Marketing Water Rights: A New Trading System Is Developing in the American West to Accommodate Increasing Demands for This Scarce Resource
MacDonnell, Lawrence J., Forum for Applied Research and Public Policy
Unlike other valuable and productive assets, free-flowing water is not bought and sold through markets.(1) Rather, individuals and entities hold rights to use water under publicly sanctioned rules and customs, now largely written into law and administered by public agencies. In the American West, such water rights are held by those who appropriate water - that is, take control of and use it. In eastern states, water rights belong to riparian landowners.(2)
Markets depend on ownership, or at least exclusive control, of the thing to be traded and on the ability to enjoy the benefits of that control or ownership. Ownership or control must be transferable to others without imposing unaccounted-for costs on third parties. And the cost of the transaction must be low compared to the value of the thing acquired.(3)
In its natural state, water is not readily susceptible to ownership. It moves, like air and wildlife. And as it moves through the hydrologic cycle, it performs countless functions that are essential to the operations of our world and that benefit us all. It supports all forms of life. It carries sediments and wastes. It transports heat. It forms clouds. Moreover, many of its benefits that humans enjoy, such as navigation and recreation, do not require ownership or exclusive control.
Because of the nature of water in streams and rivers, Romans spoke of it as the property of everyone - res publica - or the property of no one - res nullius.(4) They thought of human users as usufructuaries, entitled to enjoy the fruits of the common resource but not to own it. Today, we follow these general principles by allowing people to have rights to use water but not to own it.
Rights to use water in the West are based on taking physical control of water and putting it to a beneficial use. Those first to appropriate water from a lake or stream hold priority over all subsequent appropriators, entitling them to satisfy their uses first in event of a shortage. Thus, a water right includes a priority date.
Water rights also specify a place where the water is diverted for use, a rate of diversion, a place where the water is actually used, and a purpose of use.
A water right is regarded as a property right, freely transferable in ownership. Changes of point of diversion, place of use, and the purpose of the use without loss of priority are possible to at least some degree in all western states.
Most of the water in western lakes and streams is already appropriated. In many places, new uses cannot be met through new appropriations. Thus, interest has grown in buying existing water rights and changing their use to meet new demands for water.
An important attraction of acquiring an existing water right is that the purchaser obtains the original appropriator's priority to divert and use water, thereby stepping ahead of appropriators who have later priority dates to the same water supply.
Appropriators have been selling their water rights to others almost as long as they have been appropriating water. For instance, unsuccessful prospectors in the California gold rush of the 1850s sold their ditch systems-including their priority to divert water - to other miners. California courts upheld these sales, even when new users changed the point of diversion or the place of use. The courts' only requirement was that other appropriators from the same lake or stream would not be harmed by the change.(5)
Unlike many miners, irrigators tended to take a long-term view of their need for water. As the dominant water use in the West shifted to irrigation in the late 19th century, many states began to place restrictions on water rights trades, such as giving water districts the power to veto trades and prohibiting sales of water rights involving a change of use from irrigation.(6) Water uses of existing rights changed only if use of the underlying land also changed. …