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. Thus, for example, the Bureau of Reclamation's Salt River Project gradually transformed from an irrigation water supply project to an urban water supply project as the city of Phoenix grew into previously irrigated land.
As urban growth outstripped locally available water supplies, some cities began buying water rights from more distant agricultural lands. For instance, as dramatized in the movie Chinatown, Los Angeles surreptitiously bought irrigated lands and water rights in the Owens Valley, 175 miles (280 kilometers) north of the city, in the 1920s. Beginning in the 1950s, Front Range cities in Colorado began buying up agricultural water rights in rural areas. Such purchases increased awareness of the potential adverse effects water transfers can have on local economies.
Nevertheless, by the 1980s, a growing array of federal environmental regulations made construction of dams for water storage difficult if not impossible. Political support for federally financed water projects waned. Purchase of existing water rights to allow transfer of water to new uses in distant areas had become an increasingly important water supply option.
The western system of water rights was designed to provide security to those who appropriate water. It was not designed to facilitate changes of use. Appropriative water rights can be bought and sold without restriction so long as no changes are made in this use.
Most purchasers, however, acquire an existing right so they can put the water to some different use. Changes in use must go through a state-level review process intended to ensure that no other appropriators of water from the same lake or stream are harmed by the changed use.(7) The proponent of the new use carries the burden of demonstrating that the other appropriators will not be injured - a difficult standard typically satisfied by preparing a detailed engineering analysis.(8) Such a no-injury analysis may require several years to complete and cost a considerable sum of money.(9)
In addition to demonstrating the protection of other water rights, a no-injury analysis may also consider the interests of third parties, such as the surrounding agricultural community - including local businesses - the environment, urban interests, ethnic communities and Indian tribes, nonagricultural rural communities, and federal taxpayers. Such third-party interests may be adversely affected by the sale and transfer of water rights, but the legal basis for their consideration and protection is less clear.
For example, the permanent sale of irrigation water rights to cities means that the associated agricultural lands will go out of production. Property tax assessments on nonirrigated lands are lower, reducing revenues that support local schools and other public services. Because soil characteristics have been altered by years of cultivation and fertilization, native grasses do not return. Unless special effort is made to establish another ground cover not requiring irrigation - no easy matter in arid places - weeds are likely to take over. People leave the land, and if they need work, they are likely to leave the area as well. Nearby small towns that depend on providing services to support agriculture lose business, weakening the economic viability of the area. It is this kind of downward spiral that rural communities fear.
In addition, environmental losses may result when water rights are transferred elsewhere. For example, water appropriated from streams and aquifers for irrigation may incidentally support the growth of vegetation along the banks of ditches, at the margins of irrigated fields, and in drainage areas. Particularly in arid regions, this vegetation may provide valuable habitat for wildlife as well as aesthetic benefits. When irrigation stops and the water rights are transferred elsewhere, this vegetation will probably die.
The majority of western states also statutorily require that changes in water use satisfy a general public-interest standard, mandating that a proposed new use cannot harm the public interest - such as aesthetics, recreation, or endangered species. Few states, however, have applied this standard to date.(10) Some states have provisions specifying impacts on rural economies or the environment as a particular basis for review of a proposed water transfer. A National Research Council panel concluded that states should give third parties "legally cognizable interests in transfers" and should develop criteria to evaluate transfers "to accommodate the diverse and strongly held economic and cultural values associated with water use."(11)
One additional factor affecting the use of markets to trade water in the western states is the shared nature of many water rights. Public or collective entities such as irrigation districts, mutual ditch companies, and municipal water departments - often referred to as water supply organizations, or WSOs - built much of the physical infrastructure for storing, diverting, and delivering water for human use. Typically, WSOs also hold the legal rights to divert and use much of the West's developed water supply. Depending on state law and the type of WSO involved, individual users may be regarded as owning water rights. Generally, however, individual users either are precluded from transferring their right to another user outside their WSO or they can do so only with the approval of the WSO's board of directors.
WSOs tend to be reluctant to diminish the supply of water they control. Particularly in western states, water availability can vary dramatically between wet and dry years. WSOs therefore want to hold sufficient water rights to enable them to meet all demands, even in dry years.
Moreover, WSOs deliver water to many different users within their service area. User demands can vary considerably; but, whatever the demand, users - some of whom are members of the WSO's board of directors - expect them to be met.
Normal economic incentives tend not to drive decision making in such organizations.(12) Because WSOs are public or collective entities, often run by their users, they are concerned primarily with operating the water supply system at the lowest possible cost. In many cases, the cost of building the water supply system was publicly supported - such as by the Bureau of Reclamation or the Army Corps of Engineers - so that users pay considerably less than the full cost of making water available. Often these costs were incurred long ago, and today's users pay only for ongoing operation and maintenance - not for replacement. In many cases, environmental losses associated with the construction and operation of the water system were never addressed. And, of course, developers and users are not charged anything for the extraction and use of the water itself.
Making Water Trading Work
Markets of the kind used to trade most goods and services are not likely to develop for water rights. While water rights themselves may well be transferable in ownership, the transfer of uses creates real uncertainties, especially for third party concerns. As experience with water rights transfers grows, approaches are developing to address at least some of these uncertainties.
One strategy is to focus on acquiring water rather than water rights. Under this approach, the original users would continue to own the water rights but would allow someone else to use those rights for a set period of time, such as a year or a period of years. The original users would transfer water only in the event of a special need - such as during a drought - and they would retain the option to reinstate their use of the water.
Perhaps the best known example of this approach occurred when the state of California facilitated transfers of water from agricultural to urban uses during the drought years of 1977, 1991, 1992, and 1994.(13) The state acquired water on a one-year basis and sold it to those with inadequate supplies.
Simplifying assumptions regarding historical consumptive use were used to determine transferable quantities of water. In the early 1990s, the Metropolitan Water District of Southern California worked out an agreement with the Palo Verde Irrigation District to temporarily fallow lands within Palo Verde for two years and transfer the water on an experimental basis. Only 20 percent of the land in the district was included, based on voluntary agreements with individual landowners.
Another strategy is to make water conservation improvements to WSO water-delivery systems and to farm water-application systems. Any water saved through such improvements can then be used for water transfers so that little or no land needs to be taken out of irrigation. This approach produced a water supply for a new electric power plant in the Sevier basin of Utah in the 1970s. It has also been used in California's Imperial Irrigation District to make water available for the Metropolitan Water District of Southern California. Such an approach is highly attractive to irrigation WSOs.
A third strategy is to work cooperatively with WSOs and individual water users to develop acceptable terms for water transfers. This approach acknowledges the shared nature of many water rights and recognizes the de facto role of WSOs as watchdogs for many third party concerns affected by water transfers. Thus, for example, the Metropolitan Water District of Southern California worked with the Palo Verde Irrigation District, which in turn identified individual water users in the district interested in participating in the following agreement. Increasingly, irrigation WSOs may themselves become the initiators of water trades - selling a portion of their water supply rather than the crops that the water helped produce.
Still another strategy is to develop a mechanism, usually referred to as a water bank, specifically designed to facilitate the transfer of water from existing to new uses.(14) Thus, California set up a water bank to manage transactions during the drought years of the 1990s. The state-level bank operated according to a uniform set of procedures developed by the major water interests. Included was an agreement about who was eligible to sell water to and buy water from the bank, the price of the water, the basis for determining the amount of transferable water, and measures to address environmental concerns.
Water users on the Upper Snake River of Idaho have operated a water bank for many years. In 1979, the Idaho legislature ratified this bank and authorized banks in other parts of the state. Texas established a state-level water bank in 1993. And Arizona established a bank to manage the underground storage and reuse of Colorado River water in 1996.
Despite considerable uneasiness about moving water out of agricultural use to support ever increasing urban growth in the West, water trades are likely to play a growing role in meeting new water demands. Until now, water rights purchases have largely been unnecessary. Given the controversial and uncertain nature of water trading, water providers have preferred to rely on the more traditional methods of water supply, such as from previously unappropriated surface water and groundwater and from water conservation.
As these options shrink, however, water trades will grow. Water trades are voluntary transactions. They improve the economic efficiency with which water is used by shifting the use to activities that place a higher dollar value on the water. They keep the net burden of human demands on water resources essentially unchanged while providing for new needs. Properly structured, they impose no uncompensated losses on other parties or interests.
Very likely, trades will be managed through specially designed banking mechanisms. Streamlined methods for satisfying the no-injury requirement will be in place. Obligations for protecting third party interests will be clear. Perhaps then we will have something approaching a true market for water in the West.
1. Although free-flowing water in its natural state in a lake or stream is not owned, water can be transformed into personal property through containment and use. Thus, for example, if someone has appropriation rights to bottle and sell water, the bottled water becomes the personal property of whoever legally possesses it.
2. Probably the best single-volume summary of American water law principles is A. Dan Tarlock, Law of Water Rights and Resources (Deerfield, IL: Clark Boardman, 1988).
3. Arthur S. DeVany et al., "A Property System for Market Allocation of the Electromagnetic Spectrum: a Legal-engineering Study," Stanford Law Review 21 (1969), p. 1499.
4. Samuel C. Wiel, Water Rights in the Western States, 3rd ed. (San Francisco: Bancroft-Whitney Co., 1911).
5. L.J. MacDonnell, "Transferring Water Uses in the West," Oklahoma Law Review 43 (1990), pp. 119-130.
7. A description of the Colorado process is provided by L.J. MacDonnell, "Changing Uses of Water in Colorado: Law and Policy," Arizona Law Review 31 (4)(1989), pp.783-816.
8. L. Rice and M.D. White, Engineering Aspects of Water Law (New York: John Wiley, 1987).
9. L.J. MacDonnell et al., The Water Transfer Process as a Management Option for Meeting Changing Water Demands (Boulder, CO: Natural Resources Law Center, 1990).
10. A notable exception was the battle over Mono Lake, a unique inland sea 250 miles (400 kilometers) north of Los Angeles. Concerned citizens successfully stopped Los Angeles from diverting water from streams feeding into Mono Lake by arguing that the city's actions were harming the public trust. See John Hart's Storm over Mono: The Mono Lake Battle and the California Water Future (Berkeley: University of California Press, 1996).
11. Natural Research Council, Water Transfers in the West, p. 4.
12. Rodney T. Smith, Trading Water: An Economic and Legal Framework for Water Marketing (Washington, DC: Council of State Policy & Planning Agencies, 1988).
13. H.O. Carter et al., eds., Sharing Scarcity: Gainers and Losers in Water Marketing (Davis, CA: University of California Agricultural Issues Center, 1994).
14. L.J. MacDonnell, "Water Banks: Untangling the Gordian Knot of Western Water," Rocky Mountain Mineral Law Institute 41 (1995), pp. 22-1 to 22-63.
Lawrence J. MacDonnell, a former director of the Natural Resources Law Center at the University of Colorado, is cofounder and president of Stewardship Initiatives, a nonprofit corporation in Boulder, Colorado.…
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Publication information: Article title: Marketing Water Rights: A New Trading System Is Developing in the American West to Accommodate Increasing Demands for This Scarce Resource. Contributors: MacDonnell, Lawrence J. - Author. Journal title: Forum for Applied Research and Public Policy. Volume: 13. Issue: 3 Publication date: Fall 1998. Page number: 52+. © Not available. COPYRIGHT 1998 Gale Group.
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