Shopping for water: How the market can mitigate water shortages in the American West

Panel 1

In October of 2014, the Hamilton Project and the Stanford Woods Institute for the Environment hosted a forum, New Directions for U.S. Water Policy, which brought together government and agency officials with policy experts to discuss the release of new papers highlighting opportunities from improving water management in the West.

While California’s current drought is quite severe, it’s onset has only been in the last three years; however, the western states, and particularly the southwest, have been in a much longer term drought that so far has lasted fifteen years.  This has led to declining reservoir levels and groundwater reserves as the population continues to grow.  In order to meet the challenges ahead, the paper, Shopping for Water: How the Market Can Mitigate Water Shortages in the American West, proposes expanding the use of water markets to facilitate the movement of water resources and to mitigate the risk of water shortages.

At the forum, Senior PPIC policy fellow Ellen Hanak, Thomas Iseman from the U.S. Department of the Interior, Denver Water Executive Officer James Lockhead, and Executive VP of Paramount Farming Company William Phillimore discuss the findings of the paper with co-author Robert Glennon.  The panel was moderated by Melissa Kearney, director of the Hamilton Project.Here’s what they had to say.

Kearney 1
Melissa Kearney, Moderator

The challenge of water in the West is a long standing challenge and it demands innovative lasting solutions,” Ms. Kearney began. “In this first discussion, we’ll focus on using market mechanisms. In many contexts and with many goods and resources, we rely on market forces to allocate scarce resources to its highest value, and there’s the thought that maybe we could do more in the water area to capitalize on these forces.”

The discussion will be based around a set of proposals that are being put forth in a new Hamilton Project-Woods Institute paper written by Robert Glennon of the University of Arizona and his co-authors, Gary Libecap and Peter Culp, and they’re going to argue for five specific reforms that take advantage of the market forces in order to allocate water and address the water crisis,” she said.

To set the stage for the discussion, Robert Glennon then took the podium to give an overview of the main idea of the proposals. He began by saying it was a long paper, and he only has five to seven minutes to discuss it, so he can only give a brief overview. “I don’t think I need to spend a lot of time talking about the crisis,” he said. “The Governor made it plain. There’s a real problem. California is really at the epicenter. But that said, there’s just a few items that I’d like to put forward.”

Lake Mead by Kevin Baird Aug 2014
Lake Mead, August 2014

He then presented a photograph of Lake Mead, saying it speaks volumes. “We’re in the middle of a 14 year drought in the Colorado River, and we don’t know whether that’s the 14th year of a 14 year drought or the 14th year of a 50 year drought. It is a challenging time. There are predictions of shortages for the States of Nevada and Arizona within two years. The City of Las Vegas is spending $1 billion to build a third intake pipe because the first two are about to be pathetically above the level of the lake, totally denying water supply for two million people. The future of the Colorado River is one where we’re going to see increasing economic growth and increasing population growth. It is the classic problem of supply and demand.”

California, I don’t need to spend much time on that, but 500,000 acres of fallowed land in 2014, some of the most valuable, the most productive ag lands on earth. It is a very sad sight to fly in as I did a couple of weeks ago into Fresno and see just the kind of consequences of this drought. Dead and dying trees and orchards. Thousands of homeowners whose wells have dried up.”

Texas finally – – their drought began in 2011, they’ve already suffered more than $25 billion in loss,” he said. “It’s a very, very tough time. A little town in Texas, Plainview, at a meat packing plant operated by Cargill, it closed; 2200 people lost their jobs. The whole population of the town is only 23,000. This town has been ruined.”

Glennon Open 1
Robert Glennon, one of the authors of the report

So we have a crisis and the crisis asks for serious thinking and a fresh response,” he said, presenting a picture of the High Sierra taken in February showing bare ground. “Is this simply a product of the ongoing drought, temporary fluctuations in snow pack and precipitation level? Is it something to do with climate change? Or maybe is it both? It is a scary time.”

Our water systems were set up on the assumption that the past would be a reliable guide to the future, Mr. Glennon said. “There’s a new normal and that no longer prevails,” he said. “Yet there’s little resiliency in our water systems. Each person or each group is hanging onto their little piece of the pie. We need to build resiliency in the system.”

The demands for water are extraordinarily diverse. “If you think about water you realize that basically every company needs water,” he said. In the Silicon Valley, data centers need a lot of water, as do the fabrication facilities that are located in the area, he pointed out. “It’s not just the food people, not just the ag. The National Hockey League, those teams every year in their stadiums use more than 300 million gallons of water for a hockey rink.”

He noted that Deliotte did a study of global 500 last year, and 70% percent of them said that they currently had a supply problem either in their direct operations or in their supply chain. “This is about future of the American economy,” he said. “We may fret about running out oil, but water lubricates the American economy just as oil does.”

Water Marketing Report Cover
Click here to download a copy of the report.

What are we going to do about it? The Governor outlined some options. Business as usual, more dams, more wells, more diversions,” said Mr. Glennon. “I’d like to suggest that’s not very practical.”

The problem needs a portfolio or menu approach, and the report outlines it in this way, he said. “Conservation is a big deal, reuse is a big deal, and desal will also be part of the menu going forward, but those things either singly or collectively will not get the job done. We need to go further. Now what can we do? Price signals to encourage conservation, absolutely, but we also have to recognize that what we have in terms of water is a giant milkshake glass, and what we see is everyone who is using water has put a straw into the glass. But there are more and more straws going into the glass. It’s a classic tragedy of the common problems. We need to break the relentless cycle of overuse. And what Peter and Gary and I set forward in paper is using market forces to encourage the reallocation from lower value to higher value.”

Mr. Glennon said the report makes five recommendations:

  1. We need to reform water law. “Water law is arcane and complicated, but at bottom, it’s this: use it or lose it. That’s the rule, -use it or lose it. And the consequence of that is a very peculiar concept of waste. In western water law, to waste water is not to use the water. To conserve water exposes the water rights holder to loss of the water right. There are no incentives to do what we think needs to be done. The 20 percent that the Governor mentioned, there would be farmers who just can’t do that because they lose their water rights. So our first point is that we need to remove these disincentives. We need to create incentives for people to use less water, not penalizing them if they should use less water.”
  2. We need to create market mechanisms, such as water banks and water exchanges. “Right now almost all transfers of water and water trades are one-up. They’re complicated, they take a long time, and they are hideously expensive. We need to reduce those transaction costs, and banks and exchanges would do exactly that. Banks and exchanges would possibly serve as brokers, as clearing houses, they’d provide trading platforms, and they would facilitate the transfer between willing buyers and willing sellers.”
  3. We need to use risk mitigation strategies to enhance water supply reliability. “Take a page from the investment banking community, the hedge fund businesses, the commodities markets, the insurance companies, and look at how they hedge risk. We need to build more resiliency into water supply: Ag supplies, municipal supplies, industrial supplies. We need resiliency and risk mitigation strategies: futures contracts, dry year options, and offer ways to learn from what other parts of the economy have done and build those into the world of water. That’s one way to develop increased resilience.”
  4. Protect groundwater. “Right now as we sit here, despite this very important piece of legislation, the sustainable ground water management act that passed a few months ago, the situation remains that anyone who wants in almost any part of the state can drill a new well and start pumping away with impunity. And that’s why all of these homes around the state are having their domestic wells go dry. We need to do better. It’s a classic tragedy of the commons.”
  5. Continue to expand the federal role, principally the role of the Bureau of Reclamation. Mr. Glennon said he’s pleased with the changes the Bureau has gone through the past couple of decades. “It’s not your father’s Bureau these days,” he quipped. “It’s a completely different Bureau of Reclamation. And they have shown enormous leadership in facilitating interstate cooperation and in giving accurate information for all to digest. They have done some marvelous reporting and we need more of that. We need that kind of leadership.”

Mr. Glennon said there were concerns about the impact of water marketing on farmers, the farming community and the food supply. People are fearful, but water trading need not harm rural communities, he said. “For one thing, the municipal and industrial sector certainly doesn’t need to double its supply. A modest increase in irrigation efficiency would solve the problem. Currently about 50 percent of lands that are irrigated are irrigated with flood irrigation. It’s an incredibly inefficient form of irrigation, but it’s very expensive to modernize. Our solution is straightforward. It’s a demand offset system. If someone wants to put a new straw into the glass they need to persuade someone else to take her straw out of the glass. It’s not no-growth, but it’s a system that asks growth to pay its own way. And in that way, water trading can be a win-win. It provides farmers with the capital to modernize their infrastructure, it allows farmers to grow the same product with less water, it allows cities and industry to get the water that’s conserved, and finally the costs are borne by those who want the farmers to use less. And that’s how it should be.”

[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“This is about future of the American economyWe may fret about running out oil, but water lubricates the American economy just as oil does.” –Robert Glennon[/pullquote]

Mr. Glennon then joined the rest of the panel members for the discussion. Ms. Kearney started off with a question for Ellen Hanak, senior policy fellow with the Public Policy Institute of California, noting that she has studied and written extensively about the use of markets in California. “From that perspective how do you respond to the proposals put forth in this paper and what can we learn from the California experience with market solutions?,” she asked.

Ms. Hanak began by saying that the report is worth the read as there’s a lot of rich information in the 40 pages. She noted that a lot of the recommendations could be useful to California, but pointed out that in some ways, California is already at the forefront of some of them, particularly with respect to laws that enable water marketing to happen. “California has a fairly active market, although it’s not by any means a perfect market,” she said. “It’s about 20-some years old. It was started during a major drought from the late ’80s to the early ’90s where the State got involved setting up a water bank.   We had laws in place already that were passed in the early ’80s that made it possible to transfer water without it being taken away from you.  You could lease your water and it wouldn’t be considered that you were no longer using it. Transferring is considered a beneficial use under California law.”

Initially, it was really a market for short-term temporary transfers, especially for drought relief, and over time it’s become also a market where cities are buying water to support their long-term needs,” she said. “Even some farmers who are growing tree crops are getting into long-term deals so that they have more reliability with these transactions. Mostly the water is being sold or leased by farmers, either with extra water in storage or that are able to lower of their own production.”

The market now is about five percent of total human water use,” Ms. Hanak said. “So there’s room for it to get bigger and I think a lot of the recommendations that the authors proposed could help with that.”

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Ellen Hanak, Public Policy Institute of California

I’d like to highlight two things that are important to think about,” she said. “With respect to reforming laws and thinking about the ways of providing incentives for people to save water and sell it or lease it. It’s important not to oversimplify that. The Governor said, ‘water is complex’ and it really is in this case. There’s a tendency to assume that everything that you save by adopting more efficient irrigation technology is water that you can make available to sell on the market. It sounds good and it kind of makes sense at a top level thinking about it, but in fact, that’s not true because most of the water that’s wasted in flood irrigation is actually being used by somebody else already. It’s going back into the river and being used by a downstream user – a city, a farmer, or the environment, or it’s going into the groundwater basin and it’s available for reuse later.”

One of the legal reforms that they recommend is adopting some transparent rules so that people know how much consumptive use can be transferred – that’s the technical term for the amount that you’re actually consuming that’s not available for others,” Ms. Hanak said. “California technically has that law; we don’t always apply it well. I think it is an important law to have to it make transparent so people know how much is available with different crops.”

The second thing is that I like the idea of mitigating and thinking about reliability, recommendation number three,” she said. “One way to do that is thinking about how the market can help to support the environment. In the California market, about a third of the trades in many years have been water for instream flows and for wildlife habitat. This has mostly been short-term transfers with taxpayer dollars, and that money is mostly gone now. If we’re thinking forward to how we can use a market to help bring water into the environment, we really have to find new funding sources for that.”

Australia, which is often considered a model for marketing, used $3.5 billion to buy back water from farmers in order to have it available for the market and that’s working pretty well,” she said. “People were grumpy about it initially but it’s actually working pretty well. I think California and other Western states should really explore that. … And if Prop 1 does pass, this new water bond is to think about using some of those funds to purchase water rights for the environment.

Ms. Kearney then turned to Tom Iseman, Deputy Assistant Secretary of Water and Science with the Department of the Interior. “One of the pillars of the authors’ proposals is increased or continued and expanded leadership from the Federal Government,” she said. “From your perspective at the Department of the Interior, how do you view the Federal role in solving or addressing the water challenges?

Coming from the perspective of the Bureau of Reclamation, we’re known for owning and operating water supply projects across 17 Western states, we provide water to 30 million people and 1 in 5 irrigated farmers,” Mr. Iseman began. “I think it’s clear that we face some challenges with respect to water supply allocation and markets can play an interesting role in resolving some of these issues.”

[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“There was an era when we built these projects and it was important that we have a lot of infrastructure and that’s the reason now why we need to play a role in thinking about some of these solutions. We have this infrastructure. It puts us at the center of a lot of these questions about water supply allocation.” –Thomas Iseman, Department of the Interior[/pullquote]

But it is a complex issue for the Bureau of Reclamation,” he said. “So some of the benefits and the drawbacks, as we said, there are tensions around water supply allocation across the West. One of the things that we like about water markets is that they allow local solutions, they empower water users; you want to see transactions between willing buyers and willing sellers to resolve these questions about water supply allocation rather than decisions from the Federal government. So there are definitely positives about the benefit that we can see from water markets and water transfers.”

That said, we face a clear tension with some of our agricultural water users that are partners in our water supply projects,” Mr. Iseman said. “We hear concerns about what transfers do to the agricultural community, the local economy, and the ability to grow food for our society. And that’s definitely very front and center in terms of our work in water supply and how we think about water transfers. And that’s something that we need to navigate as we look at some of the recommendations in the report.”

As he prepared for today’s discussion, Mr. Iseman said he was impressed to see how much water markets were being used, and in a variety of ways. “One is essentially to stretch water supplies or reallocate water supplies, and particularly in times of drought. You see that there in the California with the Central Valley Project, which is a Reclamation project. It’s also happening in Southern California where you have transfers from the Imperial Irrigation District and the Palo Verde Irrigation District to the cities of Los Angeles and San Diego.”

It’s happening in other places as well,” he said. “One of the good examples is the Colorado Big Thompson project in Colorado where we’re seeing more water moving between agriculture and cities on a pretty flexible basis and there are a lot of benefits to that. One of the emerging examples is something called a System Wide Conservation Agreement on the Colorado River where we’re partnering with four cities including Denver Water to look at how you could implement more essentially market driven conservation activities to improve water supply for the Colorado water river system. So there are definitely cases where we’re using this to stretch water supplies.”

Mr. Iseman said one place where Reclamation is actively using markets is to provide environmental benefits. “We have obligations throughout the West to sustain and recover endangered species,” he said. “In many projects, we’re actually an active participant in the market to acquire water for environmental benefits for refuges or for other environmental purposes. It’s really surprising me. Just to name a few projects, Klamath Project is one, we’re doing it actively on the Snake River in Idaho, and it’s happening in the Middle Rio Grande and Pecos Rivers in New Mexico.”

We use markets for the purposes of Indian water supplies and looking at tribal water settlements,” he said. “We’ve used markets to acquire water for tribes and to fulfill settlement obligations. The settlements often empower the tribes to use their water supplies; they authorize the use of water supplies in markets and many of the tribes are actually taking advantage of that, to move and to benefit from the economic value of the water that they have.”

Iseman 2
Thomas Iseman, Department of the Interior

Mr. Iseman pointed out that Reclamation is taking steps to institutionalize how they use markets. “We do have some policies that speak to measurement and pricing of water at our projects,” he said. “They’re modest steps and we implement them as we move forward in some of our agreements with the water users. We also have systematic approaches through our water smart grant program where we actually award project applicants for including ideas about water banks or water markets as part of their proposals.”

I wanted to point to a few of the things that we see potentially going forward,” he said. “As Robert mentioned, there’s a role in leadership and the way that we look at that is by empowering local leadership. We need to work with the local water users and empower them to make some of these decentralized decisions for how to take advantage of markets.”

Mr. Iseman said that Reclamation is looking to play a role in regional solutions to water supplies. “One of the big innovations that we’ve done are the basin studies that bring water users together across a basin to think about their water supply challenges and some of the solutions that they might be able to take advantage of. One of the best examples is on the Colorado River, and I think it’s really stimulated a conversation about looking at the objective data and some of the challenges that we face and thinking about how we solve these problems. Markets can definitely play a role in that.”

I just want to conclude by recognizing there’s an important role for markets and we’re very interested in this conversation,” said Mr. Iseman. “I think there’s a productive role that we can play with our local water use partners and we really appreciate the convening and the people who have come to the table to discuss these issues today.”

It strikes me as I listen to that what you’ve described is really sort of this innovative market based projects,” said Ms. Kearney. “When I think historically about what the Federal government did, I think about big infrastructure projects. Do you see the Federal government role changing or did you just emphasize market because that’s what we’re talking about or is that actually … ?

No, it’s definitely changed,” said Mr. Iseman. “There was an era when we built these projects and it was important that we have a lot of infrastructure and that’s the reason now why we need to play a role in thinking about some of these solutions. We have this infrastructure. It puts us at the center of a lot of these questions about water supply allocation. I think water markets are one of the tools that we can use to address that going forward because we’re not in the same place in terms of our appropriations and ability to build new water supply projects like we did historically.

Ms. Kearney then turned to James Lochhead, Chief Executive Officer and Manager of Denver Water, to hear the utilities perspective. “It’s fascinating that there are already partnerships on the ground between the Federal government and Denver Water and other utilities,” she said. “So in your view and your experience, do we need to rely on markets to get some more water allocated to urban users?

[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”] “I would argue that in this particular instance failure is not an option. Literally the future of the West is at stake in terms of how we manage, use, and develop our water supplies.” –James Lochhead, Denver Water[/pullquote]

Well, certainly the remarks of Governor Brown, Robert, and the issues that the paper raises point out in the words of Sheryl Sandberg, that we have a really hard project in front of us,” he said. “Are we up to it or not? I would argue that in this particular instance failure is not an option. Literally the future of the West is at stake in terms of how we manage, use, and develop our water supplies.”

Mr. Lochhead said his job is to make sure that a city of 1.5 million people in the fastest growing economy in the Intermountain West has a secure water supply for the next 100 years. “That means not only developing a water supply, but making sure that it is here in a healthy sustainable environment for that period of time. And so cities, in the face of a changing climate and in the face of tremendous growth, have challenges and a real dilemma. We’re the beneficiaries of vast infrastructure, but the yield of that infrastructure is at risk from climate change, and our ability to develop additional infrastructure is certainly questionable if not nonexistent.”

We can make a lot of gains in efficiency,” he said. “Denver Water has reduced water use by 20 percent over the last 10 years. We spent $100 million and saved a cumulative total of over 100 million acre feet, but that’s not the answer, that won’t do what we need to do. We can develop reuse and desalinization projects, but those are expensive and they’re energy consumptive. And in a non coastal city like Denver, reuse is difficult from a regulatory standpoint and desalinization is obviously not on the table. So that leaves us with agriculture.”

Under the current system, in Colorado at least our one option is buy and dry,” he said. “Going to the market and basically doing a transaction which means we take water from agriculture on a permanent basis; then the cities get the water and the agricultural economy dies. And that’s a solution that’s not acceptable to anybody.”

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James Lochhead, Denver Water

The paper points out the fact that we need more innovation and more flexibility in the system, but we face numerous institutional, political, and legal barriers in our ability to do that,” said Mr. Lochhead. “Our environmental regulatory structure is based totally on the preservation of the status quo. If you look at temperature, aquatic ecosystems, habitat – all the regulatory framework that we need to go through in developing, using, and managing water supply, it’s all based on the status quo which will not exist in 20 or 30 years with the advent of climate change as we see ecosystems literally moving north. So the entire ecosystem landscape is moving out from under us and we have a regulatory framework that’s fixed in place.”

We face operational constraints from the types of water projects the Federal government operates that are fixed,” he said. “We have large amounts of water that are locked up in Federal reclamation projects that cannot get out because of Federal law or Federal constraints or the constraints of local irrigation districts. We have a water rights administration system that again is premised on the status quo; it’s based on use. Taking water from the river, using it, and maintaining return flows that literally is measured to the gallon, and every water rights transaction that needs to be undertaken needs to preserve that status quo. And so the risk of putting one’s water rights up for grabs in a water change proceeding, the transactional cost associated with a market transaction – the costs associated with that means that we don’t have the ability to be flexible in the marketplace.”

[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“I want to emphasize that cities are not interested in growing at the expense of either agriculture of the environmentA healthy agricultural economy is essential to the healthy economy of cities.” –James Lochhead[/pullquote]

Finally, I want to emphasize that cities are not interested in growing at the expense of either agriculture of the environment,” Mr. Lochhead said. “A healthy agricultural economy is essential to the healthy economy of cities. In fact most of the agricultural economy in the United States is based in the city in terms of food processing. We are not interested in developing water supplies at the expense of the environment. A healthy environment is absolutely essential to our ability to supply clean sustainable water to our customers in the future. So we need to develop mechanisms to work together. And as the paper points out I think there’s plenty of water in the system to be able to do that if we can find those solutions.”

From a municipal perspective, there’s a lot of argument based around grass, Mr. Lochhead said. “It’s based on this moral judgment that blue grass is bad and somehow cities are evil for encouraging their customers or even developing any kind of blue grass, and alfalfa is good,” he said. “Or alfalfa is bad and higher value crops are good. We need to get away from these moral judgments about water use and develop a framework to more holistically manage grass. Grass is 90 percent of the water use in the Colorado River Basin, whether it’s blue grass, alfalfa grass, or pasture grass. We do a good job as municipal entities of doing demand management around bluegrass. And if we develop the flexible mechanisms and the kind of reforms that are proposed in this paper I think we can have a flexible system of managing grass in the system and do it while maintaining a healthy agriculture economy and providing for the environment and cities.”

Ms. Kearney then turned to William Phillimore, Executive Vice President of Paramount Farming Company. “I feel like you’re a little bit in the hot seat here because we’ve heard that water law protects the status quo. It seems like the status quo is pretty good for agriculture, not so much for everyone else?

I have to start off with disagreeing with that,” replied Mr. Phillimore (Laughter) “I think that water markets work. And just to mention, so I work for a farming company and we store water on the surface and underground; we buy water, we sell water. So we’re in the trenches every day.”

Phillimore 1
William Phillimore, Paramount Farming

But I think it’s worth thinking about how to improve water markets,” he said. “One of the difficulties that we have in water markets in California is the uncertainty of water rights. Water keeps getting taken away from us for the environment. Every time there’s a new regulation the State Board can take water away from us, U.S. Fish and Wildlife can take water away from us, NMFS can take water away from us, and water disappears with FERC relicensing. If you look at any traditional market, one of the things that you need for an efficient market is the basic right or the basic ownership of the product. Without that, it makes it very difficult; it makes people very uncertain as to what they should do, especially for a long-term deal.

The second thing that we need for water markets are decent rules, and rules that we know how they’re going to be applied so we can at least sort of predict within some level what the answer is going to be,” said Mr. Phillimore. “I’m thrilled — and actually I think it’s true that the Bureau of Reclamation has sped up their processes. I would just say that from my perspective there’s still room for further improvement.”

The Australian market on the Murray River seems to work very well, but it’s because when the government wanted water for the environment they actually paid for it and they didn’t just go and take it,” pointed out Mr. Phillimore. “It all comes back to the uncertainty in markets. If you don’t have certainty in markets, the markets are not going to develop well.”

In the developing markets, at least in California, I see no further role for the government,” said Mr. Phillimore. “I think the government needs to get out of the way. With markets, there are rules, there are commissions, every water deal, every water trade we try and do, we run into two or three different government agencies. They take time; there is no incentive for them to make a decision.”

[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“The Australian market on the Murray River seems to work very well, but it’s because when the government wanted water for the environment they actually paid for it and they didn’t just go and take it – It all comes back to the uncertainty in markets. If you don’t have certainty in markets, the markets are not going to develop well.” –William Phillimore[/pullquote]

Don’t get me wrong, I’m not advocating an unfettered free market, but this market is so stultified by regulation that it is not working properly,” he said. “So I don’t think that we need any greater role of the government. I think they need to let the market develop and then react to where it goes wrong rather than the other way around.”

But you also emphasized a need for rules. So presumably we need the government to enforce the rules of the market?,” prompted Ms. Kearney.

Yes, but to have rules that are set and don’t change on a daily basis or a weekly basis, or don’t depend on which branch of what agency you have to go to on that day,” said Mr. Phillimore.

Mr. Glennon then responded. “Let me pick up on the point about no role for government because I think it really flags comments from each of the four about what will marketing do to the farming communities and to the food supply,” he said. “In our paper, we think that there needs to be oversight by the Federal government. Now we believe strongly in markets. Rules matter; you can’t have a market without rules. You can’t have a market without property right – something to transfer. I sell you my pen and that depends on a rule that says at law I own the pen and I can transfer the pen. So we need to have a system set up by law that facilitates trade. And that depends on the role of government.”

Markets can fail, and there are several people who said what about the impacts of trade,” said Mr. Glennon. “The farmers are going to make out wonderfully. The farmers are going to be the direct beneficiaries of someone writing a check and paying them to modernize their infrastructure or whatever. But what about the farm workers? What about the businesses who are in the farming community – the John Deere dealer, the pesticide, fertilizer suppliers, local business of any stripe? When you have transfers, you have impacts from transferring a public resource, which is what water is – a public resource that’s subject to some market rules and aspects but it still is public. So I think we need to prevent the buy up and dry up.”

We also have to make sure that the transfers don’t harm the environment because as Ellen a lot of this water is performing ecosystem services in the environment and if you start transferring large pockets of water, you need to take into account what is that doing to the downstream environment,” he said. “So we’re very much in favor of rules, but sensible rules to protect the farm community and to protect the environment.”

Mr. Glennon said that it’s worth noting that most transfers have been farmer-to-farmer taking advantage of spot markets. “In some studies that Gary Libecap and I did, we found that aggregate farm income over 25 years in 12 Western states with 3200 trades and leases did not go down. Well, how can that be? Well, because farmers are savvy business people. When someone comes in and offers them some money the farmer can say no, I like what I’m doing … or they say, that land out by the barn it’s all clay soil. We can fallow that; it wasn’t very productive anyway. Or they do adjust their crops, change from one crop to another, or they use the city or the environmental group’s money.”

Hanak GlennonThe paper talks about the water trusts in Oregon with huge sums of money being put forward by an environmental group to persuade someone to modernize infrastructure and that’s what they do,” he said. “Then you get them to grow the same product with less water. That’s the critical part. At the end of the day we have to make sure that we aren’t harming farming communities. I think everyone on this stage absolutely gets that.

This all presupposes that we can measure water withdrawn and water used and water rights transferred,” said Ms Kearney. “How far are we from that reality? I mean it sounds like we need years to get all that data before we can ever really talk about having well functioning markets.”

No, I don’t think that’s true at all,” said Mr. Phillimore. “I think that at least in California I think we have pretty good measurement systems.” He said that we have groundwater regulation and we need it, but to measure water use by counting the numbers of wells and putting meters on the wells rather than by using satellites to pick up consumptive use seems to be sort of 20th century rather than 21st century. “I’m talking about measuring consumptive use by satellites. The latest land satellite has a component – it’s not perfect yet and they don’t fly over often enough, but just think about the cost of regulating wells, putting meters on and reading those meters in contrast to an airplane flying up and down the Central Valley maybe twice a week. I mean we’ve got to look at some of those things. I think it’s all measureable.”

Idaho is already using satellite imagery to regulate water rights and ground surface water management, so it’s early 21st century,” added Ms. Hanak. “It’s not far in the future.”

Kearney Iseman PhillimoreIt’s not that it’s right there now but within a year or two,” said Mr. Phillimore.

In Colorado, it’s so measured that we’re slaves to it,” said Mr. Lochhead. “We have to actually preserve the status quo to the gallon and that means that any market transaction is in this rigid framework. There’s no flexibility. I’m a water lawyer, and you have a system where lawyers and engineers are litigating these issues and it’s a barrier to any kind of flexibility or innovation. “

Ms. Hanak said that a key to successful reform in California is to let farmers be able to trade their groundwater. “Right now, the legislation sets up a framework for basin management authorities at the local level to decide what their sustainability management is going to be, but it’s going to have to be getting to some sort of sustainable yield over time. An important incentive in that process will be allocating in some way the rights to pump and enabling some folks who maybe don’t have the greatest soils to sell that water to somebody who has the tree crops on great soils or other very productive uses.”

I would agree with that, but you do have to be careful because of the way that ground water moves or doesn’t move, and the different qualities of ground water within a certain area,” said Mr. Phillimore. “I think ground water trading, you’re going to find will be pretty localized depending a bit on how it’s connected to surface water. But if it’s pure ground water trading, it’s going to have to be very localized.”

Phillimore LochheadRobert, you’ve referred to selling your blue pen, but it seems to me selling water is not actually that concrete,” said Ms. Kearney. “So when we talk about property rights, how in practice — maybe in the State of California or in other places does this work? Is this withdraw, is it consumptive use, is it for a set amount of time? Does it depend on who else is sharing water from that source?

It can be all of the above,” replied Mr. Glennon. “The problem when you go to transfer it isn’t that you don’t know how much you can take out; it’s that everyone else in the system gets to object when you go to transfer it under a rule called the no harm to junior appropriators. Everyone is there. And so what we call for in the paper is let’s define water rights by the amount consumed. It can be by land satellite imagery … by satellite you can see that’s alfalfa or that’s some other crop and you know in that area how much that crop takes. So let’s have the state water department agencies define water rights by that consumptive use. Then every time someone wants to transfer water, we don’t have to get into a potential fight that pits of hundreds of other people on the same system. Instead, it would be a presumption if you’re growing alfalfa in this area, this is how much water the alfalfa consumes.”

We’re not sophisticated enough to have a system in place whereby we can have flexible mechanisms,” said Mr. Lochhead. “At this point in time, it’s very difficult if not impossible for a city to go to a farmer and say I will pay you to rotate the fallowing of your fields as you choose; just make sure you provide so much water, or pay to not to irrigate in the heat of the summer, to switch from a higher consumptive crop to a lower consumptive crop, or to install conservation measures. All of that is basically undoable because of this regime of having to preserve a set return flow pattern back into the river and because of the byzantine nature of the transactional costs associated with making that kind of a deal. So what the paper highlights is that it’s impossible right now for us to sit across the table and actually make that kind of a deal. Cities are willing to pay third-party impact costs; that should be part of the transaction, but we literally can’t get to the table to make that kind of a transaction.”

We need to build in the kind of changes that Jim [Lochhead] is talking about, especially on the alfalfa in the summer,” said Mr. Glennon. “Alfalfa grown in parts of California during the summer uses four times as much water as other cuttings during the year and it produces alfalfa with a lower quality, it’s poor quality alfalfa, and it’s even poor quantity. The yields aren’t very good. So if we’re going to protect the farming communities, we have to figure out a way to get the very most wasteful uses out of the system. And that would be growing alfalfa in the middle of the summer. You don’t want to fallow the whole field year round. There is some high quality alfalfa being grown and alfalfa sometimes gets a bad rap as being just for people who eat beef, but alfalfa is also supporting dairy. Almost everyone in this room eats yogurt and dairy products. … We need to protect alfalfa growers in those communities, but we need to get them off of growing it under conditions that’s extreme, as in the deserts of Arizona and California in the summer.

Iseman Hanak GlennonMs. Hanak said there are some issues with not having clear regulations at the state level, or the state and Federal working together, but I think also we have this at the local level sometimes. “In California, you have some irrigation districts that will allow you, if you’re a farmer to fallow and to lease water to yourself in another irrigation district, but not lease water to somebody else. That’s something that doesn’t make sense because it leads to all kind of crazy land leasing in order to be able to get the water moving around. Those are the kinds of things I think that potentially can be decided at a state level.”

All of those require high priced lawyers and hydrologists, and that’s okay for those of you who are lawyers and hydrologists,” he said. “It’s expensive, the transaction process. “John Leshy once famously quipped that irrigation districts are like snowflakes – each one is different. When you’re trying to set up some general rules, something that a state can do and you’ve got all of sui generis irrigation districts, it’s darn difficult.”

Ms. Kearney noted that the discussion so far has been about reallocating water from low value uses to higher value uses, or from agriculture to urban uses. “There’s a really interesting figure in the paper that shows supply is generally flat in the Colorado River basis, but it’s the demand for water that’s rising with no sign of stopping. … When I look at that figure I think well it’s not that we have less water, we just have too many people who want it. Is this really a water problem or why is everybody living and growing their technology businesses in the driest part of the country? It seems like either we have to shift some of that development or people living here, or the companies working here have to figure out how to do more with less. That’s a little bit different spin than the allocation angle.”

The elephant in the room is population growth,” said Mr. Glennon. “We nudged over 300 million in the United States about four years ago and Census Bureau predicts that we’re going to hit 420 million by 2060.

[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]It was Reclamation that gave a very sober message to the seven basis states saying these ideas just don’t make economic sense. What does make economic sense? Conservation and reuse. There are a few others, but basically conservation and reuse will get the urban sector a long way down the road. –Robert Glennon[/pullquote]

“As economists, we think of demand as what people are willing to pay for,” said Ms. Hanak. “I think the basin study is great, but that line for demand is not what people are willing to pay for – it’s more what people would like to use. As one of my close colleagues, Richard Howitt from UC Davis likes to say, the problem is not that there’s not enough water, there’s just not enough cheap water. And so this where markets come in because you really are talking about water becoming more scarce and essentially more expensive. What are people willing to pay? Urban areas are willing to often pay for recycled water and for other high cost things, but, there’s also just a lot of cheap water still in the Colorado River Basin and some of those uses probably are going to go away.”

Speaking as one of those evil cities, Denver serves about 25 percent of Colorado’s population and we use about two percent of the State’s water,” Mr. Lochhead said. “Ninety percent of the water in the Colorado River Basin is used for alfalfa or pasture grass so it’s not a matter of growth. In fact, I think we should be encouraging highly dense, innovative, vibrant cities as centers of culture and commerce and economy and at the same time maybe we can preserve a vibrant agricultural economy and rural lifestyle that’s so important in the West. What we need to do is to free up that market to allow for us to live within our means.”

Mr. Lochhead referred to the experimental program offered by Denver Water, the Metropolitan Water District of Southern California, Southern Nevada Water Authority and the Bureau of Reclamation that funds pilot projects to demonstrate who conserved water can be managed to the benefit of the river system and the reservoirs. “It’s amazing the reaction that we’ve gotten. The on the ground farmers – they’re interested as business people in doing a deal. If you talk to local politicians they will tell you that this is all about these terrible cities that are going to dry up agriculture and all for the benefit of Las Vegas. (Laughter) So we need to just get over those cultural regional differences and actually get down to talking about how we can do this and keep everybody’s economic interest whole.

I want to make a point about what’s been referred to about the demand/supply study that the Bureau of Reclamation did in 2012; they deserve enormous credit on that,” said Mr. Glennon. The study considered all manner of ideas – towing icebergs, different ways to save water – about 140-160 solutions in all, he said. They treated each of them equally and subjected them to rigorous cost analysis and just let the chips fall. “At the end of the day, a lot of projects didn’t make the cut because there were other things that were so much clearly less expensive. … It was really the Bureau of Reclamation announcing that these large water projects that we built in the past, that was an interesting era and that era is over. It’s not going to happen again. You’re not going to find large new dams being built and hundreds of miles of canals. You either have the infrastructure in place now or you’re not going to be able to do it. You can tweak the ones in place but you’re not going to be doing that. And it was Reclamation that gave a very sober message to the seven basis states saying these ideas just don’t make economic sense. What does make economic sense? Conservation and reuse. There are a few others, but basically conservation and reuse will get the urban sector a long way down the road.”

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Photo creditPicture of Lake Mead, August 2014, by flickr photographer Kevin Baird.

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