CA WATER COMMISSION: Groundwater Rights Summary and Allocations Challenges for Market Development

For the past several months, the California Water Commission has been leading a process to frame state considerations around how Groundwater Sustainability Agencies might construct well-managed groundwater trading programs.  The Commission has been hearing from experts and the public at workshops and Commission meetings to inform their work.  The project will culminate in a white paper that summarizes their findings and includes a set of conclusions and suggested next steps for how to shape well-managed groundwater trading programs with appropriate safeguards for communities, farms, and the environment, and what role the state could play to ensure that those protections exist.

At the July meeting of the California Water Commission, commissioners heard from Amanda Pearson, Attorney IV at the State Water Resources Control Board, who gave the State perspective on water rights and SGMA, and from Valerie Kincaid, Partner at Paris Kincaid Wasiewski LLP, who provided an overview of groundwater rights law and how it relates to water markets.

Assistant Executive Officer Laura Jensen noted that the Commission is not expected to weigh in on groundwater rights and its consideration of safeguards; this information is being presented to the Commission to increase understanding of the issues.

Overview: Groundwater rights and SGMA

Amanda Pearson kicked off the presentation by giving broad context for the types of issues related to water rights and water use that markets might need to navigate to be successful, as well as groundwater adjudications and how they interface with SGMA.  She first gave the standard disclaimer that she is presenting her own views and not the official views of the State Water Board.

A groundwater adjudication is another management system that can affect how groundwater is used.  Groundwater adjudications have been around for almost 100 years, with the first adjudication coming down in 1924.  Since then, there have been some problems with groundwater adjudications, and they have developed in complexity in terms of the types of things courts are writing into the decrees and the kinds of management tools applied.

The key purpose of an adjudication, to my mind, is really to identify who has what groundwater rights,” said Ms. Pearson.  “Adjudications often include physical solutions and often result in the appointment of a Watermaster to make sure that water use is going in accordance with the adjudication decree.”

In contrast, SGMA is relatively new, having been enacted in 2014; it hasn’t developed through litigation very much yet, so we are still very much on the cutting edge of this law.  

A theme throughout SGMA is the primacy of local management, but with the state as a backstop. The Groundwater Sustainability Agencies prepare and implement Groundwater Sustainability Plans to manage their basin in accordance with SGMA, and the state only steps in if, for whatever reason, the GSA (or GSAs) fail to do so.

SGMA might involve the identification of groundwater rights, but to me, it’s more about managing the use of groundwater with an eye to sustainability, which means avoiding the six undesirable results,” said Ms. Pearson.  “The two processes have slightly different objectives, but they really work together.”

SGMA does include a list of adjudicated basins that are excluded from some of the requirements of SGMA. Follow-up legislation in 2015 created quite a bit of harmony between groundwater adjudications and SGMA.  Ms. Pearson gave several examples: per the legislation, adjudications are to be conducted in a manner consistent with achieving sustainability within the timeframes of SGMA.  Groundwater Sustainability Agencies may intervene in groundwater adjudications. If a court adopts a physical solution in groundwater adjudication, it must consider any existing Groundwater Sustainability Plans. And in the process of adjudication, there can be a request to revise the SGMA basin boundaries through the procedure established under SGMA.

GSPs and adjudications affect groundwater use similar to surface water management, where established uses of surface water might be managed differently than the status quo under certain conditions.  For example, if there is a severe drought, there might be water right curtailments. Curtailments usually go in order of water right priority, but there might also be exceptions for human health and safety needs.

When a GSA takes action to manage groundwater use in their basins, they might also move away from the status quo for several reasons, said Ms. Pearson.  She gave some examples:  There might be human health and safety needs such as drinking water wells that could be affected by groundwater contamination, lowering groundwater levels, or seawater intrusion. There might be environmental concerns about the depletion of interconnected surface waters because the lowering of interconnected surface water that has adverse impacts on beneficial uses is one of the undesirable results defined in SGMA.  There might also be decisions to subordinate unexercised rights which is permitted in adjudications, said Ms. Pearson, noting that while SGMA doesn’t provide for altering of rights, some GSAs might try subordination as a management tool.

However, the powers that GSAs have are not limitless, said Ms. Pearson.  “SGMA does not change the underlying groundwater rights, and there’s some uncertainty regarding precisely where the limits lie because a lot of these issues have not yet been worked through the courts.  They are starting to, but we don’t have very many, if any, decisions even at the trial court level yet.”

Uncertainty and the associated risk also arise because there are a lot of variables that can be resolved in a lot of different ways through the implementation of adjudications or SGMA.   For example, a Groundwater Sustainability Plan might be adopted that alters the prior status quo somehow, such as with interconnected surface waters; a GSA might tackle that by restricting groundwater extractions but only in a particular area of a basin. On the other hand, there might be a Groundwater Sustainability Plan that doesn’t seem to alter the status quo, but it might be challenged in court, and the court might make management decisions that affect the use of groundwater.

So, for example, if we have the potential problem of interconnected surface water and the Groundwater Sustainability Plan does not address it, they might get sued on that ground, and the court might step in and take some action to address that problem,” said Ms. Pearson.  “An adjudication might find prescription or otherwise change the prior understanding of what the rights in a particular basin are. And in either adjudication or a GSP, there potentially could be actions that affect the use of storage space in the groundwater basin. This can be very important for markets because markets might need to utilize storage space on a temporary or even a longer-term basis, based on whatever the particular market plan is. “

All of this uncertainty matters because it might be hard to get markets off the ground if there’s hesitancy to participate because risks are hanging out there,” she continued.  “Any market that does get off the ground might be so disrupted by later management action that it effectively collapses and doesn’t get going again, or needs to be kind of started from scratch.”

The development of groundwater law in California

Valerie Kincaid then discussed groundwater rights and allocation challenges to market developments, focusing on the rules of what you can and can’t do with each type of groundwater right and why that matters for markets.   

In 1914, the then-called Water Commission (the precursor to the State Water Resources Control Board) developed a surface water permitting system.  So after 1914, those who wanted to divert surface water had to get a permit from the State Water Board.  

At that time, the legislature declined to adopt a similar process for groundwater.  “If you read some of the legislative history from back then, there are some great comments about how we could never do that; it would be much too hard, much too difficult,” said Ms. Kincaid.  “Let’s only take on what we can handle here in the surface water context, and they declined to do any groundwater regulation at that point.”

In 2014, about 100 years later, the Sustainable Groundwater Management Act was passed.

Ms. Kincaid noted that as a result, most of the rules with groundwater, as opposed to surface water, have been established with case law, so the rules for groundwater that have emerged are somewhat patchworked together because they arose through the resolution of existing matters and cases.  

So there’s a ton of case law about your neighbors stealing your groundwater in drought times, and the rules on that might be very strong,” said Ms. Kincaid.  “However, there’s hardly any case law on prescription or those kinds of things where the case law is less developed.”

I have yet to see a market developed that just markets groundwater,” said Ms. Kincaid.  “This is pretty important because if you’re using a market that is using both surface water and groundwater, remember that marketing groundwater will be much different than marketing surface water. For example, to move surface water, unless it’s a pre-1914 right or a riparian right, you have to go to the State Water Resources Control Board for permission for that a lot of times.  So this dual system we have in California is important. It’s important to think about those different rules when we’re talking about the development of markets.

The Sustainable Groundwater Management Act is significantly different than the surface water system.  SGMA focuses on sustainability and local management; it does not create a system of permitting or allocation. However, it empowers GSAs to develop GSPs, or Groundwater Sustainability Agencies to develop Groundwater Sustainability Plans.

Although there is no permitting system in place, the GSAs understood in developing their Groundwater Sustainability Plans that they needed to know who was taking how much water out of the system and when and what the effects are, said Ms. Kincaid.  It’s an integral part of market development because once GSAs understand that, they could potentially develop a market to control it or allow it to be nimble.

One important note is that SGMA does not allow GSAs to change or alter groundwater rights, but a GSA does have the authority to limit extractions.  “There has been quite a bit of discussion in the GSA world about what that distinction is – if I can’t tell someone what their groundwater right is, but I can tell them that they can’t extract as much as they thought they could. There is no difference on the ground. I think there is, but for the actual groundwater extractor, it might be more of a distinction than a difference. But a long story short, we have to be very careful when talking about markets and remember that GSAs are not allowed to come in and determine a groundwater right holder’s groundwater right. So GSAs have limitations in that way.”

Another limitation that the GSAs have is that they do not have well-permitting authorities; under SGMA, the counties maintain the authority to permit groundwater wells.  “Importantly, there’s no real consistency determination required, meaning that a lot of counties and GSAs are just beginning now to discuss the interaction between the plans that GSAs did, and the permitting of new wells, or deeper wells by the county,” said Ms. Kincaid.  “A lot of times, the counties are involved in the GSA, so that’s a natural discussion, but sometimes they’re not. And so this concept of how well permitting and SGMA interact is still unanswered right now.”

Types of groundwater rights

If someone is extracting groundwater, it has to be under a basis of right, of which there are four types:

Pueblo water rights

A pueblo water right is held by a city or government that is a successor from a Spanish or Mexican municipality, such as Los Angeles.  Pueblo water rights have long been established, and it’s highly unlikely that a municipality with a Spanish or Mexican land grant would come forward today and want to establish a new pueblo water right.  A pueblo water right is the highest priority of use, so any local city or municipality that had its land grant as a Spanish or Mexican municipality before we became a state is at the top of the priority.

Ms. Kincaid noted some limitations on pueblo rights: they don’t attach to foreign water or imported water, so if someone’s bringing in water to the basin, pueblo water right holders are not entitled to that water.

Overlying rights 

A landowner has the right to take water from lands they own; this is an overlying groundwater right.  It is the second-highest priority right under pueblo. Overlying water rights are not quantified; instead, an overlying groundwater right holder is entitled to as much water as they can beneficially use on the overlying parcel.

So if you’re growing nothing, or if you’re putting water on a very low water crop, and you only need one acre-foot per acre, hypothetically, that’s how much you get,” said Ms. Kincaid.  “If you change that up, and you begin to have a crop that needs ten acre-feet per acre, as long as it’s reasonable, that is your right. So it’s not quantified, which, as you can probably begin to imagine, is going to cause us problems later when we’re talking about shortage.”

She also noted that the water right is limited to the beneficial use on the overlying parcel; a landowner cannot move groundwater off of the overlying parcel. 

Also, she pointed out that overlying rights are never municipal rights.  “Municipal or public extractions can never be supported by an overlying right,” she said.  “Even if you have a city that says, ‘we’re just serving everyone’s overlying parcel, but we’re a municipality,’ the rule is that’s not what you’re doing. If you’re a municipality, you’re either a pueblo water rights supplier or an appropriative water rights supplier; you will never be an overlyer. That’s just one of the rules.”

Appropriative rights

Appropriative rights are born with the actual taking or appropriation of water, and the quantification is limited to the historic amounts that are diverted.  That means that if historically a groundwater user has taken 200 acre-feet in a year, that is their appropriative water right.   An appropriative right holder is third and last in line in the priority system, but there aren’t as many limitations as an overlyer. 

You can export water, you can sell water, you can move it off your land, and you are able, as long as there’s supply, to put water on your property and then export it as you need to,” said Ms. Kincaid.  “You have an ability to take more water than your overlying parcel needs through an appropriative water right; you can move that water around, and you can be much more nimble with an appropriative water right.”

She reminded that all municipal suppliers have either a pueblo or an appropriative water right.

Prescriptive rights

Prescription is not really a separate kind of right; it’s really the practice of stealing someone’s existing right,” said Ms. Kincaid.  “With groundwater, there is a decent amount of prescription, so you can be called the prescriptive water right holder. But really, it’s the practice of stealing someone else’s category of right – pueblo, overlying, or appropriative.”

To develop a prescriptive right, the following components are necessary:

The water use has to be open, actual, and notorious.  “What that means on the ground is that you’re not hiding it. You’re not taking water from someone else’s well in the dead of night. You are not pretending not to take it by building some structure around it, and when your neighbor comes over and asks if you are using groundwater and you say no.  It’s any outward pumping, growing crops. It’s open, notorious, and people know you’re applying groundwater.”

The water use has to be hostile and adverse to the actual owner.  That means you have to be taking someone else’s rights, it has to hurt them, and it can only happen in a time of non-surplus or overdraft, she said.

It has to be under a claim of right. This means you have to say, this is my water right I’m diverting under,” said Ms. Kincaid.  “There are a lot of cases that talk about, ‘my neighbor was using water, but he knew he was borrowing it from me. So it wasn’t under his own claim of right.’ So if you’re saying that this is my right, I’m using it, I’m not borrowing from you, that satisfies number three.”

It must be all of these components continuous and uninterrupted for five years.

That’s a pretty high bar to meet.  It has to be all of those things. And when you do that, you step into the shoes of either an overlyer or an appropriator, whoever’s right you’re taking.  Those rights are subject to prescription.”

Ms. Kincaid emphasized that prescription can only occur in overdraft conditions; if a basin is in surplus for just one year, the process starts all over again.  “So in adjudications where people are asserting prescription, the very first thing that people get together and do is bring your information that you’ve been in overdraft for at least a five year period,” she said.  “If you cannot prove that out of the gate, that a court will say you can’t prove prescription.”

She also noted that a private pumper, such as an overlyer, cannot prescribe against a public entity, but public agencies can prescribe the rights of appropriators and overlyers.  However, appropriative and overlyers can protect themselves from prescription by continuing to pump; this is called ‘self-help.’  So if a farmer sees that wells are going dry and he reduces his pumping, but the other pumpers in the basin continue to pump at the same amount, the farmer has not practiced ‘self-help’ and is vulnerable to prescription, especially for that amount of pumping he reduced.

The public policy on this was not particularly great,” said Ms. Kincaid.  “When SGMA was being developed, one of the things that people saw was that, in order to do self-help, you had to extract 100% of your demand in order to protect it from a fellow potential prescriber. … So SGMA said stop. As of January 1, 2015, no groundwater extractions from the date a GSP is adopted or an alternative plan is approved can be used to either establish or defend against any claim of prescription. So SGMA did a timeout on prescription to stop this public policy of people pumping down to the bottom of the basin.”

Allocations:  The challenge of dividing the pie

The most challenging component of groundwater is allocating water in times of shortage or dividing the pie when there isn’t enough to satisfy everyone.  The first step is to identify how big the pie is.  “‘Why is the pie so small?’ is going to be one of the most challenging questions for SGMA and everyone in the groundwater world because we’re beginning to all account for groundwater maybe in different ways than we used to now we have to do it through GSAs,” said Ms. Kincaid. 

Native groundwater versus non-native groundwater

Groundwater allocations and how much groundwater folks can extract depends on the amount of native groundwater, which is generally water from natural channels, recharge from precipitation, subsurface flows from adjacent basins, or water moving back and forth underneath from basin to basin, and percolation from applied groundwater.  

 “Why the pie is so small all of a sudden is because native groundwater does not include imported water or water brought in from outside of the basin or stored surface water, which means seepage from non-natural facilities. So if it’s seepage through a river, you can probably count that as native groundwater, but if you’re putting it in a canal or reservoir and that’s seeping, that is recharge from stored surface water – that is surface water, it’s not native groundwater.”

Another type of non-native groundwater is the over-application of irrigation with the intent and purpose of storing.  “So if you flood irrigate and lots of water percolates past the root zone, and you intend on storing that water, it doesn’t just become native groundwater that everyone can use. You intend to store that water, so it is not free water. It’s yours still.”

Salvage water, another type of non-native water, is water saved by improving efficiencies such as lining irrigation canals or constructing a storage reservoir that, but for that storage, would have washed out of the basin. 

You saved that water from washing out of your system and salvaged it; it’s yours because of your investment in that storage facility,” said Ms. Kincaid.  “You get to claim that.”

So immediately we see this. We thought the pie was really big, but really the pie just shrunk because we’re talking about native groundwater only.”

The importance of connectivity

One of the first things to be determined in an adjudication is the extent of the groundwater basin, which SGMA defines as the basin boundaries defined in Bulletin 118.  The sources must be hydrologically connected to be in the same basin. 

The reason that’s so important is that’s really your pie as well,” said Ms. Kincaid.  “So if you’re connected, then you’re in the same basin, and all of the groundwater rights and how you split in priority apply.  The overlyers split amongst and between themselves, but only in the same basin.”

The term is ‘correlative,’ and it means ‘share and share alike.’  Overlyers don’t have their demand quantified; overlyers are entitled to pump and use a reasonable amount of groundwater to put to beneficial use on their land.  So if the overlying demand is 300 and the supply is 100, there is only 1/3 of the supply, so overlyers generally get a third of their demand.

The rules coming out of the court is that they should take their proportionate share, which of course, in the legal world, is never clear,” said Ms. Kincaid.  “People fight over that a lot. Because it might not just be that everyone gets 1/3.  What happens if I have 100 acres, and I fallow part of it so that I can use 100% of my supply on my remaining planted acres; I’m not going to cut a third because I already did that.  Or maybe I have invested in drip irrigation and have already reduced my demand, while others are still using flood irrigation; now I’m supposed to cut back a third as well, that doesn’t seem fair to me.”

So proportionate fair share, I would love just to say if you have a third of your supply, everyone should reduce their demand by that amount, but that’s not really how it goes in practice, especially during times of shortage.”

Water right priorities

For appropriative rights, in times of shortage, the rule is ‘first in time, first in right,’ similar to the surface water system.  Those who appropriated water in 1910 are senior to those who appropriated water in 1913; the senior rights are satisfied first before any junior demands.

So after first satisfying the pueblo rights and then the overlyers, if there is any to give the appropriators, the most senior appropriators can take it all, and that’s the rule, said Ms. Kincaid.  “This is managing shortage where there’s not enough pie in each category. So it’s correlative if you’re an overlyer; first in time, first in right if you’re an appropriator.”

Prescription and overdraft

As a reminder, for prescription to happen, the basin must be an overdraft; the water use is actual, open, and notorious; it’s hostile, it’s hurting the person that you’re taking water from; it’s uninterrupted for five years; and public agencies can’t be prescribed against – it is a one-way street.

What ends up happening on the ground is if there is a long period of unquestioned overdraft,  and you have a very significant municipal demand, overlyers and appropriators begin to have their rights eroded because those municipalities have fairly continuous demands. And they will take the rights in overdraft of overlyers and appropriators who don’t continue to use self-help,” said Ms. Kincaid.  “That begins to kind of change the dynamics a little bit here.   The public agencies begin to elbow out the overlyers and appropriators in systems that have long term overdraft.

Dormant overlyers

Dormant overlyers pose a challenging question: do you save pie for those not at the table? Use is not a requirement for an overlyer; much like a riparian, that right is based on land ownership. A landowner that owns a parcel overlying a groundwater basin is an overlying water right holder, whether they use that water or not.  If they do not, they are a dormant overlyer.

The question becomes in times of shortage and figuring out who gets what water, how to deal with dormant overlyers:  Do you account for their potential water use? Or do you do subordinate them?  Can you subordinate them, even though non-use does not mean they lose their overlying water right?

Dormant overlyers have been an issue in adjudications and for some GSAs as well.  “We don’t want to carve out a giant piece of pie for this person if they’re not at the table,” said Ms. Kincaid.  “Then you’re telling everyone else at the table, I can’t give you enough pie, even though you want it. This other guy, I think he’s going to get here at some point, so I’m saving this giant chunk of pie for him.  That doesn’t seem to be efficient, and we do need to put all of our water into efficient, beneficial use.”

So there are cases in adjudications where courts have allowed the subordination of dormant overlyers, which means if you’re not currently taking water, you get less. The courts say, ‘you weren’t here, you weren’t taking water. I’m going to set you aside as a water right holder that is going to be treated differently. I’m not going to really protect your rights as much.”

I think this is very controversial for GSAs as it gets into the issue of whether you can determine a water right or not, so I’ve seen GSAs be pretty conservative on this,” she continued. “But Antelope Valley and other adjudications have said, we’re going not to give you the same slice of pie like everyone else, just because you’re not using the water. … So if you’re not using it, you may lose it. So adjudications have really treated this class of water right holder very strangely and very differently amongst in and between adjudications.”

In lieu pumping

If you are using surface water in lieu of groundwater, it is written into the water code as a beneficial use of water.  This provision was added to the water code to promote conjunctive use projects and programs.  Before that, overlying groundwater rights holders were leery of taking surface water instead of pumping groundwater for fear of prescription and not practicing self-help.  So the water code was changed to make in-lieu use of surface water instead of groundwater extractions as a beneficial use of groundwater.

Ms. Kincaid noted that SGMA does require disclosure and quantification of in lieu use in the water budget. “It’s going to be very interesting to see how people account for this in water budgets,” she said.  “It remains to be seen whether in lieu users can bank water for future use.  People do say, ‘I’m taking my surface water, I’m applying it, but I’m not just giving that banked groundwater away, that saves groundwater. I’m banking it, and I’m going to take it later.’ That’s the conjunctive use idea of using surface water in wet years when it’s available. But the danger is that when I am shorted so much, I’m actually going to take not only my fair share of groundwater this year but all that water that I banked in previous years as an in lieu pumper.”

Reasonable and beneficial use

There is a requirement to use water reasonably and beneficially, so even sizeable overlying groundwater right holders cannot use a massive amount of water to do a small thing. 

The original unreasonable use case was when a water user was using the entire San Joaquin River to flood a very small amount of land, and that’s unreasonable. So there is this equity component that if someone’s not using water appropriately or reasonably, there is kind of an overarching concept that you can limit the amount of water. Now, adjudications have used reasonable beneficial use, saying, ‘we can’t give you that much water to do that little.  It seems wrong when everyone else is saving.’  So adjudications could use this as a limiting factor.”

However, she noted that you cannot use this to forget the rules of priority.  “You can’t totally leave those in the background. It’s a check on those systems. You can limit people within the priority system, but you can’t abandon it altogether.”

Other overarching policies

Some overarching policies haven’t been used in adjudications but still have to be dealt with, such as the human right to water in water code 106.3 that says that all humans have the right to potable sources of water, and water code section 106, which states that the use of water for domestic purposes is the highest use of water.

I don’t think that these policies are going to embrace rules of priority or upset the system to the point that we don’t have to think about or know the rules and limitations,” said Ms. Kincaid.  “But I do think that they will be thought of as adjudications consider reasonable and beneficial use, which is, ‘we’ll do priority, look at everything, and then we’ll see, does the system that we have based on priority leave a category of folks out of water completely?  Are there disadvantaged communities that are not getting any water, and that would really violate the Human Right to water component? Are there people who have public health and safety needs that were left out in the system of priorities? We applied the rigid rules; we need to go back and look at that and do a check on how the rules of priority are.  Then I think what you’re going to see as these overarching policies will be considered after that.”

Adjudications have dealt with this by using ‘set asides’ for disadvantaged communities or others before the water right priorities.  “That set aside usually includes conservation; it’s not free water. And it’s not without the need to do conservation. But there is room in adjudications and tools that focus on putting water aside for minimum and basic needs. So, basically, I think that these overarching policies will play out in that way.”

Conclusions regarding markets 

Ms. Kincaid then gave her conclusions regarding groundwater markets.  No market will be able to comply with all of the rules; they are rigid and difficult.  “The best example I can give is the rule of an overlying water right holder,” said Ms. Kincaid.  “You can’t move your overlying water off your parcel, so how are we going to create a market?  You can’t trade to yourself; that’s not going to work. So which rules are going to have to be broken?  What rules will invite challenge? Which rules will be accepted and be able to be defensible?

My sense is that rules that make the system more nimble may be more acceptable, for example, relaxing the rule of an overlying water right holder and not being able to move water off the parcel. People might like that. It increases the market and allows people to be in the market that wouldn’t otherwise be able to participate.  I don’t think an overlying holder will object to that; that gives them more options, more nimbleness.

If you decide that all dormant overlyers who are not using water today are cut off completely, give them no water, and you’re done, that’s a rule that I think is going to invite challenge. So I think you’re going to have to be more nuanced than that.  So I think you’re going to be more careful about breaking those types of rules, such as cutting people off.”

What you need to think about is the buy-in of market participants and the buy-in of non-direct market participants.  It tends to be environmental users that don’t like these markets, and they will challenge them. And if you had a market, and you subordinated all dormant overlyers, you told them, no thanks, they will challenge those.  So markets really have to be defensible and supported by the regions they are in because, really, they will have to break some rules.

Defensibility is going to be low, so that means you really want to increase stakeholder buy-in and support. And that’s a fancy way to say that if everyone likes it and no one’s challenging it, it may be okay. But, if everyone hates it, you’ve made a bunch of people really mad and angry, and they feel like it’s fundamentally breaking all the rules, it’s going to be very hard to have a market.

So those are the rules we need to know and understand while we’re bending them, or breaking them or moving away from them. It’s complicated but interesting. And certainly, the market challenge is one I am interested in continuing to see unfold.”

Concluding remarks

Ms. Pearson then wrapped up the presentation by noting that the design of the market is important in managing some of the risks and uncertainties. 

Smaller markets might be more stable at the outset, just because there’s less to challenge frankly,” she said.  “In particular basins, there might be consideration of limiting markets to particular types of transactions, or maybe starting small and ramping the market up over time as sustainability in the basin is achieved.”

At the end of the day, I think what we’re really looking at here is that when we’re considering markets, it’s important to understand things like hydrology, geomorphology, and the water rights situation, as well as things like the human drinking water needs and environmental needs, and how those things are being addressed or not being addressed by the GSP and potentially by the market structure itself.”


Commissioner Mackler asked, with the determination of the rights, if we’re setting up the trading regime or market regime where people are going to trade water rights …  If there is going to be the formation of markets, what thoughts do you have in terms of, being able to have rights that are easily identifiable and fungible so that you can facilitate a market?

No doubt, there’s going to be challenging,” said Ms. Kincaid. “One of the things that may be a limiting factor that helps us is the identification of basin and connectivity.  All of the rules I talked about are just in the subbasin. So if people are talking about markets between and amongst subbasins, that can be complicated. I know folks have talked about sub subbasin markets, meaning, EDF and Rosedale Rio Bravo did a market just within the Rosedale-Rio Bravo area of the Kern subbasin, so there are sub-markets … you’re going to have to understand who has what need of water, and it should be based on, at the very largest, a subbasin level. So those are some limiting factors that may help.  I think you’re going to have to get a huge amount of stakeholder buy-in for these markets. We’re going to have to figure out who’s in and who’s out …  If you don’t have enough participation in the market, it’s not going to be a market.  You have to have decent buy-in and participation.”

If I were developing a market, the first thing I would do is go to every single GSA in the subbasin and say, What is the component of your water rights? Who holds what? It might be a lot easier in adjudicated basins because, frankly, they all kind of have a roadmap and usually a watermaster. And maybe they’ll want to trade, but then you have to go back to the court and get that approved probably.”

So there are challenges of each, but my sense is the two things that will lessen the complexity is that the geography has to be at the largest, at the basin level,” continued Ms. Kincaid.  “Then secondarily, I would go and really mine the resources of all those GSAs in the basin, and they know so much, especially the GSA that turned in GSPs, in 2020. Those guys know a lot about what’s going on, a lot more than they did two or three years ago.”

Commissioner Makler then noted the Commission is being asked to consider the role of markets or whether or not there should be markets and what they should look like, in the context of SGMA.  “To me, I’m thinking of a market as something that ultimately sets a price. And with that price, there’s going to be a trade-off.  It may mean that somebody will raise pistachios and not alfalfa.  Or, there should be further investment in terms of a canal to bring surface water to an area, or there should be the development of greater storage …  Coming from the point of view of water lawyers and people that have engaged in water transfer discussions in the past and thinking, again, in the contents of SGMA, if the market is a tool to reach the SGMA goals, what is it that the market would do?

I think one of the things that a market can do is if we can overcome some of the rules that prevent flexibility, then what markets might be able to do is, for example, there might be the issue of interconnected surface water or seawater intrusion, or groundwater contaminants in the basin,” said Ms. Pearson.  “It might be that one of the ways you deal with that is by putting more water into the basin in certain areas to maybe repel seawater intrusion, or maybe to prevent the depletion of interconnected surface water, or maybe to prevent migration of underground contaminants, and a market might help move that water around within a basin to accomplish that goal.”

One of the other benefits of markets is that it does involve voluntary participants,” Ms. Pearson continued.  “So hopefully you get the broad buy-in … I think that’s a firmer ground legal standing wise than having a regulation come in and say, somehow you’ve got to send water to somebody else, or you have to stop pumping because we’ve got this issue. I think the risk of litigation in the latter case is higher. And I think that’s one of the ways where markets can be facilitative.”

The only thing I would add is it’s interesting that you talked a lot about price, and obviously, the price would be a component of any market,” said Ms. Kincaid.  “Usually price would drive the market, but on the ground in GSAs, I think these markets are being developed because of that shock of that first pie shrinkage.  “Our pie got so small, and what am I supposed to do? I need the ability to access water.  And maybe it is with the people who have the imported and salvage water are going to have to market that to those people. But now, in an SGMA and water budget context, more defines that. So for people who are 100% groundwater-dependent, that pie got real small, real quick, and they need some supply outlet, even before we’re talking about price. So I think that markets are being driven by that.”

Commissioner Cordalis began by drawing attention to Indian water rights to groundwater. There are 109 federally recognized Indian tribes in California, which have federally reserved rights that include rights to groundwater.  Could either of you give the Commission a brief description of those rights and how they may be impacted by water marketing or trading?

Federally reserved rights are not regulated by SGMA at all,” said Ms. Kincaid.  “So you’ve got that as kind of the first layer. And in the water rights system, they’re going to be ultimate senior. … I know that they’re adjudications that deal with this. … Generally, there is a set aside; that federally reserved right is usually taken out wholesale before the priority is evaluated. And before all of the things I talked about are considered. So again, it’s this federal versus state component. It’s something that even complicates it more. But in my mind, it’s a totally separate system. So it’s removed from that system in a reserved way. So it doesn’t get treated with all of the shortage and priority rules I talked about.”

I would say that tribal rights are definitely one of the variables that GSAs should consider if they’re looking to form markets,” added Ms. Pearson.  “It’s really important to know, to the greatest extent you can, what is happening in your basin, and the existence of rights that are outside of SGMA is an important piece of that.  Essentially, those are usually, in most cases, the most senior in a groundwater basin. But SGMA doesn’t regulate those, so they’re not subject to all of the rules we went through in your presentation. But nonetheless, they still exist and are generally sort of pulled out of the pie before the pie is allocated.”

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