Topic Area: Water Markets
Geographic Area: California, USA
Focal Question:What is needed to create a more efficient
market?
Sources:
l ) California Department of Water Resources-
http://tiger-2.water.ca.gov/dir-dwr_programs/DWR PGMS-CA
Water_Plan.html April 25, 1997
2) Saliba, B. C. and D. B. Bush (1987). Water Markets in Theory and
Practice: Market Transfers, Water Values. and Public Policv. Boulder,
CO, Westview Press.
Reviewer: Megan Leigh Dingler, Colby College '96
Review:
Water markets based primarily on appropriations rights in California
are different from most other markets due to the fact that the water
is not considered a part of the land but is often needed to realize
gains from the land.4~The high costs associated with water markets
are largely due to the substantial number of agencies and interesth
groups involved in the sale of water as well as the opportunity costs
of varying water uses. For these reasons, proposed water transactions
often take vast amounts of time and resources prior to completion or
rejection, resulting in inefficient public resource allocation. As
the demands on existing water supplies increase, finding mediation
techniques which require fewer resources will aid the market in
discovering a greater degree of allocative efficiency.
The current market structure is governed by a pyramid of agencies
with the primary governing body of the Federal Central Valley
Project(CVP), which controls approximately 65% of the state's water.
This agency, primarily serving the farming sector, is also
responsible for the greatest portion of the conveyance systems
bisecting the state, a system heavily subsidized by the United States
tax payers. Under the CVP is the State Water Project(SWP) and the
California Department of Water Resources(DWR), both having
jurisdiction over transfers crossing specified water district
boundaries of which there are nine. The next tier down involves the
approximately 3,000 organizations and agencies responsible for the
pricing and transport of water to special irrigation districts and
municipal customers.
The number of agencies involved in any given transaction outside of a
small district substantially increases the transactions costs of
negotiations. This is especially true since the farmers do not
actually own the water but contract for the use of the water on an
extended basis. The cost of negotiation and the subsequent increase
in risk often outweigh the potential gains to either party of
entering into an agreement.
The water available to California is subject to one of three
classifications: real water, new water, and paper water. Real water
is the most common approved for transfer since it does not injure any
other water rights holder. New Water is water which was not
previously available such as groundwater or desalinized ocean water.
Paper water is that water which is available only through the
fallowing of land which was previously irrigated. New and paper water
are difficult to transfer due to the environmental and economic
consequences to the region from which that water is removed. Loss of
wildlife habitat, jobs, community taxes and desert encroachment are a
few examples of these losses.
The State Water Code which defines the conditions for all transfers
within the state dictates that all proposed transfers meet the
"no-injury-rule," laid out in sections 1706, 1725, 1736 and 1810(d)
of the Code. This means that down stream water rights holders must
not be adversely affected by the loss in return flow resulting from
the removal of the transferred water, environmental habitats must be
respected, and local communities must be compensated for the loss in
employment and allied industry income resulting from fallowing. The
proof of no-injury lies with the proponents of the transfer.
In the case of increased groundwater reliance, no-injury is very
difficult and costly to prove due to the uncertainty mvolved in
hydraulic movements through the earth's crust. A farmer who overlays
an aquifer has riparian right to that water. If that farmer also
holds a contract for surface water, the surface water may be
available for transfer. As the farmer increases pumping of
groundwater, a cone of depression will form around the pump, drawing
the aquifer level down. The aquifer will recharge by drawing from
adjacent surface water sources. If this transfer is allowed, other
water rights holders will effectively be subsidizing the farmer who
transferred water rights, by supplementing the increased groundwater
withdrawals. Such was the case with many of the 1991 Water Bank
transfers which were intended to mediate the effects of the
drought.
Growing municipalities in Southern California, are increasing the
demand for water and ultimately the price. Unless new water is
created, either through desalinization of ocean water or increased
extraction from existing sources currently reserved for habitat
maintenance, farmers will feel an increasing pressure to conserve. By
conserving the water which is provided to irrigators at prices below
marginal cost, water districts and farmers will be able to capture
the increasing scarcity rents provided by the municipalities. This is
the case with deal struck by the Metropolitan Water District(MWD),
which serves the Greater Los Angles area, and the Imperial Irrigation
District(IID), serving the Imperial Valley.
In 1987 the MWD agreed to pay the costs of conservation technologies
to the IID. The average cost of ditch lining to reduce ground seepage
for 400,000 acre feet of conservation investment is $240 acre foot
conserved. This price is the least expensive of the options which
were available to the MWD at the time. A portion of this price was to
implement technologies allowing a portion of the water to seep into
the ground, thus maintaining wildlife habitat and seepage recharge of
aquifers which would have been dramatically altered had a portion of
the water not been allowed to enter the surrounding soil. Through
MWDs increased investment, allowing aquifers to be artificially
recharged by water which is initially subsidized, the growers
relaying on groundwater to irrigate their crops are receiving water
effectively subsidized twice by the tax payers. This situation
creates inefficient allocation of financial and environmental
resources as the price paid by groundwater users does not reflect the
true market price were all externalities included in this price.
Until the agencies involved in transactions can be decreased or
reorganized so as to lower the risk, and transactions costs involved
in selling water the market will continue to be thin and a "going"
price will remain elusive. The development of a going price will
facilitate farmers in making socially optimal decisions regarding the
amount of water to use for irrigation, and the type of crop to
plant.
~In order for an efficient market to form a greater investment must
be made into evaluating the hydraulic properties and habitat needs of
the irrigated area so that the price paid for transferred water may
effectively represent the externality costs involved in the
reallocation of the resource. The creation of such a market will
allow water to flow to the socially optimal point as determined by
the market, thereby reducing waste and pollution resulting from over
irrigation and chemical input run-off.