Tag Archives: Book Club: Unbundling Water Rights

I have to say, friends, that slowly reading through a blueprint for transitioning from western water rights to Australian water rights has not created a bonanza of blogging attention. It is worth it, however, to read stupid bullshit like this and really understand what it would take to do that here.

ADDED 10/13: I listened to RAND’s Drought and Water Policy presentation. If the drought continues, ACWA is going to start pushing harder for water markets. I transcribed the discussion of water markets; it is beneath the jump.  When I finish going through the Unbundling paper, I want to start asking for a lot more specifics.  I cannot imagine a transformation like the one described in the Unbundling happening within a decade.  What could come sooner, by Year Six?  Dropping the requirement of a CEQA analysis for water transfers?  State law saying that we don’t care about third party impacts?

My other thought on hearing this discussion is the possibility that the transaction costs for water trades are just that high.  There’s a lot of talk about streamlining and lowering the barriers to moving water.  But water is heavy, hard to track and hard to move.  When you are talking about out-of-basin transfers, the physicality of water may override economic theory.

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Conversion from Existing to New Rights System

Yes, of course the first step in the process is to shut out all newcomers.  I do understand why.  However, this is just one more way that this proposed process rewards existing wealth holders.

The formula for issuing shares is clever.  The formula given only addresses appropriative rights.  With minor tweaking, it could include pueblo rights, and possibly also Indian rights.  I haven’t thought about how it would include riparian rights, but I am sure some clever graduate student could work in a formula that grants all riparian holders the same priority, perhaps adjusted by parcel size.

Issuing shares is where the first major qualitative change in right occurs.  That is the point where the most senior appropriative rights holder changes over from not experiencing any cuts until everyone with a more junior right has been completely shut off to accepting a proportional cutback with everyone else.

Then, a quick reminder that third-parties should have no say in trades and that trades shouldn’t be reversed.

I found this paragraph striking:

Unbundling of rights should reflect the status quo as closely as possible. In over-allocated systems, a case can sometimes be made for simultaneous re-assignment of shares, but unless there is broad community consensus about the best way to do this, great care needs to be taken. The entire conversion process can be destroyed by arguing that the existing regime is inequitable or that now is the time to give someone else an opportunity, to give additional shares to the environment, or both. As a general rule, these conversations are best dealt with separately from the process used to build a register.

Whatever you do, don’t use the conversion process as a time for redistribution, or introducing justice concerns, or anything other than preserving the existing wealth order. Do that separately from converting from old-style rights to water shares, says this paper, but even though I read to the end, we never returned to the idea.

Water Registers

I found the explanation of Water Registers (they’re like land titles, held in a single central location) straightforward enough.  The process seemed like a major effort but as doable as any other part of this proposed undertaking.  I notice that again, increasing commodification of water is asserted as a good outcome of creating water registers.  (‘Banks will like this, now water rights could be mortgaged.’)

Priority Tiers

I am not sure I completely understand the priority tiers.  They relate to the risk of not getting water.  I may understand this better later, but for now, I am assuming that in a good tier, shareholders get allocations in dry years.  In a medium tier, shareholders would get allocations in a normal year. In a bad tier, shareholders would only get water in very wet years.  I’ll go with that until something I read later doesn’t make sense.

This reminds me of bond ratings and tranches, which reminds me of The Subprime Primer.  The Subprime Primer is so great.  My friend and I read it aloud as a play once.  Then my friend moved to Finland.

This was the shocking part of the water rights transformation process.  Not the unbundling, not the accounts, not the governing boards.  Within some boundary (watershed? basin? district? river reach?), this plan standardizes and sets the terms for all water transfers.  Once established and the plan is adopted, there should be no legal means to appeal any transfer that follows those terms by any third party.

I had my usual flurry of thoughts about any Australian policy proposal.  First came my standard “motherfuckers with their usual unscaleable bullshit, fucking single-basin, one-river, six-district fuckers, bothering me with their stupid fucking plans for some tiny-ass, no-groundwater, no takings-law hick state.”  How could we possibly write the intra-basin sharing plans?  The trans-basin sharing plans?  How many?  How could we possibly reduce the geographic and hydrologic variety of California to a standardized set of exchange formulas?  But then I figured that we could take some time to write plans for smaller basins, even if we can’t cover the entire state with one plan.  So I calmed down and had a new thought, which was “motherfuckers who apparently have no fucking activists, come tell me to get them all to agree on one formula for one place but they can’t sue after and how does that fucking work?”  Because that’s a neat trick, if you can work it.

In essence, a water resource sharing plan sets out the rules for determining how much water needs to be set aside to provide for base flows, transfer to other systems, and allocations to shareholders. Plans also stipulate how this water may be used and how flows should be managed to take account of environmental needs, facilitate recreation, maintain water quality, and provide other types of public goods. If these plans are made statutory or are prepared under pre-existing executive authority, the opportunity for a third party to legally challenge them is limited.

Then there’s a nice example about standardizing exchange rates (which are the quantification of environmental and third-party effects) down to a coefficient.  There’s not much detail about who, specifically, writes the water resource sharing plans,  nor whether that is a collaborative local process.  Now I like a technocratic imposition of rules and regs as much as the next bureaucratic would-be dictator, but it is increasingly hard to pull that off these days.

***

You know, the State of California isn’t stupid, and the State of California has wanted to “facilitate water transfers” ever since the 1992 Drought Water Bank.  Oh god, does the State of California want to “facilitate water transfers”.  Possibly the only thing the State of California wants to do more than “facilitate water transfers” is “streamline water transfers“.  This schema, with these water resource sharing plans?  They REALLY streamline water transfers.  No outside appeal.  All transfers covered by a plan have standardized, quantified exchange rules.

California has tried to do this for two decades.  The water transfer programs have tried to write one programmatic EIR, so that if you can transfer water within their guidelines, the programmatic EIR will cover the transfer instead of requiring the buyers and sellers to do an independent EIR.  CALFED tried in the 2000s.  Every administration has tried.  The effort never goes anywhere; it has never been able to cover the range and variety of transfers.  It always founders.  Looking at how much the water resource sharing plans exclude third parties and flatten out complexity, I begin to appreciate how strong and coarse-grained a Californian effort would have to be.  This strikes me as the piece of the process that would be hardest to duplicate.  Not the new infrastructure, not converting the rights.  This is the piece that seems like the greatest change.

ADDED 10/12:  This is a good explanation of the current analysis every cross-Delta water transfer must go through.  The proposed water resource sharing plan would replace that transfer-by-transfer analysis.

The main concept here — formally separating a water right into its components — is a neat trick.  One part is the right to keep getting water allocations into the future (share).  The other part is the immediate allocation, based on the current hydrology.  Here in California, we saw a couple transfers of the entire water right in the last drought, and the media absolutely could not make the distinction between buying some of this year’s wet water and buying the right to that water in perpetuity.  Nearly every story was about the shockingly high costs of a water transfer ($5K) and how people were paying sky high rates per acrefoot.  But the buyers were buying all the future acre-feet in that water right as well.

The article starts to get into converting water rights to shares, mentioning converting senior and junior rights.  Later in the paper, it gives more detail on how to weight those proportions so senior rights holders get more and junior rights holders get less.  This is the first place we see that this paper is precisely about what it says: converting appropriative rights to an unbundled system.  It doesn’t address pueblo rights, riparian rights, or a horrible mixture of rights.  I do think we could we could find a formula for converting those as well, if we wanted to make this happen.

***

Since I’ve never seen a super-duper water market, maybe I just don’t understand what a super-duper water market would be like.  Maybe there would be an ease of transaction that I am not picturing.  But I don’t have the sense that transactions here are substantially legally hampered by the distinction between this year’s water and the right itself.  Buyers and sellers know what they’re trading.  If it is a few hundred dollars per acre-foot, it is a chunk of this year’s water.  If it is a few thousand dollars, it is the right with all its future water as well.

My sense is that when trades are locked into legal disputes, they’re not locked up over the nature of the right.  They’re locked up over details particular to the exchange.  A third party lives off the return flows from the seller.  A local group contends that a seller sold surface supplies, replaced them with groundwater and damaged a spring.

***

OK, so far I think I’ve got it.  Unbundling the right into the current allocation of water and the share of total supply into the future.  A mention of water accounts, of water brokers.  I see the same thing as before, that the promised rewards are predominantly economic.  I am starting to get the vibe that this solution is a hammer looking for nails, that the problems it describes aren’t exactly California’s problems (but still withholding judgment).  I would love to know what you guys are getting from this.

Hello, friends.  Let’s start with the Introduction, starting on page 7, going through page 10, stopping at the header Building Blocks.  We can go back to the summaries once we understand the material, if we still want to.

Professor Young writes clearly and well.  I can’t improve on his text by summarizing or explaining it.  I hope you’ll read it yourself and come back to give your own impressions.

My impressions:

It is feels almost circular to point this out, but this work is all about capitalism and markets.

The primary insight of that experience is that progress comes from building the institutional conditions that enable markets to flourish. In Australia, the gains came from implementation of a sequence of reforms that simplified the system and gave users every incentive to consider selling their water to someone else. As the systems used to define water rights were improved, the value of the rights increased. Water trading became the norm, and profits increased. In the first decade of water reforms, the internal rate of return from holding a water right averaged well over 15% per year (Figure 1).

Success is increased GDP and profits to people who were lucky enough to hold rights at the beginning.  This work takes those goals as self-evidently good; it doesn’t build a case for them.  If you are interested in other goals (human flourishing, consistent food production, deep ecology) you won’t see them included here.  This is a proposal very rooted in capitalist trade: historic instruments of trade, turning water use decisions into economic decisions, pricing risk, incentivizing investment.  Nothing wrong with that, but I’ll hold the bias in my mind as I read along.

***

We’ll go through the six core concepts in detail later.  After that came four characteristics, pg 9.  I liked the first two characteristic of robustness and hydrologic integrity.  Our current system doesn’t have those, so they’d be an improvement.

The third characteristic favors the already rich:

• Efficient management of supply risks so that those who need access to a very reliable water supply have the opportunity, at an appropriate cost, to secure it.

The fourth characteristic again commodifies water.  This is the very goal of this proposed process, so of course it does.  I keep noting it so that I remember to think critically about it, rather than uncritically accept this characteristic as a good thing.

• Incentives that encourage people to search for more efficient ways to save and use water and also, to invest in resources that use water.

***

Another concept directly applicable to water is the idea of double-entry book keeping, which requires everyone to operate under a simple rule: if one account is to be credited, another account has to be debited.

Dude.  You have got to be a hardcore economist to attribute conservation of mass to double-entry book keeping.

Your turn, y’all.  What did you see in the first couple pages of the introduction?

Are any of you interested in reading this proposal to convert western water rights to Australian-style water rights with me?

It is admirably clear and well written.  I have quite a bit to say about it, both pros and cons.  It’d be easier to chunk it out and discuss it with others, if you are up for it.  I could see this being real dull for laypeople.  It’d give me lots of blog fodder.  Are you interested?  Will you read along and comment?  Authors, if we do this, would you please stop by to answer our questions?

***

I have read the paper once.  Here are my first impressions, before I try to understand it closely.

• This is very profoundly a rights structure and a process blueprint that maintains current power and wealth distributions.  I am not surprised that Australia managed to convert to this, because it privileges and benefits existing power holders.
• It doesn’t give an explicit definition of success.  By implication, I understand success to be increased economic development (pg 6, p3) or minimized losses to gross ag value (pg 7, p2).
• There is a lot of real nice cleverness in here, presumably gained from experience.
• Doing this would require infrastructure investment that would help a whole lot no matter what water rights reform we adopt.  If we could do real-time metering of every water use and see that all show up on centralized online water rights accounts, we’d be in a new world of water management regardless of water rights structure.
• If conversion to these rights is so profitable to the winners of the share/allocation trading scheme, why are we issuing grants to initiate the metering and account building/water resource sharing plan (pg 27, p1).  Why is this all on the State dollar?  Why isn’t this a loan from the state, to be recouped out of future trading profits?
• The water resource sharing plans (pg 12) look a lot like a water transfer programmatic EIS, which has proved an impossibility for the State for twenty years, despite considerable motivation.  From here, I can’t see how a process that includes third parties could develop these water resource sharing plans. Not given the way they shut down later legal redress.
• The effort involved in developing water resource sharing plans strikes me as non-scaleable.  For every basin here?  For the projects?  Hoo boy.
• Nevada should totally try this and let us watch.  No one cares what happens there, so there’s nothing to lose.

If this list made you kinda tingly and intrigued, please say you’ll join the book club. This is a real proposal, clearly and carefully made.  Given the love for Australia we see again and again, it’d be good to understand it thoroughly.