Water Bought and Sold

 The last chapter of “Water for Sale,” a book by Fredrik Segerfeldt begins:

“Excessively low prices fixed by politicians have led to waste, lack of caution, and misallocation of resources-in short inefficient use of water... In addition, the lack of property rights and water trading has resulted in water being pent up in less productive activities..;”

Mr. Segerfeldt was talking about the water supply in the developing world, but much of this appears very pertinent to the allocation of water rights in the west. The problem has been complicated by growing demand for water and shrinking water resources as the west becomes more arid.

As the New York Times reported last weekend private investors have been buying up water rights in Colorado and selling them to developing communities. The most valuable water rights were grandfathered under the 1922 Colorado Compact which for almost a century has controlled the allocation of water of the Colorado River. Today, the river provides water to 40 million people and 5.5 million acres of farmland in Colorado, Wyoming, Utah, New Mexico, Nevada, Arizona and California, 29 Native American tribes and the Mexican states of Sonora and Baja California.

Overuse of water, drying out of the West due to changing climate, and growing demand for water by growing populations throughout the basin are creating a water crisis. Under the Colorado Compact the Upper Basin States must deliver 7,500,000-acre feet of water each year for the Lower Basin States and 1,500,000-acre feet for Mexico. The Lower Basin states of Arizona, California and Nevada were first to address their growing problem by creating a Drought Contingency Plan to address California’s use of the shrinking excess of the Lower Basin allotment.  

The Upper Basin States of Colorado, New Mexico, Utah and Wyoming have agreed to create their own Drought Contingency Plan. This plan is needed to prevent a “Compact Call” under the Colorado Compact which would simply cut water to users across the Upper Basin States proportionally if they are unable to deliver the water, they are required to send through Lake Powell under the Colorado Compact.

Colorado want do use Demand Management - a temporary, voluntary, and compensated reduction in water use in the Colorado River Basin. Each of the Upper Colorado River Basin States are conducting their own investigations to determine whether a potential program would be feasible in their states as well. The goal is to create a 500,000 acre-feet “insurance” pool in Lake Powell reservoir contributed by the Upper Basin States to prevent a “Compact Call.”

This effort began years ago in Colorado.  Initially they envisioned that eastern slope municipalities would be willing to trade water diversion rights with Western Slope irrigators, allowing senior water rights holders to deposit their water rights into a “bank” from which junior water rights holders could lease these rights instead of curtailing their consumption. However, Colorado has not been able to develop a sustainable way to make this idea work, and now investors are trying market mechanisms to determine what price best allocates water to competing agriculture, municipal and industrial demands that is fair and equitable and minimizes cost which letting Colorado meet their of the 500,000 acre-feet of water storage in Lake Powell.

Back in December a new water futures contact on the still small California spot water market began trading on Wall Street. Stay tuned to see how that works out. Envisioned as a hedge for large water consumers who cannot curtail demand, such as almond farmers and electric utilities, against water prices fluctuations as well a gauge of scarcity for investors in water resources. I look forward to seeing how that mechanism works out.  Water availability and need is usually very local, but in California about half of all rain and snow melt flows naturally in the state- primarily for human use and to maintain the environment. Forty percent of the water goes to agriculture through the Central Valley Project (CVP), State Water Project (SWP), the Colorado allocation, local reservoirs and groundwater basins. The final 10% goes to cities. So, water moves between water basins and water rights under the SWP and CVP can be bought or sold depending on need. This might make the market large enough to be efficient and effective at allocating water. Likewise water rights can move along the Colorado River between water basins.