5—
Legal Considerations, Valuation, and Ground Water Policy

This chapter outlines the fixed ground water allocation and quality policies that affect ground water valuation. The chapter also describes how new policies are trying to balance environmental protection with the corresponding economic consequences. It concludes with a section that addresses research needs based on the lack of information relating valuation information to ground water management decision. American ground water policy is a combination of state, local and federal laws dealing with ground water allocation and ground water quality protection. Ground water allocation is almost exclusively the province of state law, whereas ground water quality protection is a mixture of state, local, and federal laws. State ground water allocation laws date back to 19th-century court decisions (Murphy, 1991; Tarlock, 1995), while most modern ground water quality laws date from the 1970s and 1980s (Beck, 1991).

An important ground water allocation issue is how to evaluate current versus future use of ground water. Unfortunately, states rarely consider future ground water uses in establishing ground water allocation policies dealing with ground water depletion. The states that do have explicit policies to limit ground water depletion typically simply prohibit additional ground water uses and do little to regulate current ground water uses to extend aquifer life (Aiken, 1982). There is unfortunately too little attention given to regulating existing ground water uses to lengthen aquifer life, let alone any explicit quantitative evaluation of the trade-off between current and future ground water use. Consequently, ground water valuation has historically played almost no role in state ground water allocation policies. Ground water policies in most states could be strengthened by acknowledging ground water's future value.



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Valuing Ground Water: Economic Concepts and Approaches 5— Legal Considerations, Valuation, and Ground Water Policy This chapter outlines the fixed ground water allocation and quality policies that affect ground water valuation. The chapter also describes how new policies are trying to balance environmental protection with the corresponding economic consequences. It concludes with a section that addresses research needs based on the lack of information relating valuation information to ground water management decision. American ground water policy is a combination of state, local and federal laws dealing with ground water allocation and ground water quality protection. Ground water allocation is almost exclusively the province of state law, whereas ground water quality protection is a mixture of state, local, and federal laws. State ground water allocation laws date back to 19th-century court decisions (Murphy, 1991; Tarlock, 1995), while most modern ground water quality laws date from the 1970s and 1980s (Beck, 1991). An important ground water allocation issue is how to evaluate current versus future use of ground water. Unfortunately, states rarely consider future ground water uses in establishing ground water allocation policies dealing with ground water depletion. The states that do have explicit policies to limit ground water depletion typically simply prohibit additional ground water uses and do little to regulate current ground water uses to extend aquifer life (Aiken, 1982). There is unfortunately too little attention given to regulating existing ground water uses to lengthen aquifer life, let alone any explicit quantitative evaluation of the trade-off between current and future ground water use. Consequently, ground water valuation has historically played almost no role in state ground water allocation policies. Ground water policies in most states could be strengthened by acknowledging ground water's future value.

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Valuing Ground Water: Economic Concepts and Approaches Valuation has played a more significant role in ground water quality policies, however. Under state and federal Superfund programs, valuation is a critical factor in determining the amount of money recoverable for natural resources damages. Valuation has also implicitly (through cost-effectiveness analyses) become a significant factor in determining ground water remediation levels in Superfund cleanup sites and future drinking water standards. Valuation may become an even more important consideration in ground water protection policy if formalized regulatory benefit-cost studies become a more significant part of developing and selecting federal environmental regulations. Critics of current federal environmental policies contend that those policies should have as their primary objective risk reduction rather than environmental protection. Focusing environmental regulations on risk reduction and subjecting proposed environmental regulations to regulatory benefit-cost studies has been required administratively since the Carter administration. Proposed federal legislation would elevate risk reduction and regulatory cost-benefit tests to the highest environmental policy objectives, raising the policy significance of resource valuation. Such a change would represent a fundamental shift in federal environmental policy. VALUATION AND GROUND WATER ALLOCATION As stated earlier in this report, most states treat ground water as if it were a free good: well owners are subject to few if any pumping restrictions except in unusual circumstances. Where no use restrictions are established, ground water tends to be undervalued. In most eastern states ground water use is subject only to court decisions, which effectively means there are no legal constraints on ground water development and use. Eastern and western states that require state permits as a condition of ground water use seldom impose pumping limits that take aquifer life into account. Only rarely are current ground water uses balanced against future water needs. Ground Water Allocation Law Doctrines Ground water law in the United States is the result of a bewildering mix of state court decisions and state statutes. While some generalization is possible, each state's ground water law is unique. This overview broadly categorizes state ground water laws primarily as they relate to allocation, and briefly surveys state and federal ground water protection policies. Common Law States The common law doctrines of absolute ownership, reasonable use, correlative rights, and eastern correlative rights are based on state court decisions and

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Valuing Ground Water: Economic Concepts and Approaches are implemented through litigation or private negotiation. While prior appropriation was initially adopted in a few western states by court decision, it will be discussed separately as a statutory rather than a judicial doctrine. Absolute Ownership. The earliest judicial theory of ground water rights is the doctrine of absolute ownership, also referred to as the English rule. Under the absolute ownership doctrine the landowner is, by virtue of land ownership, considered owner of the ground water in place. Thus in absolute ownership jurisdictions a landowner may pump as much ground water as possible, without regard to the effect his pumping has on neighboring landowners. The English rule of absolute ownership reflected 19th-century judicial observations that the movement of ground water was unknowable and thus it was unfair to hold a landowner liable for interfering with a neighbor's well when it was not knowable whether the defendant's pumping actually affected the plaintiff's well or not. The English rule was once quite popular in the United States, but now only Texas among the western states remains an absolute ownership jurisdiction; although Texas now has a number of sub-state districts where ground water use is now regulated, e.g. Houston/Galveston area, High Plains, San Antonio. Some eastern states may still be English rule jurisdictions, but the judicial trend is toward adoption of the eastern correlative rights doctrine. Reasonable Use. The reasonable use rule, or American rule, was developed in the 19th century. Under the American rule landowners are entitled to use ground water on their own land without waste. If their use exceeds this ''reasonable use," the landowner is liable in damages. The American rule may still be followed in a few eastern states, although it is being judicially replaced by the eastern correlative rights doctrine. The reasonable use doctrine is part of the ground water jurisprudence of Nebraska, Arizona, and California. Western Correlative Rights. The California doctrine of correlative rights also initially developed in the 19th century but has continued to develop. Under the correlative rights doctrine, if the ground water supply is inadequate to meet the needs of all users, each user can be judicially required to proportionally reduce use until the overdraft is ended. The policy significance of correlative rights is that each well owner is treated as having an equal right to ground water regardless of when first use was initiated. The correlative rights doctrine is part of the ground water jurisprudence of California and Nebraska, although its sharing feature has been incorporated into the ground water depletion statutes of a few other western states. Eastern Correlative Rights. The eastern correlative rights doctrine, inspired by the Second Restatement of Torts, states that when conflicts between users occur, water will be allocated to the "most beneficial" use, giving consideration

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Valuing Ground Water: Economic Concepts and Approaches to a wide variety of factors, including priority of use. Several factors are enumerated to be considered in a judicial determination of whether a water use at issue is "unreasonable": (1) the purpose of the interfering use, (2) the suitability of the interfering use to the watercourse, (3) the economic value of the interfering use, (4) the social value of the interfering use, (5) the extent and amount of harm it causes, (6) the practicality of avoiding the harm by adjusting the use or method of use of one riparian proprietor or the other, (7) the practicality of adjusting the quantity of water used by each proprietor, (8) the protection of existing values of water uses, land, investments, and enterprises, and (9) the justice of requiring the user causing the harm to bear the loss. Statutory States Permit States. A few states, including Florida, Iowa, Wisconsin, and Minnesota, require a state permit as a condition of well construction and use. Typically, users become subject to a rationing program during periods of shortage so that public water supplies are protected at the expense of other uses. Appropriation States. With the exception of the major ground water using states (e.g., Texas, Nebraska, Arizona, and California), western states apply the doctrine of prior appropriation to ground water. This means that the right itself is dependent upon obtaining a state permit rather than simply owning land overlying the ground water supply. Between ground water users, priority of appropriation gives the better right. This means that first in time is first in right. Ground Water Allocation Law Issues Ground water rights conflicts between well owners, and problems caused by surface-ground water interference are among the issues addressed by allocation law issues. Ground Water Rights In the common law states, ground water rights are based upon owning land overlying the ground water supply and are defined by court decision. In the statutory states, including the eastern permit states, ground water rights are based upon obtaining a state permit and complying with its terms. In the permit and appropriation states, state statutes generally define the extent of ground water rights. Common Law States. In all common law states, the right to use ground water is based on owning land overlying the ground water supply. In absolute ownership states, pumping is not restricted to avoid harm to others or to avoid waste.

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Valuing Ground Water: Economic Concepts and Approaches (However, in Texas, malicious pumping may be judicially restrained.) In reasonable use jurisdictions there is generally no ownership interest in the ground water itself until it has been captured. Pumping may be judicially restrained to prevent waste or nonoverlying uses. In correlative rights jurisdictions the right to use ground water is also based on owning land overlying the ground water supply, although in California prescriptive rights can be obtained for nonoverlying uses. Pumping may be judicially restrained to prevent waste or to apportion an inadequate supply. In eastern correlative rights states, pumping may be judicially restrained during shortages, although the basis upon which shortages will be allocated is not predictable. Ground water rights are least well defined in the eastern correlative rights statutes, since judicial notions of what may constitute the "most beneficial" use of ground water may change over time. Statutory States. In both eastern permit states and appropriation states, rights to use ground water are based on obtaining and complying with the terms of a state permit. However, most existing ground water uses were automatically grandfathered into the permit system. Pumping rates may be limited in a permit and further limited during shortages. In eastern permit states, public water supply uses and domestic uses will generally be protected during shortages. In appropriation states, senior users (i.e., those with an earlier priority date, or in other words, an older well) are protected during shortages without regard to use. A junior user with a higher use, however, may be able to condemn a senior's use right during shortages and thus pump water out of priority. Well Interference Conflicts Well interference is where the cone of depression of one well intersects with the cone of depression of another well, reducing the yield of both wells. In an artesian aquifer, well interference may occur when the pumping from one well drops the water level below the pump of another well. Well interference may occur even when there is sufficient water available to supply all users—it may be the result of inadequate wells rather than an inadequate supply. Most ground water disputes have tended to be well interference disputes. Common Law States. In absolute ownership states, a landowner is not liable for interfering with a neighbor's well. Thus the neighbor's only recourse is to drill a new well deeper than the neighbor's well. This has been described as "the race to the pumphouse." In reasonable use states a landowner complaining of well interference is entitled to relief only if the complained-of use is wasteful or not on overlying land. Thus plaintiffs complaining of well interference have little legal remedy in the absence of gross waste or nonoverlying uses. The courts' definition of what constitutes a wasteful use is rather generous. Arizona courts have defined overlying land to include only the tract of land where the well is

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Valuing Ground Water: Economic Concepts and Approaches located. Nebraska, a reasonable use state, minimizes well interference conflicts between high-capacity wells through statutory well-spacing restrictions. In correlative rights states, competing pumpers have equal rights during shortages. Statutory States. In eastern permit states and appropriation states, well interference conflicts may be reduced through permit conditions such as well-spacing restrictions and pumping restrictions. Further, in eastern permit states public water supply and domestic uses are generally protected during shortages. Otherwise, correlative rights principles will likely be applied. Prior appropriation is primarily a surface water doctrine that has been applied rather uncritically to ground water. As ground water problems developed, the principles of prior appropriation were modified to better apply to the ground water context. Two modifications that were made in response to well interference conflicts are establishment of reasonable pumping depths and problem area regulations. Sometimes the senior or oldest wells may not be fully penetrating. To allow senior appropriators to insist upon original pumping depths being maintained could seriously constrain ground water development. Thus several appropriation states do not strictly maintain priority during well interference disputes, but only protect "reasonable pumping depths" through well permit restrictions on pumping. If a senior's well cannot pump at that depth, typically the senior appropriator is responsible for replacing the well. In some appropriation states ground water development and use has resulted in chronic well interference problems. Special pumping and development restrictions may be imposed by the state engineer in designated problem areas. Regulations can include a ban on new high-capacity wells and pumping restrictions to maintain reasonable pumping depths and reduce interference conflicts. Ground Water Depletion Ground water depletion occurs when withdrawals from the aquifer exceed recharge. This is sometimes referred to as ground water overdraft or mining. Overdraft is significant in the Ogallala aquifer region, including Nebraska, Kansas, Colorado, Texas, and New Mexico, as well as in California, Nevada, and Arizona. The amount of water that can be safely withdrawn without leading to long-term aquifer depletion is sometimes referred to as the safe-yield amount. Common Law Doctrines. Of the overlying rights doctrines, only the correlative rights doctrine addresses depletion. In absolute ownership states pumpers can completely ignore depletion and in reasonable use states they need be concerned about depletion only to the extent that their uses are wasteful or non-

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Valuing Ground Water: Economic Concepts and Approaches overlying. In eastern correlative rights states, courts can apportion water between competing users. Florida (a permit state) is the primary eastern state with significant ground water depletion concerns. In theory, courts in correlative rights states can limit withdrawals to an aquifer's safe yield, thus preventing depletion. In practice, in California safe-yield adjudications are used primarily to define baseline pumping rights so that ground water recharge agencies can charge pumpers a pumping fee for using more than their safe-yield allocation. Problem Area Regulations. Dealing with ground water depletion has not been a major feature of eastern permit state ground water administration. Most ground water shortages are seasonal rather than perennial. In appropriation states, the most common way to deal with depletion is to establish special problem area regulations. Once the problem area has been administratively defined, typically no new high-capacity wells may be drilled within the problem area. Less frequently are the uses of existing appropriators limited, a significant policy failing. Initial ground water appropriation allocations are typically generous, not requiring a high degree of water use efficiency. Where problem area allocations have been established, they typically are high enough to allow current irrigation practices to be maintained with little or no change. Any increases in irrigation efficiency typically come only as well yields decline. Nebraska and Arizona, both reasonable use states, have adopted problem area statutes to deal with ground water depletion. Through statute and regulation, Arizona identified areas with depletion problems and instituted water-use reductions in phases. Nebraska's depletion statute is a local option for natural resource districts (NRDs). In one area the NRD has required well metering and pumping reductions. Most NRDs, however, have opted to ignore their depletion problems. Texas, an absolute ownership state, has a similar local option approach in which runoff irrigation controls and education programs have been implemented by local ground water conservation districts. Conjunctive Use. In California, the courts have recognized the rights of entities storing water underground to control the use of that water. As a result, when ground water pumpers have received their safe-yield allocation through a court adjudication, they are typically required to pay a fee to the recharge entity pumping water stored underground, i.e., for pumping ground water in excess of their safe yield allocation. Where both surface water and ground water are available to ground water pumpers, the recharge entity can raise or lower ground water pumping fees to encourage surface water use during periods of ample surface supplies or to discourage surface water use during periods of surface water shortage.

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Valuing Ground Water: Economic Concepts and Approaches Surface-Ground Water Interference Where ground and surface water supplies are hydrologically connected, courts typically have followed the "underground stream" doctrine to interrelate surface and ground water rights of use. This means that wells will be treated as surface diversions and governed by surface water law. Riparian rights jurisdictions basically follow a theory similar to the reasonable use doctrine of ground water rights, although the eastern correlative rights doctrine has been applied to both surface and ground water. Where surface water rights are appropriative, priority would govern surface-ground water disputes. Under the "Templeton" doctrine, the New Mexico State Engineer has required a junior ground water appropriator to purchase and retire sufficient surface appropriations to compensate for the expected stream depletion effect of a proposed well. Colorado has an elaborate system for integrating surface appropriations and appropriations of subflow and tributary ground water. Generally junior ground water appropriators are expected, through plans of augmentation, to compensate the stream for their expected stream depletion effects of well pumping. Ground water pumping that reduces stream flows upon which endangered species depend for habitat may be regulated under the federal Endangered Species Act. In Texas, the Sierra Club has sued the U.S. Fish and Wildlife Service, arguing that well pumping from the Edwards Aquifer near San Antonio has reduced stream flows to the detriment of endangered species. Municipal and irrigation uses of ground water are currently under federal court order to be reduced to meet endangered species stream flow requirements. In some instances, prevailing ground water laws impose constraints on individuals and institutions from assigning the appropriate TEV to ground water in operationally meaningful ways. Among the constraints that can be found in prevailing ground water law are: failures to vest clearly the right to use ground water (i.e., provisions which allow the law of capture to prevail); prohibitions or constraints on the marketing of ground water; forfeiture provisions in which the failure to apply the water to beneficial use may risk forfeiture of right; provisions which encourage individual users to ignore the social costs of use; and provisions which encourage the exploitation of ground water in a competitive fashion (virtually all of these barriers to accurate depiction of TEV apply to surface water as well). Water Rights Transfers In most western states, where water supplies are short, irrigation is the predominant use. To accommodate new uses for municipal, industrial, recreational, and environmental purposes, water rights in most western states can be bought and used for a different purpose. Typically this involves quantifying the original consumptive use, and allowing that amount to be transferred to another party so it can be used for a different purpose and perhaps in a different location. Restricting

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Valuing Ground Water: Economic Concepts and Approaches transfers to consumptive use preserves return flows from the original use to other appropriators on the stream. Water marketing has been hailed as the modern, environmentally friendly way to deal with water shortages in the arid West, as opposed to dam construction. Most water right transfers involve surface water rights. However, ground water transfers are common in Arizona. Water markets provide flexibility in water use and management while also providing "real world" prices for water, which can be useful in attempting to value ground water. More states should consider the authorization and promotion of water marketing, including transfer of ground water rights when appropriate. An emerging policy issue is how to deal with adverse community impacts from transferring water from irrigation to nonagricultural uses (NRC, 1992). A principal concern is that as water is transferred away from irrigated agriculture to other uses, the community's agribusiness economic base may be threatened. A variation on the water right transfer theme is for an entity, typically referred to as a water bank, to purchase water rights from users willing to sell them, and then resell the water to whoever needs it. Water right sales to a water bank may be temporary, whereas most water right transfers are permanent. Water marketing and banking are important to valuation in that such water right transfers provide actual market values for water, which in turn provide crucial information for valuing ground water. Valuation and Ground Water Management Arizona's Ground Water Management Act of 1980 reflects a series of conscious water allocation choices to a much greater degree than most state water allocation legislation does. Arizona's Act mandates the goal of eliminating ground water overdraft by the year 2025. Overdraft is to be reduced by a series of 5- and 10-year plans that apply to Arizona's most populated areas and agricultural center. Thus Arizona's Ground Water Management Act is a rare example of state legislation that implicitly values ground water. Such legislation can help pave the way for other states to use valuation studies in determining ground water's future economic worth. Florida also regulates ground water uses to protect public water values, including environmental services from ground water. The principal consequence of the law of capture ground water allocation policy relied on by many states is that potential future uses of ground water are not taken into account. Valuation plays no significant role in ground water allocation policy under the law of capture. Indeed, the extent to which state water law fails to deal effectively with ground water depletion indicates the degree to which its policies ignore valuation. Valuation as an analytical tool has typically been more important to water suppliers in helping them evaluate water supply alternatives. A recent study involving ground water valuation was prepared for the city of Albuquerque to

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Valuing Ground Water: Economic Concepts and Approaches help it evaluate water supply alternatives, it is described further in Chapter 6 (Brown et al., 1996). VALUATION AND GROUND WATER QUALITY PROTECTION Ground water quality protection law is perhaps even more fragmented than ground water allocation law. While federal law provides a legal umbrella, no single unifying federal ground water quality protection law exists. The federal Clean Water Act does not establish a basic program for ground water quality protection the way it does for surface water. Rather, federal ground water quality protection programs are scattered throughout a variety of federal environmental statutes. For example, resource valuation plays a significant role in Superfund policy. First, valuation is implicitly involved in benefit-cost analyses of Superfund cleanup alternatives. Second, valuation is critical in recovering damages caused to natural resources. Under the 1996 Safe Drinking Water Act amendments, benefit-cost analysis will be used in establishing new drinking water standards. Ground Water Quality Protection Ground water quality protection measures generally address either point source or non-point source pollution. Point Source Pollution CWA. Section 502(14) of the Clean Water Act (CWA) defined a point source of water pollution to include "any discernible, confined and discrete conveyance … from which pollutants are or may be discharged." This would include a discharge pipe into a stream or an injection well. The CWA thoroughly regulates point discharges into waters of the United States, including streams and wetlands. However, the CWA does not regulate point source discharges to ground water. SDWA. The Safe Drinking Water Act requires public water suppliers to periodically test the quality of the drinking water they supply to their customers. If testing reveals violations of one or more of the EPA drinking water standards (also referred to as maximum contaminant levels or MCLs), remedial action must be taken. Under the 1996 SDWA amendments, new MCLs will be established by EPA at a slower pace, and they will be subject to benefit-cost analyses and risk assessment. (More on this later.) States can grant waivers for drinking water system

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Valuing Ground Water: Economic Concepts and Approaches violations to communities of up to 3,300 people, and to communities up to 10,000 with EPA approval. The SDWA has three provisions relating to ground water. First, MCLs are used by EPA as reference points in determining Superfund ground water cleanup standards. Second, EPA may designate aquifers as sole source aquifers for drinking water supply and prohibit federal activities adversely affecting the sole source aquifer. Finally, underground waste injection is regulated through the SDWA underground injection control program. A 1996 amendment to the SDWA may further affect ground water quality protection. The 1996 amendments provide funding for communities to enter into source protection programs to protect the community's drinking water quality from contamination. Where ground water is the source of a community's water supply, SDWA funding will be made available for ground water quality protection. CERCLA. The federal Superfund program of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and the Superfund Amendments and Reauthorization Act (SARA), requires cleanup of ground water contaminated by waste disposal. Ground water remediation may be required to comply with MCL standards, although less stringent cleanup standards may be approved by EPA on a case-by-case basis through a technical waiver process. The issue of "how clean is clean" under CERCLA is very contentious. In addition, significant CERCLA effort is expended to receive or recoup cleanup costs from responsible parties and potentially responsible parties. Many have argued that a more no-fault approach would result in faster cleanup than the current approach, which encourages litigation. RCRA. The Resource Conservation and Recovery Act (RCRA) provides for cradle to grave regulation of hazardous waste transport and disposal. In addition, underground storage tanks (USTs) storing petroleum products and other hazardous chemicals, are regulated under RCRA. Cleanups from leaky underground tanks may be paid for through state UST cleanup funds if the leaky tank complies with cleanup eligibility requirements (which vary considerably among states). Private Cleanup Liability. In addition to ground water cleanup liability imposed under CERCLA and RCRA, those guilty of ground water contamination may be liable under state cleanup statutes or court decisions for the costs of ground water cleanup. Most states have state Superfund laws for ground water cleanup as well as state UST cleanup funds. However, state laws vary considerably regarding the degree of financial responsibility imposed, ranging from a no-fault approach to a CERCLA approach.

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Valuing Ground Water: Economic Concepts and Approaches Nonpoint Source Pollution The term nonpoint source water pollution is not defined in the CWA. A draft EPA guidance document, however, defines NPS pollution: NPS pollution is caused by diffuse sources that are not regulated as point sources and normally is associated with agricultural, silvicultural and urban runoff, runoff from construction activities, etc. Such pollution results in human-made or human-induced alteration of the chemical, physical, biological, and radiological integrity of water. In practical terms, nonpoint source pollution does not result from a discharge at a specific, single location (such as a single pipe) but generally results from land runoff, precipitation, atmospheric deposition, or percolation. Pollution from nonpoint sources occurs when the rate at which pollutant materials entering water bodies or ground water exceeds natural levels. The CWA does not directly regulate NPS (which can be a significant source of ground water contamination). However, EPA encourages states to control NPS pollution of surface and ground water through the Section 319 program (successor to the Section 208 program). EPA also requires states to implement NPS control strategies through the Coastal Zone Management Act (CZMA). Many observers expected EPA NPS authorities to be expanded in the anticipated CWA reauthorization along the lines of the CZMA NPS authorities. The CWA will not be reauthorized before 1997 at the earliest, however, and whether EPA NPS authorities will be extended beyond the current Section 319 program is uncertain. FIFRA. EPA has broad authority to regulate and prohibit pesticide use under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). Most states are also authorized by state statutes to regulate pesticide applications to protect ground water quality. In addition, EPA, under its FIFRA Pesticides in Ground Water Strategy, is requiring states to prepare management plans to further regulate pesticide use to protect ground water quality when EPA determines that ground water quality will not be adequately protected by simply following pesticide label directions. Fewer states are authorized to regulate fertilizer applications to protect ground water quality. EPA currently lacks legal authority to regulate fertilizer application to protect ground water quality. Prevention of Ground Water Contamination EPA's principal strategy for dealing with ground water pollution is to prevent its occurrence, due principally to the very high costs of ground water remediation. Through grants to states, EPA can encourage ground water pollution prevention despite EPA's lack of a general ground water protection authority.

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Valuing Ground Water: Economic Concepts and Approaches Watershed Management. Under Section 319 of the CWA, EPA makes grants to states to address surface and ground water NPS pollution on a watershed basis. States typically make cost-sharing funds available to farmers to implement conservation measures to reduce erosion and sedimentation, and to implement agricultural chemical best management practices (BMPs). Wellhead Protection. Under the SDWA, EPA provides some funding to states to support local wellhead protection (WHP) programs. States help public water suppliers identify the WHP area, typically the 20-year time of travel area for the community's wellfield. Once the WHP area has been identified, communities are encouraged to inventory potential contaminant sources and to use their zoning authorities to keep incompatible land uses and practices outside of the WHP area. Existing incompatible uses are encouraged to take extra precautions to prevent contamination or to relocate outside the WHP area. Planning and Zoning. Local communities and counties may exercise their zoning authorities to regulate or limit land uses that may contaminate ground water. Some states may use their facility licensing authority to protect ground water when licensing the location of hazardous waste disposal and similar facilities. Valuation and Superfund Site Cleanup The original 1980 Superfund ground water remediation policies were cost insensitive: cleanup cost was not heavily considered in establishing site cleanup standards. This changed in the 1986 Superfund amendments (SARA). Under the current federal Superfund program, remediation actions must be ''cost-effective over the period of potential exposure or contamination" (42 U.S.C.A. 9605(a)(7); Seiver, 1996). Thus as a basic principle, ground water contamination cleanups must be "cost effective." Of course, cleanup standards also significantly influence cleanup costs. In addition, EPA must establish national cleanup priorities for potential cleanup sites. Cleanup priority criteria include: (1) the affected population, (2) the specific health risk associated with the hazardous materials to be remediated, (3) the potential for direct human contact, (4) destruction of sensitive ecosystems, and (5) natural resource damage affecting the human food chain (42 U.S.C.A. (a)(8)(A)). These cleanup priority criteria suggest that some ground water may be more valuable than other ground water based on the economic and environmental demand for the ground water. Perhaps the most controversial Superfund issue revolves around quality objectives. Ground water, for example, is generally required to be cleaned up to drinking water standards, regardless of the expected future use of the water. Critics contend that such policies ignore the real, more limited risk of the contaminated costs, and drive up cleanup costs to the point that the Superfund program may face bankruptcy (NRC, 1994). EPA may, however, relax ground water

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Valuing Ground Water: Economic Concepts and Approaches cleanup standards for particular cleanup sites from 10-6 (i.e., the estimated health risk is one additional cancer out of 1 million persons exposed over 70 years) to 10-4 (i.e., the estimated health risk is one additional cancer out of 10,000 persons exposed over 70 years). Accepting the higher health risk would significantly lower cleanup costs. The fundamental policy issue is the following: What level of contamination represents an acceptable risk? Valuation and Natural Resource Damages Superfund and other federal environmental programs (Olson, 1989) authorize states and the federal government, among others, to sue (as "natural resources trustees") polluters for damages for natural resources destroyed or injured by hazardous substance releases and oil spills. Superfund also requires federal regulations to be developed for assessing the value of injured or destroyed natural resources. Any natural resource damage assessments conducted by trustees and following the regulations adopted by the U.S. Department of the Interior receive a rebuttable presumption of accuracy. Trustees may use other valuation techniques, but the damage assessment would not enjoy a rebuttable presumption of correctness. The Department of the Interior adopted its natural resource damage assessment regulations in 1986 and 1987 (Copple, 1995). The damage assessment regulations were invalidated in part in federal court in 1989. Among other things, the court ruled that damages recovered by trustees should not be limited to the lesser of (1) the cost of restoring or replacing the equivalent of the injured resource or (2) the lost use value of the resource. However, the court did sustain the use of the contingent valuation method in natural resource damage assessment. Amendments to Department of the Interior regulations on damage assessment regulations are pending. CHANGING ENVIRONMENTAL PRIORITIES: POLICY DIMENSIONS OF GROUND WATER VALUATION A fundamental environmental policy issue is whether pollution control or other environmental regulations are health-based or technology-based. Health-based regulations begin with the premise that once a desired level of environmental quality has been determined, polluting activities will be regulated to whatever extent necessary to accomplish the specified environmental quality. Thus the resulting pollution control requirements are established (1) without regard to the availability of pollution control technology to accomplish the specified environmental standard and (2) without regard to the economic costs imposed on polluting entities. The health-based approach is favored by those placing a high priority on environmental protection. Critics, however, contend that health-based environmental standards disregard the economic cost of environmental controls

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Valuing Ground Water: Economic Concepts and Approaches and are likely to result in pollution controls too costly relative to the environmental benefits they yield. Technology-based regulation offers a different model. Under this approach polluting entities are required to adopt currently available pollution control technology that is affordable. Whether adoption of this technology yields the desired level of environmental quality remains secondary to technological and economic feasibility. Technology-based regulations are favored by those subject to pollution control requirements. Critics of technology-based regulations contend they will not reduce pollution levels sufficiently to protect human health and the environment. Economists have also criticized the technology-based approach as being economically inefficient: the same amount must be spent on pollution control regardless of the actual amount of pollution being abated. Critics of current environmental policy contend that even technology-based regulations pay too little attention to the economic costs imposed by environmental regulations. Beginning with the Reagan administration, increasing efforts have been made to explicitly quantify the economic and environmental costs and benefits of proposed environmental regulations to balance those costs and benefits. Regulatory impact assessments (RIAs) of proposed EPA environmental control regulations have been conducted to determine whether the economic and environmental benefits of proposed regulations justify the regulations' proposed costs. Similar analyses are being conducted to see whether environmental regulators are focusing their attention and resources on those problems posing the greatest risk to human health and the environment. The RIA and similar evaluation processes require a more explicit balancing of often competing environmental and economic objectives in the regulatory process. Critics of current environmental policies are forcefully contending that those policies should focus on reducing risk and should impose only those regulations that can achieve their objectives in a cost-effective way. Regulatory Impact Assessment One controversial environmental policy issue is the extent to which federal pollution control requirements should balance protecting human health and the environment with compliance costs. Most federal environmental laws are cost insensitive, subordinating compliance costs to the protection of human health and the environment. Only a few federal laws require formal balancing of environmental protection and compliance costs. Critics contend that the costs of many pollution control (and similar) programs impose costs that are not commensurate with the environmental benefits achieved; that billions of dollars are spent to guard against relatively trivial risks. President Reagan initiated a formal balancing of environmental protection and regulatory compliance costs through his controversial Executive Order 12291, which required EPA and other agencies to prepare regulatory benefit-cost analy-

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Valuing Ground Water: Economic Concepts and Approaches ses for proposed regulations imposing public and private costs of at least $100 million annually. Agency benefit-cost analyses were reviewed by the Office of Management and Budget (OMB). Environmentalists opposed Executive Order 12291 as administratively imposing benefit-cost criteria on federal environmental rules when such criteria were not authorized by Congress. However, both Presidents Bush and Clinton adopted similar Executive Orders. The House of Representatives in 1994 adopted regulatory impact assessment legislation, HR9, which would require RIAs for major rules imposing public and private costs of at least $25 million annually ($50 million for small business costs) and on Superfund cleanups costing over $5 million. The RIA requirements would apply to all new federal environmental, health, and safety regulations, including new regulations under existing laws. Risk assessment refers to identifying how many lives will be saved or other benefits achieved by the proposed regulation. Benefit-cost analysis in the RIA context refers to determining how much it will cost per life saved under the proposed regulation. The RIA process is intended to identify proposed regulations with "high" cost-benefit ratios. HR9 stalled in the Senate and is unlikely to be adopted in 1997. Nonetheless, the bill raises fundamental environmental policy issues that relate directly to ground water valuation. The overall effect of RIA requirements would be to discourage rules for which a positive benefit-cost analysis cannot be generated or is marginal. Unfunded Mandate Act of 1995 While general RIA legislation has not been enacted, elements of the HR9 RIA process were incorporated in the Unfunded Mandates Act of 1995. Federal programs often require state and/or local governments to bear a significant portion of program implementation costs. This practice is now referred to by critics as creating an "unfunded federal mandate." An example of an unfunded mandate is the Safe Drinking Water Act. Communities whose water supplies violate SDWA standards must either treat their water to EPA levels or obtain a new water supply. No federal funding is available to meet these costs, hence the SDWA imposes an "unfunded mandate." President Clinton has signed legislation requiring that unfunded (or underfunded) federal mandates be identified before they are adopted by Congress (109 Stat. 48, March 22, 1995; Fort, 1995). Unfunded mandates costing states and/or local governments at least $50 million annually are subject to a separate vote on establishing the unfunded mandate if a vote is requested. Cost estimates are prepared by the Congressional Budget Office. When faced with an unfunded mandate "point of order," Congress has several options: (1) provide the funding, (2) delete the mandate, (3) reduce the mandate to fit the funding, or (4) approve the unfunded mandate.

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Valuing Ground Water: Economic Concepts and Approaches The Unfunded Mandates Act also requires federal agencies to prepare assessments of any proposed regulations imposing more than $100 million in combined compliance costs for states, local governments, and the private sector. Federal agencies are prohibited from issuing regulations containing federal mandates that do not (1) employ either the least costly or most cost-effective method or (2) do not have the least burdensome effect on the governments or private sector, unless the agency also publishes an explanation of why the more costly or more burdensome method was adopted. These regulatory review requirements are subject to judicial review. The act is not retroactive but would apply when existing laws are reenacted. Most federal environmental, health, and safety programs contain program requirements that may be considered unfunded mandates. Accurate information regarding ground water values would make unfunded mandate regulatory reviews better relative to evaluation of the economic and environmental trade-offs involved in ground water protection policies. LEGAL ISSUES IN REDEFINING GROUND WATER RIGHTS Clearly, how private rights for ground water use are legally specified affects the value of that property right and the associated land. Changes in ground water right specifications may threaten property values and may likely be resisted by ground water users. Ground water users traditionally have resisted legal changes that affect the quantity they can pump, even though these restrictions (often little more than required improvements in ground water use efficiencies) may significantly extend aquifer life. Political barriers to reforming ground water law often are significant, and reform efforts unfortunately are most successful in response to a perceived ground water crisis. One often criticized aspect of ground water rights is uncertainty. However, the lack of specificity regarding ground water rights most often reflects a lack of scarcity. As ground water becomes more scarce, its rights to use will become more sharply defined through litigation and/or legislation. Takings and Property Rights Another legal issue is that of takings. Often when property rights are modified, for example, through environmental regulation, the takings issue is raised. Simply stated, the U.S. Constitution requires that if government regulation of a property interest amounts to a complete destruction of that property interest, the property owner must be compensated or the regulation not implemented. Traditionally, states have enjoyed broad discretion to regulate property rights in the public interest. Recently, however, federal courts have begun to consider with more favor landowner complaints that some government regulations constitute a regulatory taking or partial taking of private property. While takings jurispru-

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Valuing Ground Water: Economic Concepts and Approaches dence is hardly settled, this trend in takings law may make government agencies less inclined to take aggressive actions to protect ground water and more amenable to negotiating policies with all stakeholders, rather than simply imposing predetermined ground water policies. However, ground water regulations are routinely upheld in court, and efforts to defeat ground water regulations as takings will likely fail. REDUCING RISK AND VALUING GROUND WATER As noted in Chapter 1, more than half of the United States depends upon ground water as a source of drinking water, and the nation's reliance on ground water for drinking purposes is increasing. Moreover, ground water supplies contribute 30 to 40 percent of the flow of the nation's streams, an important ecological factor. The base flow provided by ground water contributes significantly to stream flow during periods of low precipitation. During drought periods stream flow may be entirely or largely derived from ground water discharge. Thus even the significant 30 to 40 percent contribution of ground water to total stream flow understates the significance of base flow. During droughts, most or all of the water in a stream is likely to derive from ground water discharge. Moreover, ground water plays a crucial ecological role in sustaining wetlands (NRC, 1995) Despite the obvious strategic importance of ground water to human health and the environment, the EPA Science Advisory Board (SAB), in its influential report Reducing Risk, somewhat surprisingly concluded that ground water pollution represented a relatively low risk to natural ecology and human welfare (U.S. EPA, 1990, page 13). Despite acknowledgment that the natural recovery time from ground water contamination was centuries (U.S. EPA, 1990), the SAB seemed unaware of the significance of ground water both as the nation's primary drinking water source and as a major source of stream flow. The Board's conclusions are inconsistent with the drinking water and ecological services provided by ground water. This study, on the other hand, finds that ground water is a resource critical to the nation's future, both as the our primary source of drinking water and as a significant source of stream flow. Because of these crucial human welfare and ecological functions performed by ground water, and because of the acknowledged difficulty of ground water remediation, protecting and maintaining the quantity and quality of the nation's ground water supplies must receive a high priority. RESEARCH NEEDS The published literature related to ground water valuation is limited. The studies on the use of valuation methods mentioned in Chapter 4 are characterized

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Valuing Ground Water: Economic Concepts and Approaches by a limited focus and budget (the one exception being the national study by McClelland et al., 1992). None of the studies completely address ground water's TEV; rather, attention was given to the valuation of extractive services or other specific components within the TEV. And since most of the case studies were conducted in academia, funding was limited. Further, most of the published literature and case studies were authored by economists and if an interdisciplinary approach was utilized, it was not documented. Environmental economics, particularly as related to ground water valuation, must be seen as an emerging profession. It must be based on an interdisciplinary approach when applied to ground water development, protection, or remediation projects. However, several barriers to such interdisciplinary efforts exist. Tow of particular significance are the absence of any standardized terminology to facilitate verbal and written communications, and internal organizational structures within regulatory, governmental, the private, and consulting sectors that tend to isolate economists into small groups with specific and narrow functions. Therefore, there is a need for capacity building related to professionals who can address ground water valuation. In other words, ground water professionals who are not trained economists should learn enough economics to be able to understand and use another professional's ground water valuation. As additional information becomes available, it should be transferred to practitioners. At present, no integrated and comprehensive research program on ground water valuation exists. For example, comparative studies of common ground water management decisions that could be aided by valuation have not been completed. Likewise, for a given type of decision, such as whether or not to initiate a remediation program, a range of solutions should be explored. Accordingly, a fundamental recommendation resulting from this NRC study is that the EPA, along with the National Science Foundation, DOE, DOD, and other agencies as appropriate, should plan and implement an integrated and comprehensive research program focused on ground water valuation. Following are suggestions of ways that this research need could be addressed: Pertinent federal agencies such as EPA, DOE, and DOD should jointly sponsor a series of research and case studies that examine: (1) a range of ground water-related decisions that could be facilitated by valuation information; and (2) a range of hydrogeological and contamination conditions that could be used to reflect both go/no go and prioritization decisions related to remediation. Such studies should include the integration of remedial investigation/ feasibility studies, risk (or endangerment) assessments, impact studies, and valuation information. An additional research question that could be explored based on both existing studies and the proposed research and case studies is exactly how the valuation information is used in each decision context; that is, was valuation the sole factor, an equal consideration, or a supplemental item of information? The appropriate composition of interdisciplinary teams to conduct ground

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Valuing Ground Water: Economic Concepts and Approaches water valuation research needs to be explored. Participants should include environmental economists, ground water scientists and engineers, and political scientists. The roles of such disciplines and the constraints related to interdisciplinary endeavors need to be studied. Also, the public's perception of the use of valuation methods and its understanding of valuation study results should be gauged. Attention should be given to developing and improving methods for quantifying the value of ecological services and for determining existence and bequest values for ground water resources. These topics have so far received minimal attention. Of particular significance is both the recognition of ecological services and the development of integrated methods to quantify such services. Efforts should also be focused on developing TEV information for ground water resources. Technical and economic uncertainties must be recognized in efforts to develop site-specific information regarding the benefits and costs of decisions related to development, protection, and/or remediation of ground water. For example, in relation to remediation decisions, the stochastic modeling of the contamination problem and the potential effectiveness of cleanup measures should be used to develop ranges of information that can be viewed together as an indicator of "sensitivity analysis." The possible influences of uncertainties and nondelineated costs and benefits (or ground water services) should also be considered in a qualitative manner. Finally, because we are only recently recognizing the importance of valuing ground water, there are extensive educational and technology transfer needs for ground water professionals, environmental economists, regulators, and ground water managers. As noted earlier, the planning and conduct of such valuation studies requires interdisciplinary involvement. While the leadership should come from EPA, other federal, state, and local agencies, along with appropriate professional groups such as the Association of Ground Water Scientists and Engineers (AGWSE), American Geophysical Union (AGU), American Water Resource Association (AWRA), and others, should jointly participate in technical and policy conferences and in generating a body of published literature on the value of ground water and the advantages and limitations of valuation methods. Handbooks related to planning such studies should be developed. Such efforts would help to increase awareness of ground water's value and to demonstrate how valuation information could improve decision-making. It is recognized that many of these stated research needs are broad. Such needs could be made more specific upon the development of a research strategy focused on ground water valuation. The strategy which should be spearheaded by EPA, should include an overall goal, specific objectives, delineation of multiple agency involvements (e.g., EPA, USGS, Corps of Engineers, NOAA, and nongovernmental organizations), specific problem statements on needed research topics, and budgetary requirements and time schedule.

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Valuing Ground Water: Economic Concepts and Approaches RECOMMENDATIONS These institutional considerations, suggest several areas of governmental action: Federal, state, and local agencies should give consideration to the TEV of ground water in their deliberations on new or amended legislation or regulations related to ground water management. States should consider the authorization and promotion of water marketing, including transfer of ground water rights when appropriate. Although a transition to a market that adequately captures the full value of the resource may be difficult, water markets provide flexibility in water use and more efficient allocation of water among uses. Water markets also provide real world prices of water for current use values, and their prices aid decision-makers in valuing ground water. Helping to drive water marketing is the fact that the importance of ground water has changed in the context of conjunctive use. Recharge of surface water and effluent to replenish ground water is now common in southern California. States should be encouraged to develop clear and enforceable rights to ground water where such rights are either lacking or absent. A system of clear and enforceable extractive rights to ground water is prerequisite to economically efficient use of that water. Without such rights users will not have the incentive to value ground water correctly either now or in the future. Because of many uncertainties related to ground water valuation as demonstrated in both the methods chapter (Chapter 4) and this chapter, EPA and other pertinent agencies should plan and implement an integrated comprehensive research program on ground water valuation. Federal agencies should conduct research and develop case studies in ground water valuation that includes a range of environmental conditions and economic circumstances. In addition, federal, state, and local agencies should develop valuation methods that quantify ecological services and bequest and existence values. Such research will help states manage and protect their ground water resources and could help to demonstrate improvements in decision-making that would occur with valuation information. REFERENCES Aiken, J. D. 1982. Ground water mining law and policy. Colorado Law Review 53(3):505-528. Beck, R. E. 1991. Environmental controls. Waters and Water Rights 5: Chapters 52-57. Charlottesville, Va.: Mitchie Company. Brown, F. L., S. C. Nunn, J. W. Shomaker, and G. Woodard. 1996. The value of water: A report to the city of Albuquerque in response RFP95-010-SV. Albuquerque, NM: City of Albuquerque. Copple, R. F. 1995. NOAA's latest attempt at natural resource damages regulations: Simpler… but better? Environmental Law Reporter 25:10671.

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Valuing Ground Water: Economic Concepts and Approaches Fort, D. D. 1995. The unfunded mandate reform act of 1995: Where will the new federalism take environmental policy? Natural Resources Journal 35(3):727-730. McClelland, G. H., W. D. Schulze, J. K. Lazo, D. M. Waldman, J. K. Doyle, S. R. Elliott, and J. R. Irwin. 1992. Methods for Measuring Non-Use Values: A Contingent Valuation Study of Groundwater Cleanup. Boulder: University of Colorado. Murphy, E. F. 1991. Quantitative Ground Water Law. Waters and Water Rights 3: Chapters 18-24. Charlottesville, Va.: Mitchie Company. National Research Council. 1992. Water Transfers in the West. Washington, D.C.: National Academy Press. National Research Council. 1994. Ranking Hazardous Waste Sites for Remedial Action. Washington, D.C.: National Academy Press. National Research Council. 1995. Wetlands: Characteristics and Boundaries. Washington, D.C.: National Academy Press. Olson, E. D. 1989. Natural resources damages in the wake of the Ohio and Colorado decisions: Where do we go from here? Environmental Law Reporter 19:10551-10557. Seiver, D. W. 1996. Law of chemical regulation and hazardous waste. 1:§6.06[2]. Deerfield, Ill.: Clark Boardman Callaghan. Tarlock, A. D. 1995. Law of Water Rights and Resources. Chapters 4, 6. Deerfield, Ill.: Clark Boardman Callaghan. U.S. Environmental Protection Agency Science Advisory Board. 1999. Reducing Risk: Setting Priorities and Strategies for Environmental Protection. Washington, D.C.: Environmental Protection Agency.