Returning to Mr. Lustgarten’s close look at water markets in practice, I am pleased that my three questions for prospective water markets would have predicted the success and failure of the examples. A reminder of the three questions:
- What social goal is the water market trying to achieve? That goal cannot be “have a real good market”. Water markets are tools, among other tools like regulation or planning, that can be used to achieve something. What is that thing for this specific proposed market?
- What is the built-in mechanism that ensures that the market is redistributing a fixed amount of water with economic efficiency, rather than efficiently drawing an open-ended amount of water out of the environment, the ground, and rural communities?
- What is the built-in mechanism for the Kaldor-Hicks compensation? The Kaldor-Hicks criteria says (roughly) that the water reallocation would create so much more value that the winners could compensate the losers (beyond or outside the sale itself). But that never actually happens, so I would want to see a mechanism for that built right into the market.
The answers for Crowley County, the example of a water market destroying small towns:
- No explicit goal. The implicit goal was to put a structure in place that allowed cities to buy water.
- No built-in mechanism for limiting the water sales to a fixed quantity of water. Cities were able to purchase all of the farming water in the county.
- No mechanism for Kaldor-Hicks transfers, so third parties got no compensation. The money directly from the water sales themselves seem to have mixed effect. The farmer and son-in-law quoted sound as if the money didn’t keep them as satisfied as farming and having a healthy town would have. But perhaps Mrs. Tomky and the children who used the money to move away were quite pleased by the sales. I don’t know how the utils balance out.
The answers for Palo Verde, the example of a transfer that looks like a success:
- The goal was to get some reliable water for MWD.
- The transfer water is limited to water from fallowed acreage, which is capped at 35% of each farmer’s holdings.
- MWD “has also invested $6 million in the community, to counter whatever economic harm might come from the fields’ temporarily drying up.”
My readers with water rights! Here’s what you do. If Mr. Deane approaches you to buy your water rights, do not let him make his pitch. Keep him at bay with a pointy stick and ask him those questions until you get answers you like. Do not sell your water rights unless you understand and you like the answers.
On the public record 
This water market thing so takes me back! I became interested in California water policy as a CA Dept of Fish & Game field biologist nearly 60 years ago but it wasn’t until I joined Bill Davoren to pull the fledgling Bay Institute’s case together for the 1986-88 SWRCB Bay-Delta water quality/ water rights proceedings that I first encountered the push for water marketing spearheaded by the Environmental Defense Fund’s Tom Graff. Tom saw water marketing as a way of spreading a limited resource around between willing sellers and buyers to reduce conflict. Because I viewed water as public trust resource, and because I thought that water allocation in this state should recognize the need to protect public trust resources, I opposed water marketing as a privatization of a public trust resource.
Even as those SWRCB proceedings got underway California slid into an El Nino-type drought that lasted for six years. The water marketing transfer proposals began to appear on the SWRCB’s calendar almost immediately, all brokered by DWR. That first year, 1987, the SWRCB staff advised that the transfers/ water market exchanges would require CEQA compliance, which stopped them dead in their tracks.
The SWRCB, aided and abetted by Assembly Water Committee chair Jim Costa, then created a fiction in which water transfers were temporary, exempt from CEQA compliance requirements, if they were for only one season (never mind if they were repeated the next year – one-year transfers would always be temporary/ CEQA exempt)
There has been a feigned interest on the part of State government to get a handle on the ‘third party impacts’ of water-market transfers, beginning with an in-house discussion committee following the 1977-78 drought, and, again, using a citizens’ advisory committee following the 1986-92 drought but no substantive State policy directions have come of these committees.
The bottom line is that Tom Graff won, that the State has embraced water transfer-based water marketing without regard for third party impacts, including the effect of such water transfers on public trust resources – endangered species or any other public trust responsibilities.
It’s interesting how some of the most significant big-ticket public policies impacting the lives of Californians, like water market-based water transfers (that is, the State Water Resources Control Board plays an absolutely pivotal role in water transfers) evolve for years below the radar.
I only recently started to understand the environmentalist origins of the push for water markets. Your description of the history is very good. Thanks for that.
I agree the state has got to get serious about a truly comprehensive water management plan. Market based water transfers must have third party impacts factored in. Yes indeed I totally oppose water marketing of public trust resources (especially of the precious Calif. Aquifer system). State leadership has got to wake up to reality. Their current management plan is grossly insufficient.
The current overall management plans is trying to meet too many constraints. The State wants an overall management plan that:
1. has no explicit losers
2. supports the Peripheral Canal.
So long as those constraints are in place, there can’t be a comprehensive plan.
Fortunately, blogs aren’t bound by those constraints. I can spout off anything!
OTPR
Just to be a bit clearer about the embrace of water marketing by the Tom Graff flank of the CA environmental movement, it was rooted, as best I can recall, in the belief that the sharing of water through the new SWRCB water transfer-enabled water market would serve as an alternative to building new dams – this at a time when ‘beaver fever’ still gripped CA’s powers-that-be.
A study came out of UC-D in the late ‘70s (if memory serves) that showed the cost of new (i.e., proposed) reservoir water rising from something like $200/ acre-ft to $1200/ acre-ft – or maybe it was $2000/ acre-ft –which had some river-huggers dancing in the streets to ‘Game Over’ and other, more cautious enviros like Graff, thinking ‘hmm, the way to shut down the new-reservoirs crowd conclusively is by creating a water market moving water from low-value uses to higher-value uses, like urban uses. (A lot of interesting things were going on 40 years ago, including a significant slackening of in-migration to CA, a matter that played significantly into the contested shelving of the SWP’s proposed Dos Rios Dam on the Middle Fork Eel)
All this now seems so quaint, so yesterday, when you have people with whole brains like John Garamendi pimping losers like Sites Reservoir. The Sites et al thing is worse than Groundhog Day (the never-ending campaign for the Delta Missing Link/Whatever) – it’s like going all the way back to where I came in nearly 60 years ago. ‘A zillion dollars/ acre-ft? No problem, forget the cost, full speed ahead. Crazy!
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My sense of public equity was shaped by my service, beginning in 1960, in Fish & Game’s 14-county Sierra-to-the-Sacramento River Region 2 where I found (on my desk) so very many decisions that had been made off-the-cuff in the rush to get the domestic show back on the road following World War II – recommendations for salmon streamflow requirements in the Feather River below Oroville, for example, provided in a two-sentence 1940s telegram from Fish & Game’s SF headquarters (and which field- work showed to be too low by three-fold). All those on-the-fly commitments by Fish & Game had to be straightened out before the State Water Rights Board (the SWRCB’s predecessor) and other venues and they came as very unpleasant surprises. So finding pleasant solutions like water transfer-enabled water marketing was more Tom Graff’s thing than mine. I was more accustomed to delivering bad news and digging my heels in in an attempt to get things straightened out on behalf of overlooked public trust resources – work which seems to get more difficult with each passing year.
More details on Crowley and your questions… there was no “third-party compensation” per se, though the cities have done more than just walk away from the dying town. They have maintained two rural representatives on the ditch board, even though proportionally they’re entitled to zero, and do their best to deliver water down the ditch in a manner the farmers can actually use. The farmers I talked to seem pretty happy with their efforts, as far as they go. Furthermore, they have to manage the land they bought to some (small) degree and every city I talked to agrees that future buy-and-dry must entail dry-land management by the city, rather than the disinterested retiring farmer, to minimize dust, weeds, et al.
The sellers are indeed of mixed opinions about how good the money was. Some of my interviewees got out of debt and sent their kids to college, which they never could have done without the sales. Some of the others ended up having to relocate to Pueblo and Colorado Springs, with no skills needed to work in a metropolis. Essentially none of them packed up and moved to the beach, which is how the cities tend to present the outcome.