5
Changing Water Resources Institutions

Kenneth D. Frederick*

Resources for the Future

Washington, D.C.

Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and to reduce uncertainty in exchange. Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity. They evolve incrementally, connecting the past with the present and the future; history in consequence is largely a story of institutional evolution in which the historical performance of economics can only be understood as part of a sequential story. Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline. (North, 1991, p. 97)

The nation's water institutions establish the opportunities as well as the incentives to use, abuse, conserve, or protect water resources. They determine

*  

This paper draws extensively on his chapter, ''Water Resources: Increasing Demand and Scarce Supplies," in K. D. Frederick and R. A. Serlio, eds., America's Renewable Resources: Historical Trends and Current Challenges (Washington, D.C., Resources for the Future, 1991).



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Sustaining our Water Resources 5 Changing Water Resources Institutions Kenneth D. Frederick* Resources for the Future Washington, D.C. Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and to reduce uncertainty in exchange. Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity. They evolve incrementally, connecting the past with the present and the future; history in consequence is largely a story of institutional evolution in which the historical performance of economics can only be understood as part of a sequential story. Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline. (North, 1991, p. 97) The nation's water institutions establish the opportunities as well as the incentives to use, abuse, conserve, or protect water resources. They determine *   This paper draws extensively on his chapter, ''Water Resources: Increasing Demand and Scarce Supplies," in K. D. Frederick and R. A. Serlio, eds., America's Renewable Resources: Historical Trends and Current Challenges (Washington, D.C., Resources for the Future, 1991).

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Sustaining our Water Resources how trade-offs among alternative water uses are made and whether high quality water is available for or a constraint on the provision of safe drinking supplies, new development opportunities, water-based recreation, and/or fish and wildlife habitat. This paper sketches broad changes in the use and management of the nation's water resources and suggests how key institutions have influenced these changes and the overall benefits the nation derives from its water resources. The paper also considers the adaptability of these institutions to changes in the supply and demand for water. The following discussion of the use and management of America's water resources over the past 200 years is divided into three broad stages. The first stage, which ended about 1900, was a period when demands on the resource were small relative to supplies, the ability to control flows was very limited, and natural supplies shaped the exploration, settlement, and development of the country. The second stage, which extended from about 1900 to 1969, was a period of rapid growth in water use and in our capacity to control supplies and of general neglect as to the impacts of human activities on stream flows and water quality. The third stage is characterized by ongoing attempts to mitigate the effects of past abuses and to deal with sharply rising water costs, increasing competition for available supplies, and changing values. The elements of a fourth stage in which future institutions provide appropriate incentives to conserve and protect the resource and opportunities to transfer resources readily in response to changing supply and demand conditions are outlined in a concluding section. THE NINETEENTH CENTURY The natural availability of water had a strong influence over the exploration and development of the country during the nineteenth century. Rivers were the principal routes for exploration and trading, cities grew up around major rivers and harbors, factories were located beside streams to harness the power of flowing water, and agriculture was located where precipitation was adequate or a stream could be easily diverted for irrigation. With little capacity to control natural flows, either too much or too little water was an obstacle to developing about one-third of the original 48 states. Floods inhibited development in the Mississippi, Missouri, and Sacramento river basins, and the lack and unreliability of precipitation limited settlement in much of the West. Canals, constructed primarily by state and private interests, were the principal water projects undertaken during this century. Federal influence over water development came largely through policies designed to encourage

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Sustaining our Water Resources settlement of flood-prone, semiarid, and arid areas. The Swamp Lands acts of 1849 and 1850 provided free federal lands to states along the lower Mississippi River under the condition that funds from the sale of the lands be used for flood control and drainage. The Homestead Act of 1862 helped push the frontier west by providing settlers free title to 160 acres after five years of residence and cultivation. Further encouragement for settlements in areas with little precipitation was provided by the Timber Culture Law of 1873, the Desert Land Law of 1877, and the Carey Land Act of 1894. These acts relaxed ownership requirements for settlers in arid and semiarid areas and encouraged irrigation and land reclamation. States reserve the right to control the waters within their borders that are not encumbered by federal law or interstate compact. The earliest state water laws governing surface-water use were based on the common law doctrine of riparian rights. These rights restrict water use to lands adjacent to a stream and to "reasonable" uses that do not place undue burdens on other riparian users. All riparian owners are required to curtail use during periods of shortage. This doctrine worked well where streams were abundant and when demands on the resource were modest. But in the West where streams are less common and flows are smaller and less reliable, the constraints on movements of water to nonriparian lands and the uncertainty of supplies associated with these rights were a serious impediment to development. Prior appropriation became the primary basis of water law in the 17 western states. Appropriative rights are established by withdrawing water from its natural source and putting it to beneficial use. During periods of shortage, water supplies are allocated according to the principle of "first in time, first in right"; junior appropriators receive no water unless supplies are sufficient to provide the owners of senior rights with their full allotment. This allocation system provides a powerful incentive for the early diversion of stream flows. And the provision that unused rights can be lost gives appropriators an incentive to "use it or lose it." Instream flows are sacrificed under the appropriation doctrine. But this was not a source of much concern for settlers worried about the unreliability of supplies from unregulated western streams. By the end of the nineteenth century the welfare and even the survival of countless people living in arid, semiarid, and flood-prone areas depended on benign precipitation patterns. The more easily irrigated lands were already developed, and drought as well as the low summer flows traditional of many western streams were a major source of uncertainty to holders of junior water rights. Additional irrigation development depended increasingly on storage to expand dependable supplies, but many irrigators and privately financed irrigation projects were already heavily in debt. Government support was

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Sustaining our Water Resources widely considered to be essential for the future growth of irrigation and the overall economic development of the West. THE CONSTRUCTION ERA: 1900-1969 The twentieth century ended a long period during which there had been little progress in the technology for developing and using water. Mechanical power replaced wheelbarrows and mules as the principal means of moving earth early in the century. Improvements in the production and use of concrete expanded the possibilities for constructing dams. New pumping technologies made it feasible to tap ground water supplies from greater depths and to transport water greater distances. And the development of hydroelectric power and electric transmission technologies provided a powerful new stimulus for undertaking water development projects. The most important achievements in terms of their impact on human health and welfare were in the provision of drinking water supplies, a major source of debilitating and deadly disease during the previous century. Cholera during the first half of the nineteenth century and typhoid during the latter half were the waterborne diseases of particular concern. Improved filtration techniques made major improvements in drinking water quality possible toward the end of the nineteenth century. But it was not until 1908 that chlorination emerged as an inexpensive way to ensure the bacteriological quality of water. National drinking water standards were established in 1914, and soon thereafter the safety and quality of municipal drinking water supplies were widely taken for granted. Bolstered by these technological advances and the ascendancy (with the start of Theodore Roosevelt's presidency in 1901) of the conservationists' view that it was wasteful to leave water resources unused that were capable of producing crops, power, or other outputs, the United States began a long period of intense water development. Building dams, canals, pumps, and other infrastructure to control and divert supplies became the accepted solution to virtually any water problem during this period. Large multipurpose dams became symbols of farseeing humane management of natural resources, and water planners sought to provide municipal and industrial users with virtually unlimited supplies at the lowest possible financial cost. The federal government became a major player in developing the nation's waters. The Reclamation Act of 1902 established the Reclamation Service (currently the Bureau of Reclamation) to assist in developing the West through irrigation. The purview of the Corps of Engineers was broadened in 1913 to include power development and use and in 1917 to plan and construct

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Sustaining our Water Resources flood control works. The Federal Power Commission was established in 1920 to sell surplus power generated from federal dams, to license nonfederal power developments on navigable waters, and to survey future water power development opportunities. The federal role in water development expanded further in the 1930s as water development projects took on a new purpose, the creation of jobs. New Deal legislation gave the president extraordinary powers to initiate and finance public works, including municipal water works, sewage plants, irrigation, flood control, and hydropower. River basin account in which power revenues are used to pay for other elements of a water project was used to justify federal support for numerous uneconomic irrigation projects. The Tennessee Valley, Authority (TVA), created in 1933 with responsibility for all water-related functions of the federal government in the Tennessee River basin, had transformed the Tennessee River from one where fluctuating flows inhibited regional development into one of the world's most highly regulated rivers within just two decades. The Soil Conservation Service (SCS), another New Deal creation, emerged as an important water developer in the 1950s when its mission was broadened to include the construction of upstream water storage facilities for flood protection and agricultural purposes. Municipal and industrial water supplies, recreation, and fish and wildlife habitat also became allowable functions of SCS reservoirs in 1956. Four federal agencies—the U.S. Army Corps of Engineers, the Bureau of Reclamation, TVA, and SCS—were seeking to expand their roles over the use and development of water resources by the end of World War II. Moreover, the availability of generous subsidies and the ''first in time, first in right" doctrine of western water law provided powerful incentives for local communities and their congressional representatives to seek federal water projects. With the federal government paying all the costs associated with flood control and navigation works and subsidizing the costs of irrigation and other project benefits, water projects were desired for the jobs and federal funds they brought to a community regardless of the net impacts of the project on the use of the resource or the nation as a whole. The demise of the National Resources Planning Board by Congress in 1943 left the executive branch without the capacity to prepare or evaluate plans for overall development of the nation's waters. The void was filled by a coalition of the congressional committees responsible for the budgets of the four construction agencies, the agencies seeking increased funding and influence, and local interests seeking federal subsidies. Political considerations dominated the allocation of federal funding for water projects. The requirement, first spelled out in the Flood Control Act of 1936, that the benefits exceed the costs was not an obstacle when a project was supported by the senators and representatives controlling

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Sustaining our Water Resources the budgets of the construction agencies. When necessary, the agencies were adept at inflating the benefits and deflating the costs claimed for such projects. The combination of these technological, economic, and political forces contributed to the rapid growth of water use and dam and reservoir construction that characterized the first seven decades of this century. Total offstream water use rose from about 40 billion gallons per day (bgd) in 1900 to 370 bgd in 1970. The number of completed clams rose from less than 3,000 at the start of the century to more than 50,000 by 1970. The cumulative storage capacity of these dams increased from 10 million to 753 million acre feet (maf). The largest increases came in the quarter century following World War II when water use increased by 200 bgd and more than 35,000 clams with a combined storage of 474 mar were completed. Water use changes were particularly striking in the West. Although the 17 western states possess only 36 percent of the renewable supplies, they accounted for 85 percent of consumptive freshwater use in the 48 conterminous states in 1970. Irrigation, which increased from 19 million to 35 million acres during the 25 years, accounted for 92 percent of the West's consumptive use of water in 1970 and was the primary reason for the widespread depletion of western streams and ground water stocks. Ambitious plans were developed in the 1960s to counter the growing scarcity of water in the West. The Pacific Southwest Water Plan submitted to President Johnson in 1964 proposed 17 new projects and programs, including pumping Colorado River water over the mountains into central Arizona, two big dams on the Trinity River in California and a tunnel to divert water from the Trinity to the Sacramento basin, a wider California aqueduct for delivering water to the central and southern parts of the state, and two large hydropower projects on the Colorado River at opposite ends of Grand Canyon National Park. Another proposal would transport more than 16 maf annually from the Mississippi River to the southern High Plains where irrigators were depleting the Ogallalla aquifer. The most ambitious schemes proposed to bring huge quantities of water into the western United States from Alaskan and Canadian rivers. Most of these schemes to make water plentiful where nature had not were shelved as a result of growing economic and environmental concerns. DEALING WITH LIMITS AND CHANGING VALUES Institutions that treat water as a free resource, planners who seek to provide irrigation regardless of economic considerations and uninterrupted supplies to municipal and industrial users under all but the most extreme droughts, and a population willing to ignore the impacts of its water uses and

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Sustaining our Water Resources development projects on instream flows helped prolong the construction era. Three factors—the high cost of developing new supplies, federal budget deficits, and environmental concerns—brought the water construction era to an end about 1970. These factors are reflected in changing construction and water-use patterns. Water development projects peaked in the mid-to-late 1960s when more than 2,000 new dams and nearly 29 maf of new storage were completed annually. In contrast, from 1970 to 1982 only 1,069 new dams and less than 10 maf of storage were added annually. Per capita water withdrawals peaked in the mid-1970s, and total withdrawals peaked (at least temporarily) five years later. The costs of developing new supplies inevitably increase over time for three reasons. First, the best reservoir sites are developed first. Second, the quantity of water that can be supplied with a high degree of probability rises at a diminishing rate as storage capacity on a stream increases. And, third, the opportunity costs of storing and diverting water increase as the number of free-flowing streams declines and the demand for instream flows rises. The availability of federal funding for new water projects declined as the Vietnam war absorbed a larger share of the budget and as concerns over the size of the federal deficit grew. Water projects became more difficult to justify economically as the discount rates used to evaluate projects increased from 2.5 percent in the 1950s, to 3.25 percent in the early and mid-1960s, to 4.625 percent in 1969, and to as high as 8.875 percent in the 1980s. Furthermore, local enthusiasm for federal water projects waned after a 1986 law required a significant increase in local cost sharing for Corps of Engineers' projects. The Bureau of Reclamation started negotiating increased cost sharing in the late 1980s. Evidence that the United States was paying a high price for neglecting the full environmental impacts of its water projects and uses became overwhelming during the 1960s. Numerous federal and state laws have been passed to reverse this neglect and to protect and restore the nation's waters. Indeed, since the early 1970s, environmental concerns have been the driving force behind most water-related investments, a formidable obstacle to investments in new dams and reservoirs, and an increasingly important factor in the allocation of supplies. The National Environmental Policy Act (NEPA) of 1969 is the most important of these laws. Prior to NEPA, opponents of a water supply project had the burden of proving that the project would result in unacceptable environmental damage. Since NEPA, federal agencies have been required to assess the environmental impacts of their actions and critics have possessed a potent legal tool for opposing water projects and for proposing alternative

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Sustaining our Water Resources water use. NEPA also established the Environmental Protection Agency (EPA) with responsibility for setting and enforcing water quality standards. Environmentalists acquired several other legal hooks for preventing, stalling, or modifying water development plans. Projects that would excessively damage natural amenities are now precluded on more than 100 rivers and stretches of rivers designated under the Wild and Scenic Rivers Act of 1968. EPA is able to veto water projects on environmental grounds under section 404 of the Clean Water Act of 1972. And the Endangered Species Act of 1973, which prevents federal agencies from undertaking activities that threaten the survival or critical habitat of a species designated as endangered, has been used to delay and alter several proposed water projects. More importantly, this act is forcing major changes in the management of existing projects in the Columbia, Missouri, and Sacramento basins. Also, many states have passed laws designed to protect instream flows and limit surface and ground water development. The Clean Water Act of 1972 established ambitious goals of restoring all navigable waters to a "fishable and swimmable" condition by July 1983 and eliminating all pollutant discharges to these waters by 1985. Conventional pollutants such as fecal coliform bacteria and organics dumped directly into the nation's surface waters through municipal and industrial pipes and ditches were considered to be the nation's principal water quality problem in 1972. Technology-based effluent standards and federal construction grants have been the principal regulatory and economic tools used to limit and treat these point-source discharges. In excess of $100 billion has been spent since 1972 to limit point-source pollutants. While the quality of many lakes, rivers, and estuaries has improved as a result, the goals of the Clean Water Act have not been met. Large additional expenditures for reducing and treating point-source discharges are anticipated. But investments to control these pollutants are encountering diminishing returns in their ability to restore streams, lakes, and estuaries. Nonpoint sources of pollutants such as runoff from farms, urban areas, and construction sites and seepage from landfills and septic systems are now the principal sources of both conventional and toxic pollutants. Because there is no single point where these pollutants can be intercepted prior to entering a water body, the problems as well as the solutions often involve land use rather than water-use practices. Land use is particularly important for the water quality impacts of agriculture, a major polluter of 30 percent of the nation's impaired rivers and 45 percent of the impaired lakes (EPA, 1990). Overall, agricultural policies contribute to these water quality problems by encouraging cultivation of marginal lands and use of agricultural chemicals. In 1980 the Rural Clean

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Sustaining our Water Resources Water Program was initiated to demonstrate the impact of best agricultural management practices on water quality. However, this program was never well funded or targeted to areas where it would contribute most to water quality problems. The Conservation Reserve Program established under the Food Security Act of 1985 provides farmers with an annual rent and half the cost of establishing a permanent cover on land that is offered for and accepted into the conservation reserve. Relatively few of the lands included in the reserve during the first several years under the program were in areas where they could contribute significantly to improved water quality. More recently, however, the eligibility requirements have been relaxed to include lands where erosion may not be a problem but cultivation would pose serious water quality problems. Toxic substances present a particularly difficult regulatory challenge for several reasons. First, our knowledge as to what substances are toxic and in what doses, durations, and combinations is very limited, and epidemiological and laboratory studies on animals are unable to do much more than identify problems. Second, toxins are difficult and expensive to detect in the low concentrations that may be harmful. And, third, toxins are not readily eliminated from the environment. Conventional municipal treatment technologies do not remove many potential toxins. Pretreatment of industrial effluent can keep some toxins out of municipal sewage, but they may still end up in water supplies when they are disposed of in landfills or the atmosphere. In the early 1970s, burial was considered the best way to dispose of toxic substances. Currently, billions of dollars is being spent to clean up landfills that are leaking toxins into water supplies. The Safe Drinking Water Act of 1974, which required the EPA and the states to limit contaminants in drinking water, was the first of several federal laws focusing on curbing toxic substances in water. Other major legislation motivated in part by similar concerns includes the Federal Insecticide, Fungicide, and Rodenticide Act Amendments of 1975; the Toxic Substances Control Act of 1976; the Resource Conservation and Recovery Act of 1977; the Clean Water Act Amendments of 1977; the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (Superfund); and the Safe Drinking Water Act Amendments of 1986. In addition to being a manifestation of society's concerns about human exposure to toxins, these acts reflect a growing understanding of the complexity of the problem, uncertainty as to what to do about it, and a neglect of economic considerations in dealing with it. Hundreds of billions of dollars has already been spent and tens of billions more is being spent annually to protect and improve the quality of the nation's water supplies without any attempt to determine if the benefits exceed

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Sustaining our Water Resources the costs. Furthermore, there has been little effort to explore or introduce more cost effective approaches to achieving environmental goals. INSTITUTIONS FOR BALANCING FUTURE WATER DEMANDS WITH SUPPLIES The United States has developed an enormous infrastructure to control, transport, and put its water resources to a multitude of uses. Large water projects, however, are no longer widely accepted as symbols of farseeing and humane management of the nation's water resources. To the contrary, they often appear to be financially and environmentally costly attempts to protect special interest groups from having to adapt to increasing water scarcity. The principal task for the future is not to construct more infrastructure but to build institutions that will ensure the existing supply system and the nation's scarce water resources are managed and allocated wisely. Improved management of existing supplies might provide relatively low-cost, environmentally benign opportunities for increasing safe water yields in some areas (Sheer, 1986). These opportunities, however, are often constrained by institutional barriers such as multistate water laws, legal constraints on collaboration among separately owned suppliers, inadequate regulations providing for conjunctive management of ground and surface supplies, and the lack of a national water policy to reconcile the differences among the multitude of federal agencies pursuing narrow and often conflicting objectives in a river basin. While the options for further increases in reliable supplies are now limited and costly, water demands are growing with population and income growth and the increasing values being placed on instream uses. With demand growing faster than supply, water costs will continue to increase even if supplies are managed efficiently. Demand management—which includes transferring water among alternative uses in response to changing supply and demand conditions, introducing appropriate incentives to conserve, and protecting instream flows and water quality—provides the principal means of controlling the magnitude and nature of the nation's future water costs. When water is underpriced and locked into traditional uses, more of the costs take the form of constraints on development and high costs for new water users. When water bodies are not used freely for disposal of wastes, more of the costs show up as deteriorating aquatic ecosystems and health problems. On the other hand, when the full social costs are borne by the users and water can be voluntarily transferred (subject to consideration of third-party impacts), the

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Sustaining our Water Resources resource is used more efficiently and the highest-value users are assured of adequate supplies. The institutional obstacles to more effective demand management are many. Institutions rooted in an era when water was not considered to be scarce and transfers were viewed as unnecessary or unimportant limit the ability to respond to changing supply and demand conditions. Federal policies that provide irrigators with highly subsidized water and no incentives to conserve or transfer supplies to other uses encourage waste and increase overall water scarcity. Water pricing continues to treat water as a free resource, and average-cost pricing in an increasing-cost industry keeps prices below the marginal costs that would encourage more conservation and make development of some higher-cost supplies unnecessary. Neglect of economic considerations limits the benefits society derives from the enormous funds spent to protect and improve water quality. And restrictions on and uncertainties over water rights discourage water-related investments and inhibit transfers. Political factors stymie the introduction of many reforms. Two major challenges are to develop institutions for introducing environmental values into water-use and investment decisions in a balanced and expeditious way and for incorporating third-party interests into water transfer decisions without imposing high transaction costs. During its 10 years of existence, the Water Science and Technology Board has been on the forefront in increasing our understanding of complex water resource systems, the impacts of humans on these systems, and the role of institutions in determining how water resources are used and abused. Board studies have addressed many of the issues I have discussed. Studies concerning restoration of aquatic ecosystems, appropriative and riparian water rights, use of hydropower and its environmental and social costs, water transfers in the West, irrigation-induced water quality problems, cooperation in urban water management, ground water quality protection, the cleanup of hazardous wastes in relation to water quality, and toxic substances in the Great Lakes are just a few of these. Moreover, the numerous ongoing and proposed studies suggest that the board will continue to be a major contributor to the scientific knowledge and public understanding that are essential to developing institutions that will promote wise management and use of our scarce water resources. REFERENCES Frederick, K. D. 1991. Water Resources: Increasing Demand and Scarce Supplies. In K. D. Frederick and R. A. Sedjo, eds., America's Renewable Resources: Historical Trends and Current Challenges. Resources for the Future, Washington, D.C.

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Sustaining our Water Resources North, D.C. 1991. Institutions. Journal of Economic Perspectives 5(1):97–112. Sheer, D. P. 1986. Managing Water Supplies to Increase Water Availability. In U.S. Geological Survey, National Water Summary 1983-Hydrologic Events and Issues. Water-Supply Paper No. 2300. U.S. Government Printing Office, Washington, D.C. U.S. Environmental Protection Agency (EPA). 1990. National Water Quality Inventory: 1988 Report to Congress. EPA 440-4-90-003. EPA, Washington, D.C.