assessed monetary fee could be used to purchase water rights for restoring in-stream flow within the state. However, caution must be exercised to design a fee program that does not reduce the total or marginal gains from trade to the point that the water transfer is discouraged. Thus, the amount of the fee must be specific to each transfer and not be a uniform requirement.

In some instances it may be possible to obtain overall reductions in water use in a particular region or for a specific economic activity, with the amount saved (or some portion thereof) then returned to in-stream flow (NRC, 1992). In renewal of contracts for water delivery from federal or state water storage projects, it is possible to initiate a negotiation process in advance with all interested parties (see Recommendations 3 to 5) to establish some target for reduced deliveries. Following the model for sulfur oxide reductions now incorporated into the Clean Air Act, there may not need to be requirements for uniform reductions in water consumption among all users. Instead current rights holders could be allocated water consumption allowances that together equal the total water consumption target. These water use allowances would then be tradable to ensure that those who are able to most efficiently reduce water use should do so. In effect, such an approach encourages continued development of markets for water rights, but allows those markets to trade an amount of water that is constrained by a desired in-stream flow.

Where there is a general abundance of water relative to use, as in many humid eastern states, the creation of water markets would not be appropriate because trades would be too infrequent to justify the setup costs and administrative costs of such a market. With the exception of some parts of Florida, where markets may be more developed, this condition describes most eastern states. In these cases, the committee suggests establishment of special administrative procedures that facilitate negotiation over water rights conflicts (usually for urban water supply) and ensure protection of in-stream flows (Collins, 1990). However, the focus should be on protection of future flows.

17. Federal and State Agencies Should Cooperatively Design Landowner-Financed Regional Restoration Projects.

Under the Section 404 program, EPA and COE follow a sequencing procedure that requires permit applicants first to avoid, through alternatives, then to minimize, and finally to compensate for damage permitted to wetlands within aquatic ecosystems. Compensation in this approach typically means that wetland acres and functions that

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