processes by which transfer proposals are evaluated and implemented. The impacts of transfers and the parties affected are many, diverse, and potentially substantial. Third parties are described in detail in Chapter 4; they can include other water rights holders; agriculture (including farmers and agricultural businesses in the area of origin); the environment (including instream flows, wetlands and other ecosystems, water quality, and other interests affected by environmental changes); urban interests; ethnic communities and Indian tribes; rural communities; and federal taxpayers.

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Water Transfers in the West: Efficiency, Equity, and the Environment The types of impacts felt by these parties are quite varied but can be broadly thought of as economic, social, and environmental. Economic effects include impacts on incomes, jobs, and business opportunities. Social impacts include changes in community structure, cohesiveness, and control over water resources, and such changes can occur in both rural and urban communities. Environmental effects are broad based, including effects not only on instream flow, wetlands, and fish and wildlife, but also on downstream water quality and on recreational opportunities that are dependent on streamflows, riparian habitats, and aesthetic qualities. Because local governments in the area of origin are seldom the buyers or sellers in water transfer transactions, their interests and those of community residents frequently are of concern. Damage to the environmental and aesthetic amenities of natural and rural areas may be significant. For example, transfers that involve surface waters may decrease instream flows, leading to degradation of wetlands and water quality and to loss of riparian habitat. Such transfers also can result in increased sewage treatment costs to municipalities that rely on the depleted streams. Where surface water and ground water are closely linked, the export of ground water also can alter surface flows, with potential adverse effects on riparian vegetation and wetlands. Ground water transfers may lower the water levels in the aquifer, affecting other water users pumping from a common aquifer, drying up wetlands, and altering riparian vegetation and wildlife habitat. Negative effects tend to be most serious when transfers involve moving water from one watershed or region to another. In such instances, the benefits associated with that water are lost to the local area. Fiscal impacts include loss of property tax base and bonding capacity, tighter spending limitations, and reduced revenue sharing. Water transfers from agricultural to other uses may lead to the retirement of irrigated land. Environmental consequences include soil erosion, blowing dust, and tumbleweeds, which arise after crop production ceases (Woodard, 1988). When farmland is retired from production, the loss of agricultural jobs and related businesses may inhibit future economic growth in the area of origin. When the tax base shrinks, causing local services to decline, the area of origin becomes less attractive to new businesses. Also, water and land resources needed for new local development may be unavailable as a result of major water transfers. The committee considers voluntary water transfers to be the most promising approach to reallocating water, but it recognizes that voluntary transfers may be related to pressures for involuntary water allocation. Judicial and administrative rulings and water realloca-

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Water Transfers in the West: Efficiency, Equity, and the Environment tions often provide a stimulus for voluntary water transfers. Chapters 5, 8, and 11, which discuss the Truckee and Carson basins in Nevada, the Yakima basin in Washington, and the Imperial Valley in California, respectively, illustrate the relationships between voluntary and involuntary transfers. Water transfers are viewed by many as a valuable means of meeting the changing water needs of the West, and they are taking place. A recent study, for example, determined that from 1975 to 1984 some 3,853 transfer applications had been filed in Utah; 1,133 in New Mexico; 858 in Colorado; and 42 in Wyoming (MacDonnell, 1990a). The average quantity of water involved in a transfer ranged from roughly 6 acre-feet (7 megaliters (ML)) in Utah to 10 acre-feet (12 ML) in New Mexico and 11.5 acre-feet (14 ML) in Colorado. In contrast, Wyoming 's few transfers tended to involve substantially larger quantities of water, with a median amount of nearly 900 acre-feet (1,110 ML). In a 1986 survey the Western States Water Council found a wide range from state to state each year in the number of transfers (Johnson and DuMars, 1989). The differences depended primarily on the relationship between unappropriated supplies and anticipated demand. For example, in North Dakota, where unappropriated water has been available to meet new water needs and demand for new uses is low, few transfers occurred. At the other extreme, the survey found that water rights are freely bought and sold on the open market in the rapidly growing states of Colorado, Utah, Nevada, and New Mexico, where hundreds of transfers occur each year. Other studies also suggest that water transfers are increasing in number and are occurring in more areas than previously (Higginson-Barnett Consultants, 1984). These reports indicate that the higher level of transfer activity in some states reflects both the full use of available water supplies and the general level of support for transfers found in state law and procedures (MacDonnell, 1990a). A 1990 study also found considerable differences among states in transfer approval rates, as well as differences in the number of months taken to make a decision on a transfer application and in the costs incurred by transfer applicants and objectors in the course of the state review process (Colby et al., 1990). These studies raise some concerns about the barriers posed by transaction costs but conclude that current transaction costs do not appear to be excessive in light of the need to protect the expectations of water rights holders sharing a common source of supply. As one report acknowledges, “[p]erhaps the major policy challenge facing the western states in this area is how to address third party effects” such as instream flows, recreation, area-of-origin equity, and water quality associated with the reallocation of western water (MacDonnell, 1990b).

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Water Transfers in the West: Efficiency, Equity, and the Environment Water Transfers in the West: A Study of Six States Western water lawyers have always said that water flows uphill toward money. The shift in water policy from supply augmentation to the reallocation of existing supplies makes it important to know the truth behind this dictum. Many in the water community believe that the web of transfer procedures and substantive rules imposed to protect junior water rights holders will impede market transfers of water rights. To explore this element of water transfers, the U.S. Geological Survey sponsored a major empirical and analytical comparative study of water transfers in six western states (Arizona, California, Colorado, New Mexico, Utah, and Wyoming) to determine the level of transfer activity, to identify the major legal and institutional factors that influence the efficiency and equity of these transfers, and to measure the transaction costs imposed by the transfer process. This study, The Water Transfer Process as a Management Option for Meeting Changing Demands (MacDonnell, 1990a), has made an important contribution to our understanding of water transfer issues. The study concludes that existing third party protection rules do not impede transfers, although the time necessary to obtain transfer approval and the costs of this approval can be significant. Despite the imprecise nature of water rights, the study found that a great deal of transfer activity occurs throughout the West, ranging from informal trading of irrigation rights to exchanges, and from temporary transfers to permanent changes of the use and ownership of water rights, depending in part on the availability of unappropriated water in the state. All states have removed per se restrictions against severing water from the land on which it has been historically used, but legal restrictions still exist in several states, especially on transfers by irrigation water supply organizations. Marginal adjustments in individual state procedures can be made to further facilitate transfers, but the laws as currently written and applied generally support transfers. Most but not all transfers are reviewed by a state agency, or in Colorado by a water judge, and “[t]he approval rate . . . ranged from over 94 percent in New Mexico to about 74 percent in Wyoming. Moreover, actual denials were quite rare in Colorado, New Mexico, and Utah ” (MacDonnell, 1990a). The approval period and transaction costs of the transfer vary considerably among the states, but the costs of obtaining state approval for a transfer, except perhaps in Colorado, generally are not excessive. Thus the study concludes that the most pressing need is not to streamline state transfer procedures, but rather to address the major policy challenge involved in developing broader standards for evaluating third party impacts.

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Water Transfers in the West: Efficiency, Equity, and the Environment Indeed, arguments favoring voluntary market transfers are tempered by evidence of damage to water rights holders, adverse effects on areas from which the water is taken, impaired water quality, and reduction of instream flows for fish, wildlife, and recreation. These concerns create a dilemma for public policymakers and administrators. Market advocates urge relaxing government restrictions to facilitate markets in water as an alternative to government subsidies and regulation policies, which once were the predominant method of allocating water in the West, whereas others seek greater protection of public interest values not recognized through market mechanisms, leading to greater governmental involvement and increased restrictions on transfers (Graff, 1986; Wahl, 1989). These competing concerns demand innovative responses to balance the economic gains that transfers bring to the water reallocation process against the need to safeguard interests unprotected by the market mechanism. The desire to identify such innovative responses is a primary purpose of this report. Following a discussion on existing legal protection for third parties in water transfers, this chapter reviews the kinds of third party impacts associated with these transfers, drawing on the committee 's analysis and observations of water transfers. For each group of third parties, it describes different impacts and concerns but does not attempt to evaluate this magnitude or to review methodologies for measuring them. The chapter concludes with examples of how water transfers can be used to mitigate undesirable impacts of existing water allocations and of prior transfers. Thus, although the primary emphasis of the chapter is on the undesirable side effects that may arise as water is moved to new places and uses, the opportunities that transfers present to resolve existing conflicts and accommodate new water needs also is emphasized. PROTECTING THIRD PARTIES Chapter 3 examines in detail the legal framework for evaluating proposed transfers and considering potential third party impacts. In general, other water rights holders receive more protection in state review processes than any other third party. Water laws in the western states protect affected water rights holders from damage resulting from changes in use in order to make their rights more secure and valuable. Recent studies indicate, however, that water rights holders entering the process as protestants may incur substantial costs in protecting their rights (Colby et al., 1990). The laws of some western states allow consideration of the effects

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Water Transfers in the West: Efficiency, Equity, and the Environment Transaction Costs: Their Role in Water Transfers Transaction costs, in the economics literature, are the costs of making a market system work—defining property rights unambiguously enough so that sales can take place, generating information about commodities available, searching for trading partners, negotiating terms of exchange and contract provisions, and enforcing both property rights and contracts to buy and sell. In western water markets, transaction costs are incurred in searching for water supplies and for willing buyers and sellers, ascertaining the characteristics of water rights, negotiating price and other terms of transfer, and obtaining legal approval for the proposed change in water use. This latter category of transaction costs can be called policy-induced transaction costs (PITCs). Transfers participants incur PITCs as they seek to obtain state approval to transfer a water right to a new place and purpose of use. PITCs may include attorneys' fees, engineering and hydrologic studies, court costs, and fees paid to state agencies. PITCs are of particular interest because they are the focal point of tension between two goals: the need to broaden the range of interests represented in the transfer approval process (which will increase PITCs) and the need to reduce unnecessary impediments to desirable water transfers (which implies a reduction in PITCs). Several studies provide insights on the magnitude of costs incurred by applicants participating in state review processes. Colby et al. (1990) found that applicants' PITCs averaged $91 per acre-foot ($74 per ML) of water transferred, with considerable variation among states. Applicants' PITCs averaged $187 per acre-foot in Colorado, $54 in New Mexico, and $66 in Utah ($152, $44, and $54 per ML, respectively). Protests were found to have a significant and positive impact on applicant costs per acre-foot. Time delay, a measure of applicants ' costs of water, was also significantly related to whether or not protests were filed. In Colorado, transfers involving water rights in the most water-scarce areas of the state had significantly higher applicant unit costs and time delays than elsewhere. PITCs are higher where the economic values that may be affected by a proposed transfer are higher—in areas where water is more scarce and water rights sell for a higher price (Colby et al., 1990). MacDonnell (1990a) also compared characteristics of water transfers in several western states and found considerable variation among states. In Colorado, 80 percent of transfer applications were eventually approved over the 10-year study period (1975 to 1984),

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Water Transfers in the West: Efficiency, Equity, and the Environment whereas 90 percent were approved in Utah and 95 percent in New Mexico. (Approval does not imply that the applicant obtained permission to transfer as much water as originally requested; many approvals are conditioned on modifying the original transfer proposal to satisfy objectors.) One measure of PITCs involves the time delays while waiting for a state agency's decision on a transfer proposal. This period is measured in months from the time a transfer application is filed to the date of the state agency's decision. MacDonnell found that 60 percent of all transfers were protested in Colorado over the period 1975 to 1984 and that it took an average of 21 months to obtain state approval. In sharp contrast, only 5 percent of transfer applications were protested in New Mexico over this same period, and the average time to obtain approval was 5.8 months. In Utah, about 15 percent of change applications were protested, and the average time to obtain approval was 9 months. One explanation for the variation among states in time delays, approval rates, and frequency of protests lies in the different types of transfers occurring in each state. Transfers out of agriculture often are more controversial than transfers among farmers because of effects on the area of origin and fears of economic dislocation. Transfers out of agriculture account for 80 percent of the transfers in Colorado and only 30 to 40 percent of the transfers that have occurred in New Mexico and Utah over the last 10 years (MacDonnell, 1990a). of transfers on the special interests of areas of origin and the environment. Most states provide that transfers may be subject to a public interest review (Colby et al., 1990). Indeed, the courts in some states have involved the public trust doctrine to require such consideration even where there is no provision in state statutes. The review process can be expensive; therefore affected parties who do not have the financial means to employ attorneys, hydrologists, engineers, and other experts to substantiate potential damages are unlikely to be effective participants in a review proceeding. Federal and state environmental laws on water quality, wetlands, and endangered species protection also may restrict transfers or increase their costs by requiring that alternative water be provided for environmental needs. In summary, although some protection exists for parties affected by water transfers, serious questions arise as to the scope of legitimate interests that should be protected, the extent of protection that should be afforded, and how it should be provided.

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Water Transfers in the West: Efficiency, Equity, and the Environment RURAL COMMUNITIES Economic and Fiscal Impacts The impact of water transfers on rural communities is an issue in several of the cases highlighted in this report. No issue gave the committee more trouble than the question of how to characterize and evaluate the effects of water transfers on small communities. The reason is obvious: no consensus exists within our society about the value of these communities. The communities generally have no legal right because we view them as inferior units of central state governments, and we generally allow the market to dictate their fate. Nonetheless, we do value many rural communities, and we are sometimes willing to buffer them against market pressures. The widespread use of historic preservation controls is one example of such a buffer. As the nation becomes more urbanized and homogenized in the twentieth century, the virtues of rural communities are being extolled with a Jeffersonian fervor. However, many of the justifications for the preservation of rural communities simply reflect an elegiac view of the past that cannot serve as the basis for contemporary public policy. This report does not attempt a comprehensive analysis of the issue of rural community preservation but does suggest processes and factors that can be considered to decide which rural communities should be protected and how this might be done. Retiring irrigated land can lead to losses of farm jobs, crop production, and farm income. These direct effects can be measured with a fair degree of accuracy. However, indirect impacts of water transfers, such as losses of off-farm jobs, income, and production in nonfarm businesses and households, are more difficult to estimate. Another type of economic impact, “induced impacts,” includes changes in population, employment, and income in local businesses and activities not linked to agriculture but dependent on the vitality of the local economy in general. Retail stores, restaurants, and local services may be affected by a decline in agriculturally linked jobs and income (Charney and Woodard, 1990). Some economists have argued that water transfers will not impose large and sudden shocks on rural economies because only the marginal lands, those least suitable for crop production and least profitable to irrigate, will be sold and farmers will simply concentrate their efforts on their remaining high-quality lands and most profitable crops. However, there is growing evidence that it is not only the marginal agricultural acreage that is being purchased (Howe et al., 1990). Potential water buyers are willing and able to buy out

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Water Transfers in the West: Efficiency, Equity, and the Environment the properties with the most secure and senior water rights to high-quality water sources, in the most convenient locations, regardless of the crop being grown or farm profitability. In some of the case study areas, particularly Arizona and Colorado, high-value cropland, such as pecan orchards, has been purchased, and more economically marginal grain fields have been ignored. Water buyers seek senior rights to water sources that can be conveyed easily to the new location of use, and generally whole farm operations are purchased, not just less productive portions of farms. The “marginality argument,” which suggests that economic impacts on rural areas will be gradual and occur in small increments, thus appears to be largely baseless. Although the impacts caused by transferring water formerly used in farming to other areas and uses are difficult to quantify, and may be small in relation to a state's entire economy, they are significant to area-of-origin residents. Although each individual water farm purchase may involve only a small fraction of the area of origin 's total land and water resources, it is important to consider the cumulative effects of such purchases. Factors that make property attractive for water farms in La Paz County, Arizona, have led purchasers to concentrate in a few areas adjacent to aqueducts that can convey water to new uses. This clustering effect also is apparent in the Arkansas River Valley in Colorado. The result is that local economic impacts of transfers are borne by specific towns and counties. Local economic consequences of water transfers are felt at several different times. Some occur when land and water rights are purchased; others when the land is retired from irrigation; still others when the water is actually transported to a new area. If mitigation requirements are to be effective, they must be timed to remedy impacts when they actually occur. Local government fiscal losses, for instance, may occur well before water is actually transferred out of an area, and thus some earlier event—such as the purchase of land and water rights —must trigger a mitigation requirement for fiscal impacts. Direct fiscal impacts, including the loss of property tax base and bonding capacity and reduced debt limit and state revenue sharing, occur immediately upon purchase of the land by a municipality or other tax-exempt entity. For instance, one purchase of irrigated farms by an Arizona municipality removed 10 percent of the taxable land in La Paz County, Arizona, from the tax rolls (Nunn and Ingram, 1988). When land purchased for its water rights is removed from the county tax rolls, county tax rates must then be increased, placing a heavier burden on the remaining taxpayers, or services must be cut. At the same time, the county's bonding capacity and legal debt

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Water Transfers in the West: Efficiency, Equity, and the Environment limit, which are based on the county's net valuation, are decreased. Net valuation is also the basis for the distribution of state-shared revenues, particularly the state-shared sales tax. This means that a county receives a progressively smaller portion of state sales tax revenue as municipally owned acreage increases. Counties having only a small percentage of privately owned land are particularly vulnerable to the fiscal impacts of retiring irrigated land, particularly in areas where lands are acquired by a tax-exempt entity, such as a municipal government seeking new water supplies. In La Paz County, Arizona, 88 percent of the land is federal or tribal, and the state owns an additional 7 percent. This leaves less than 5 percent of county land in private ownership and subject to property taxes. In the late 1980s, 49 percent of this private land was purchased, or was under an option to be purchased, for the appurtenant water rights (Charney and Woodard, 1990). Direct fiscal impacts also can occur when the buyer is not a tax-exempt entity. When water rights are sold and the irrigated farmland is retired, this typically results in a reclassification and reduced valuation of the land for property tax purposes. Induced economic and fiscal impacts begin to occur after the farmland is retired. In an area where production in irrigated agriculture is reduced because of water transfers, the farms that remain may be insufficient to support some or all of the local packinghouses and seed, fertilizer, and machinery distributors. Similarly, as irrigated agriculture declines, the community becomes less prosperous, and both the economic infrastructure and the social infrastructure of the community decline. Banks, pharmacies, and other essential firms close. The social structure provided by churches, civic groups, and political organizations weakens at a time when a rural community may badly need a stable, coherent social structure to cope with economic change. The population decreases as reduced job opportunities force people to move from the rural area. If a high enough percentage of the basic industry jobs are lost, the economic viability of the community may be threatened. One concern focuses on the “ripple” effects of water transfers on communities dependent on irrigated agriculture. Just as investments in irrigated agriculture cause “linked industries” to locate in an area, transfers of water out of agriculture can cause them to leave. The economic consequences that result from disinvestment in irrigated agriculture are multiplied as concomitant disinvestment occurs in industries that support irrigated agriculture. This raises fears that traditional agricultural enterprises and associated lifestyles may no longer be viable.

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Water Transfers in the West: Efficiency, Equity, and the Environment Economic development is threatened as soon as water rights are sold for use in another area. A further round of impacts is felt when the water actually leaves the area and the reality of the transfer is experienced. The fiscal condition of the rural area deteriorates as direct and indirect effects are realized. A community's ability to attract new enterprises depends on both its tax rate and its spending patterns. The quality of public services, particularly the quality of public schools, is an important consideration when people and businesses are deciding where to locate. Thus, exporting all of the water available to a piece of land not only can foreclose future development opportunities for that land, but also may limit development opportunities throughout the area. The perceived water supply also is important. If the area of origin has no control over its water supply and is seen as being “dried up,” this perception will impede future development. Tumbleweeds and blowing dust on retired farmlands reinforce this perception (Nunn and Ingram, 1988; Oggins and Ingram, 1990). The availability of developable land also can be impaired if water purchases lock up an area's land base or increase land prices. In many parts of the West, highways, rail lines, and aqueducts run along parallel routes; land purchased for its proximity to possible water conveyance infrastructure may also be the most desirable land for commercial or industrial development. When assigned a dollar value, the losses suffered by areas of origin may appear insignificant in comparison with the total state economy or even with the substantial benefits of additional water supply that may accrue to the new users of the water. Such losses, however, tend to be concentrated in particular areas and can seriously impair the viability of small rural communities, which may lack the economic strength and diversity to respond to such rapid changes. Environmental Effects of Retiring Irrigated Farmland When land is retired from irrigated agriculture, the natural process of revegetation produces a secondary succession of plant species. Succession continues until the plant community has stabilized. Russian thistle (tumbleweed) is the characteristic species in the first phase of secondary succession on abandoned farmland in much of the Southwest. Tumbleweeds are effective in dispersing their seed, and they quickly dominate the land to the virtual exclusion of all other species. The natural succession process varies with the climate and soil type. Farmland in relatively high rainfall areas and with coarse soils

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Water Transfers in the West: Efficiency, Equity, and the Environment streams and, eventually, to take virtually the entire flow of the lake's feeder streams. The harmful environmental consequences were known, but it was “the established policy of the state that the use of water for domestic purposes is the highest use of water” (Casey, 1984). Since 1941, the level of Mono Lake has dropped 46 ft (15.3 m), the volume of the lake has been cut in half, and its surface area has been reduced by one-third. Mono Lake's ecological balance has been seriously compromised, and wildfowl populations have been decimated (Botkin et al., 1988; Casey, 1984; NRC, 1987). In recent years, environmental groups have used the public trust doctrine and California fish and game laws to curtail Los Angeles' diversions and to stabilize the lake level. One study estimated total visitor and nonvisitor benefits from the preservation of Mono Lake levels to be about $40 per California household, well above the cost of 22¢ per household that would be needed to preserve lake levels by replacing the Los Angeles diversions with water from other sources (Loomis, 1987). These figures suggest that the benefits of preservation can significantly outweigh the costs of preservation and have clear implications for California and Los Angeles area water policy decisions. Contingent valuation techniques can be useful for quantifying environmental values such as resource protection, although anyone using such numbers must be aware of the severe limitations and uncertainties of this method. Attention to the benefits generated by instream flows in the West will help to identify hidden costs in proposed water transfers. State reviews of proposed transfers may continue to favor off-stream water uses if decisionmakers rely on more easily documented economic benefits provided by water for irrigation, energy development, and urban growth. Recent evidence on the economic value of instream water suggests that instream benefits

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Water Transfers in the West: Efficiency, Equity, and the Environment can often exceed the benefits generated by off-stream uses and that economic development in the western states could be enhanced by protecting selected stream segments for recreation, wildlife, and improved water quality (Colby, 1990b). WATER QUALITY Typically, state water rights proceedings to review proposed transfers do not deal with effects on water quality because water rights are based on quantity only; water quality control is maintained through separate legal frameworks. Yet water use—where, when, and how water is diverted and applied—can have a profound effect on water quality (Getches et al., 1991). For example, in the San Joaquin Valley in California, inadequate drainage of irrigation return flows led to the accumulation of toxic levels of selenium and the subsequent contamination and closure of Kesterson National Wildlife Refuge (NRC, 1989). Irrigation from the Colorado River and its tributaries affects not only the amount of water flowing downstream, but also its salt content. The Colorado River Compact and a treaty with Mexico addressed water volumes; when quality issues became severe, separate legislation was passed to address salinity. The negative impact of irrigation in Colorado on the quality of water available to the Metropolitan Water District of Southern California was recognized physically but not considered an infringement of water rights. Only after extensive negotiations were the water quality implications of U.S. use of the Colorado River incorporated into international agreements. The economic importance of the water quality enhancement and assimilative capacity provided by streams is likely to increase as water providers and wastewater treatment facilities face more stringent water quality standards. Few studies have estimated the monetary benefits of assimilative capacity. However, Young and Gray (1972) did estimate values for assimilating biological oxygen demand. Other studies indicate substantial benefits to recreationists from maintaining and improving surface water quality in Colorado's South Platte River basin along the populated Front Range (Greenley et al., 1989). Water quality has a significant impact on the economic value of water rights because it affects the range of different uses to which water can be put and the cost of treating water to provide a quality level suitable for specific uses. In Colorado's lower Arkansas River basin, for example, irrigation companies have had difficulty marketing water for municipal use because of water quality problems. Fort

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Water Transfers in the West: Efficiency, Equity, and the Environment Lyons Canal Company and Amity Canal Irrigation Company water is viewed as “unsalable” to cities because contaminants in the water must be removed by reverse osmosis, an expensive process, after transporting water long distances from its current point of use. Once accustomed to water of a certain quality, municipalities generally consider only water of equal or better quality when searching for new and attractive sources. They pay a premium to ensure that the quality of that source is protected or to secure access to other high-quality sources. For instance, the East Bay Municipal Utility District (EBMUD), which serves more than one million customers in the San Francisco Bay area, relies on the Mokelumne River basin for nearly all of its water supplies. During critically dry years the district has had to implement water rationing and search for additional supplies. The neighboring Contra Costa Water District (CCWD) offered EBMUD use of some of its water from the Sacramento River/San Francisco Bay delta. In spite of its critical shortage, EBMUD preferred not to use this alternative source because it is of significantly lower quality than EBMUD's usual source and its treatment would have stretched the capability of EBMUD's system, which was designed only for high-quality sources. Since the early 1970s, EBMUD also has sought to transfer higher-quality water from the American River, consistent with its goal of seeking the highest-quality water available. An economic methodology known as the “damage avoided approach” can be applied to estimate the economic value of water sources of differing quality levels. For instance, industries that use water high in total dissolved solids typically face higher operation and maintenance costs and a shorter lifetime for the equipment used in processing. The value of better-quality water can be estimated by evaluating the costs that are avoided by switching from a lower-quality to a higher-quality water source (Gibbons, 1986). Analysis of market transactions involving water sources of differing quality levels also helps to measure the economic value of high-quality water supplies (Colby, 1990b). The cost of treating different water sources to provide a quality level required for a particular use is also evidence of the economic value of clean water. Water quality does enter into water allocation decisions but generally through the back door. For historical reasons the right is vested in water quantities or flow rates, with quality considerations addressed through regulatory regimes. In a legal and economic context, it would be more rational if quantity and quality attributes were equal partners in the determination of a water right and also in the determination of third party injury when a transfer proposal is being evaluated.

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Water Transfers in the West: Efficiency, Equity, and the Environment URBAN INTERESTS Urban population growth and municipal interests' desires for more water and more drought-proof water supplies are a driving force behind the water transfers discussed in the Arizona, Colorado, New Mexico, Nevada, and California case studies. Urban interests are often the buyers of water and therefore are often primary parties in transfer negotiations. However, urban interests are also sometimes affected by water transfers and by transfer regulations. A significant proportion of urban water system costs is related to water quality and treatment facilities. To the extent that a transfer affects the quality of a water source for city supplies, an urban area could experience third party effects. This concern emerged in the Colorado case study in instances where cities objected to proposed transfers because they feared that the transfer would affect the quantity and quality of flows for municipal treatment facilities that were designed to cope with a particular quality of water. Some argue that transfers may promote urban growth because water transfers are sometimes used to provide water service for new developments. During the California drought, some urban residents expressed bitterness over being required to take “30-second showers” and give up their lawns while new houses were being built “down the street,” bringing more people, traffic, air pollution, and so on. Reflecting this sentiment, a popular bumper sticker in San Diego in 1991 read “Stop Growth—Flush Twice.” In fact, however, the evidence seems to suggest that limiting water supplies may not be an effective means of controlling growth (Erlenkotter et al., 1979). Policies that make it difficult or more expensive to transfer water from an existing user, such as a farmer, to a city can affect the cost of water service for urban residents. If agencies or courts must consider a broader array of third party impacts, the costs to cities of acquiring new water supplies will probably rise and so will household and business water rates. Because of the high value placed on municipal water use, it is unlikely that the additional transaction costs will render many transactions infeasible. Some of the higher costs may be passed on to consumers, but this could actually have positive effects. Studies of urban water demand indicate that city water users respond to rising water rates by cutting back somewhat on water use, especially outdoor uses for landscape maintenance, car washing, and so on. Better water conservation by city dwellers is generally desirable. In the Arizona and California case studies, rural residents voicing concerns about water transfers expressed a view that cities ought

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Water Transfers in the West: Efficiency, Equity, and the Environment to be made to manage more effectively the supplies they already have before they are allowed to buy water away from rural areas. This issue was illustrated most dramatically in the Truckee-Carson case study, where the Pyramid Lake Piaute Tribe insisted that urban areas undertake residential water metering and water conservation as a condition for settling a decades-old dispute over allocation of water. The tribe successfully argued that these conservation measures were reasonable if urban areas expected the tribe to compromise on its own water use priorities. FEDERAL TAXPAYERS Federal taxpayers historically have borne the costs of federal subsidies for western irrigation development and crop production. Presumably, consumers throughout the nation have reaped some benefits in terms of lower food prices and western regional economic development, although it is doubtful that the national ledger is balanced. The era of subsidized water development is ending, but the federal government continues to be involved in western water management and particularly in resolving conflicts over reserved rights and endangered species debates. Federal cost sharing continues to be an important strategy contemplated by local interests trying to resolve tribal claims and other water conflicts. Federal financial participation is an important component of the settlement negotiated in the Truckee and Carson basins and of several recent tribal water settlements in Arizona. Thus federal taxpayers are an affected party in many water transfers. Taxpayers are affected whenever the federal government participates financially in a water transfer or in resolving conflicts over water claims and whenever federal agency time and expertise are expended. In fact, there was no case study examined by this committee in which federal involvement was absent or peripheral to the issues. Taxpayer dollars are well spent when federal involvement promotes efficient and equitable allocation or helps balance multiple social goals. However, when federal agencies compete against one another, operate only to protect traditional bureaucratic mandates, or fail to facilitate conflict resolution and balanced pursuit of broader social goals, taxpayers' “returns on investment” may be low or negative. Some of the broad social goals that often conflict with one another include promoting low-cost food and fiber production (water subsidies and commodity programs for agriculture), resolving reserved rights claims, protecting water quality and wetlands, and preserving endangered species.

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Water Transfers in the West: Efficiency, Equity, and the Environment OPPORTUNITIES Transfers should be approached not just as the possible cause of third party effects but also as a potential opportunity to resolve problems with current water allocations and prior transfers. Transfers can be designed to promote not only efficiency but also a broad range of societal interests. If these broader interests are represented, taken seriously, and addressed, there need not be “losers” associated with water transfers. There are many examples of transfers that accommodate these broader interests. The Metropolitan Water District (MWD) of Southern California's announcement of a major water conservation and marketing agreement with the Imperial Irrigation District (IID) has been hailed as a “win-win” transfer. Under the agreement, MWD agreed to finance improvements in irrigation system water efficiency in return for transfer of the saved water to MWD. The conservation package included the construction of new reservoirs to regulate water flows within Imperial's irrigation system, automated control structures, and the lining of earthen irrigation canals to reduce seepage into the subsurface soils and the Salton Sea. Thus at the same time that irrigation efficiency is improved in the Imperial Valley, urban water supplies will be supplemented for a growing urban population that totals nearly 15 million. (Even this generally beneficial transfer has potential environmental effects that must be weighed, however, such as declining water levels in the Salton Sea.) In 1979 the Idaho legislature created a water bank to facilitate the temporary transfer of water rights to other water users in a system with a long-term surplus. This approach actually began in the 1930s, when Idaho farmers began “depositing” water allocated to them from federal reservoirs in the upper Snake River system, to be “withdrawn ” by other farmers who needed the water. These deposits and withdrawals were made on a yearly basis under a lease agreement. The water bank created in 1979 to formalize this activity is operated by the Idaho Water Resources Board, which can appoint local committees to oversee the rental of stored water (Johnson and DuMars, 1989). The principal deposits to the bank have come from farmers in the upper Snake River basin with entitlement to Bureau of Reclamation water; the Idaho Power Company has made withdrawals to generate electricity. Both parties benefit, since the farmers are paid for water that they do not currently need and the power company obtains water at reasonable rates to produce electricity, thus saving money for its rate payers. Water transfers can help preserve and enhance public values. For

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Water Transfers in the West: Efficiency, Equity, and the Environment example, The Nature Conservancy, an international membership organization dedicated to preserving natural diversity, has been acquiring water rights in the West to complement its long-standing programs of purchasing biologically important lands. The Nature Conservancy has developed a number of strategies to acquire water rights to protect instream flows and wetlands. One of these strategies consists of acquiring existing water rights and changing them to instream uses. In so doing, it attempts to acquire generally senior water rights through purchase or donation and then to transfer such senior water rights to instream use. The Nature Conservancy anticipates that this strategy can make a significant contribution to the protection of western instream flows (Wigington, 1990). One example of this approach to transfers occurred on Colorado's Gunnison River. Under Colorado law, the Water Conservation Board is authorized to acquire and change existing water rights to instream use and to negotiate contractual enforcement remedies with the private parties that offer such water rights to the board. Pursuant to this authority, The Nature Conservancy reached an agreement with the board to donate a significant water right with a 1965 priority date to the board for change to instream use in the Black Canyon of the Gunnison River. The agreement specifies how the instream water right will be enforced against some large junior water rights to divert water out of the river at the Gunnison tunnel, just upstream from the Black Canyon, and gives The Nature Conservancy a contractual remedy should the board fail to enforce or defend the instream water right in general. The instream flow therefore is protected according to priorities established by the appropriation doctrine and is enforceable by both a state agency and a private entity. At the same time, other water rights holders are not adversely affected by the conversion of offstream consumptive uses to instream flows, with the resulting benefits to the recreation and fish and wildlife values of the Gunnison River. The Nature Conservancy, the Environmental Defense Fund, and other environmental interests are also involved in acquiring existing water rights for wetland uses as part of the solution to the complex problems in the Truckee-Carson case study in Nevada. At the direction of Congress, the federal government also has appropriated money to buy existing water rights that will in turn be dedicated to restoring Stillwater National Wildlife Refuge. Many uncertainties surround the transfer of the Newlands Irrigation Project water rights to wetlands within the refuge because of the many existing water claims and the significant amount of water needed to restore the refuge. Nevertheless, it is clear that any solution that attempts to accommo-

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Water Transfers in the West: Efficiency, Equity, and the Environment date the new uses represented by the refuge and that protects existing uses, including Indian water rights, will rely heavily on market transfers (Tarlock, 1990). These transfers provide opportunities to change past water allocations that did not consider fish and wildlife needs. A water rights transfer during the energy boom of the 1970s illustrates that rural economies can be protected as water transfers occur. The Intermountain Power Project (IPP) in Utah was designed as a 3,000-MW coal-fired power plant. A site near Delta, a town of 5,000 in west central Utah on the edge of the Great Basin, was selected with the knowledge that water rights would have to be acquired from local irrigators (Clinton, 1990). This longtime agricultural community and the surrounding area are supplied from both ground water and the regulated flow of the Sevier River. Historically, the area used about 150,000 acre-feet (185,000 ML) of water per year for irrigation. The power plant was expected to need about 45,000 acre-feet (56,000 ML) of water per year. Water rights purchase negotiations began in early 1978. Although individual stockholders of the irrigation companies could have sold water rights to IPP, local leaders organized the stockholders into a unit for negotiating purposes. Although the market price for shares in the ditch companies historically had been in the $300 to $500 per acre-foot ($240 to $400 per ML) range, when the overall negotiations were completed in 1979, IPP paid about $1,850 per acre-foot ($1,500 per ML) of entitlement (Saliba and Bush, 1987). Because only two units of the power plant are on line, using about 16,000 acre-feet (19,700 ML) per year, approximately two-thirds of the purchased rights of about 45,000 acre-feet (56,000 ML) per year is being leased back for local agricultural use. On average, each farmer received between $100,000 and $150,000, for a total infusion into the local economy of some $80 million. This infusion of capital into the area has had many results. Some farmers used the money to reduce debt; other purchased homes, additional supplies, or equipment; a few sold out and retired. By and large, the capital resources from the water purchases have remained in the local area and served to boost the local agricultural economy. The economy also has been the beneficiary of the jobs and tax base produced by the power plant (Clinton, 1990). The IPP transfer differs from many of the case study transfers that moved water out of agriculture because the water use remained in the area of origin and was leased to farmers, thus preventing sudden reductions in irrigated acreage. These examples indicate the potential of water transfers to address third party impacts and make water available for new uses. They demonstrate that strat-

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Water Transfers in the West: Efficiency, Equity, and the Environment egies can be implemented to protect affected water rights holders and public interest values that traditionally have not been recognized in market mechanisms. Money is not always the most appropriate or useful way to characterize the full range of social, political, and environmental effects of water transfers. Interestingly, the courts have ruled in some instances that money cannot be an adequate substitute for “wet water.” For instance, in the dispute between Texas and New Mexico over interstate compact violations on the Pecos River, the court ruled that past violations could be compensated by monetary payments to Texas but that any future violations by New Mexico would have to be paid with water, not money. As another example, tribes are sometimes offered monetary payments as a substitute for wet water delivered for use on reservations, so that non-Indians can continue to use water that would be awarded to tribes. In some cases, tribes have refused, arguing that money is no substitute for water supplies (Sly, 1988). Policy changes that afford broader protection to third parties generate important benefits by limiting the uncompensated costs that transfers can impose on third parties. However, broader third party protection also means that the transfer review process will likely become more complex and cumbersome, raising the transaction costs incurred by transfer proponents. Recent court rulings and legislative activity in the western states, reviewed in Chapter 3, suggest that policymakers are broadening the protection available, reflecting a growing appreciation of the environmental, recreational, and cultural benefits that water resources provide. REFERENCES Botkin, D., W. S. Broecker, L. G. Everett, J. Shapiro, and J. A. Wiens. 1988. The Future of Mono Lake—Report of the Community and Organization Research Institute Blue Ribbon Panel for the Legislature of the State of California. Davis: University of California, California Water Resources Center, Report No. 68. Boyle, K. J., and R. C. Bishop. 1984. Lower Wisconsin River Recreation: Economic Impacts and Scenic Values . University of Wisconsin Agricultural Economics Staff Paper Series, No. 216. Madison: University of Wisconsin, Department of Agricultural Economics. Brown, L., and H. Ingram. 1987. Water and Poverty in the Southwest. Tucson: University of Arizona Press. Casey, E. 1984. Water law—Public trust doctrine. Natural Resources Journal 24(3):809-810. Charney, A. H., and G. C. Woodard. 1990. Socioeconomic impacts of water farming on rural areas of origin in Arizona. American Journal of Agricultural Economics 72(5):1193-1199.

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Water Transfers in the West: Efficiency, Equity, and the Environment Clinton, M. J. 1990. Water transfers: Can they protect and enhance rural economies? Moving the West's Water to New Uses: Winners and Losers. Boulder: University of Colorado School of Law, Natural Resources Law Center . Colby, B. G. 1990. Transactions costs and efficiency in western water allocation. American Journal Agricultural Economics 72(5):1184-1192. Colby, B. G., M. McGinnis, K. Rait, and R. Wahl. 1990. Transferring Water Rights in the Western States: A Comparison of Policies and Procedures. Boulder: University of Colorado, Natural Resources Law Center. Cordell, H. K., J. C. Bergstrom, G. A. Ashley, and J. Karish. 1990. Economic effects of river recreation on local economies. Water Resources Bulletin 26(1):53-60. Crandall, K., and B. G. Colby. 1991. Economic Benefits of the Hassyampa River Preserve. Agricultural Economics Discussion Paper. Tucson: University of Arizona. Daubert, J. T., and R. A. Young. 1979. Economic Benefits from Instream Flow in a Colorado Mountain Stream . Colorado Water Resources Research Institute Completion Report No. 91. Fort Collins: Colorado State University. Erlenkotter, D., M. Hanemann, R. E. Howitt, and H. Vaux, Jr. 1979. The economics of water development and use. Pp. 169-206 in Earnest A. Engelbert, ed., California Water Planning and Policy: Selected Issues. Davis: University of California, Water Resources Center. Getches, D., L. MacDonnell, and T. Rice. 1991. Controlling Water Use: The Unfinished Business of Water Quality Protection . Boulder: University of Colorado, Natural Resources Law Center. Gibbons, D. C. 1986. The Economic Value of Water. Washington, D.C.: Resources for the Future. Graff, T. J. 1986. Environmental quality, water marketing, and the public trust: Can they coexist? UCLA Journal of Environmental Law and Policy 5(2):137. Greenley, D. A., R. G. Walsh, and R. A. Young. 1989. Economic Benefits of Improved Water Quality. Boulder: Westview Press. Higginson-Barnett Consultants. 1984. Water Rights and Their Transfer in the Western United States. Report to the Conservation Foundation, Salt Lake City, Utah. Howe, C. W., J. K. Lazo, and K. R. Weber. 1990. The economic impacts of agriculture-to-urban water transfers on the area of origin: A case study of the Arkansas River valley in Colorado . American Journal of Agricultural Economics 72(5):1200-1204. Johnson, N. K., and C. T. DuMars. 1989. A survey of the evolution of western water law in response to changing economic and public interest demands. Natural Resources Journal 29(2):372. Loomis, J. 1987. Economic Evaluation of Public Trust Resources of Mono Lake. Institute of Ecology Report No. 3. Davis: University of California. MacDonnell, L. J. 1990a. P. 65 in The Water Transfer Process as a Management Option for Meeting Changing Demands. Report prepared for the U.S. Geological Survey. Vol. I. Boulder: University of Colorado, Natural Resources Law Center. MacDonnell, L. J. 1990b. Shifting the uses of the waters in the West: An overview. In Moving the West's Water to New Uses: Winners and Losers. Proceedings of the 1990 Annual Summer Program. Boulder: University of Colorado, Natural Resources Law Center. National Research Council (NRC). 1987. The Mono Basin Ecosystem: Effects of Changing Lake Level. Washington, D.C.: National Academy Press. National Research Council (NRC). 1989. Irrigation-Induced Water Quality Problems. Washington, D.C.: National Academy Press. Nunn, S. C., and H. M. Ingram. 1988. Information, the decision forum and third party effects in water transfers. Water Resources Research 24(4):473-480.

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Water Transfers in the West: Efficiency, Equity, and the Environment Oggins, C., and H. Ingram. 1990. Does Anybody Win? The Community Consequences of Rural-to-Urban Water Transfer: An Arizona Perspective. Issue Paper No. 2. Tucson: University of Arizona, Udall Center. Saliba, B. C., and D. Bush. 1987. Water Marketing in Theory and Practice. Boulder: Westview Press. Sly, P. 1988. Reserved Rights Settlement Manual. Washington, D.C.: Island Press. Stevens, B., and A. Z. Rosen. 1985. Regional input-output methods for tourism impact analysis. In D. Probst, ed., Assessing the Economic Impacts of Recreation and Tourism. Asheville, N.C.: USDA Forest Service, Southeastern Forest Experiment Station. Tarlock, A. D. 1990. The role of market transfers in the accommodations of new uses: A case study of the Truckee Carson Basin. In Moving the West's Water to New Uses: Winners and Losers. Proceedings of the 1990 Annual Summer Program. Boulder: University of Colorado, Natural Resources Law Center. Wahl, R. W. 1989. Markets for Federal Water: Subsidies, Property Rights, and the Bureau of Reclamation. Washington, D.C.: Resources for the Future. Weber, K. R. 1989. What Becomes of Farmers Who Sell Their Irrigation Water? The Case of Water Sales in Crowley County, Colorado. Grant No. 885-054A Report. Ford Foundation. Wigington, R. 1990. Update on market strategies for the protection of western instream flows and wetlands. In Moving the West's Water to New Uses: Winners and Losers. Proceedings of the 1990 Annual Summer Program. Boulder: University of Colorado, Natural Resources Law Center. Williams, S. 1990. Winters Doctrine on Administration. Paper on Tribal Administration for Rocky Mountain Mineral Law Institute . Denver, Colo. Woodard, G. 1988. P. 170 in The Water Transfer Process in Arizona: Impacts and Options. Tucson: University of Arizona, College of Business and Public Administration . Young, R. A., and S. L. Gray. 1972. Economic Value of Water: Concepts and Empirical Estimates. Springfield, Va. National Technical Information Service, Accession No. PB-210356.