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The Vague Promise of Water Markets

It isn't often that environmentalists and the heads of corporations such as Chevron and Catellus agree, but expanding California's voluntary water transfers market seems to be one issue that brings many of them together, at least in principle.

In April, 28 executives, including the heads of Wells Fargo Bank, Bank of America, Chevron, and PG&E, signed a letter to President Clinton and Governor Wilson, urging legislation to facilitate a "fully functioning" water market, which they say is "essential to any long-term solution for the Bay-Delta ecosystem and responsible management of California's water resources." That sentiment is echoed by environmentalists such as the Natural Resources Defense Council's Ronnie Cohen who argue that such a market would encourage the efficient use of developed water supplies. "The way the system is right now, farmers and others don't get the right signals about the economic value of water and that causes a lot of waste," she says.

The market would also reduce or eliminate the need for expensive new infrastructure projects, say advocates. "Money for new dams and canals is not going to fall from the heavens," says the Environmental Defense Fund's David Yardas . "When you look at the cost of alternative investments, it becomes clear that transfers are one of the most cost-effective options." If new projects are needed, business interests say a market would also help to ensure that they are located appropriately, and that those who would benefit from them bear the cost.

Markets are a common element of the CALFED alternative solutions, but advocates say that current statutes and regulatory requirements impede transfers from one user to another. "The system sort of works, but it's very cumbersome," says Donn Wilson of the Yuba County Water Agency, which has made approximately 15 short-term water sales out of stored water over the past decade. "It's hard to move water south of the Delta because of constraints on pumping [to protect fish], and it usually takes at least 90 days to get all of the necessary permits." For each transfer, the agency must apply to the State Board for a temporary amendment to their water rights, perform an environmental assessment and coordinate with wildlife agencies to ensure that the transfer does no environmental harm, among other regulatory requirements. One problem, says Wilson, is that the statutes governing water transfers have evolved piecemeal over many decades. "The water code is a kind of patchwork quilt."

Regulatory uncertainty also limits the number of willing water-marketers, according to Byron Buck of the California Urban Water Agencies. "Areas that have water are reluctant to enter into voluntary transfers because they think it might erode their long-term water rights, he says . "We need legislation to more clearly define rights and improve their security."

Not everyone is so sanguine about the possible effects of an open water market, which most observers agree would tend to move water away from rural and agricultural areas to cities and suburbs. "To claim that water is used most efficiently when it most expensive is ludicrous," says John Mills, a consultant to the Regional Council of Rural Counties. "It just means that those who have money-in this case urban California, with 25 million people-will be able to take all the water and those who don't won't be able to get any. The urban areas are treating rural counties the way Britain treated the American colonies-and we all know how that ended."

Mills' concerns are echoed in a recent report by the Pacific Institute (see Now in Print), which found that the areas most likely to transfer water, including the Imperial, San Joaquin and Sacramento Valleys, would be the most likely to suffer adverse secondary economic impacts as land is taken out of agricultural production. Indeed, some local governments are reluctant to allow transfers because of such secondary impacts, according to Buck.

Among environmentalists "opinions vary widely" about the appropriate structure for a watermarket, says Yardas. "There are legitimate concerns about making sure we don't end up with another Owens Valley situation, but with a properly regulated market I don't believe that is likely." The market would also need to include mechanisms to allow the environment to participate, perhaps through fees on water use. "Surcharges would make water more expensive at the margin, which would encourage efficiency, as well as create a dedicated funding source for environmental water purchases," suggests Yardas.

Yardas believes that the first step toward a more open water market is to convince Californians that the days of huge, publicly financed water projects are over. "We need leadership at the state and federal levels to make it clear that people are going to have to pay their own way as far as water is concerned," he says.

Contact: David Yardas (510) 658-8008, Byron Buck (916) 552-2929

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