Water Transfers and the Future of the West: Options

This is the fourth part (Part 1, Part 2, Part 3) in a series sharing my year-long research into agriculture-to-municipal (AMI) water transfers from scientific, ethical, and practical perspectives. In this section, I explore policy options- some well used, some less so- to mitigate the undesirable effects of AMI transfers on third parties while preserving the benefits to growing cities and the public. I’ve included the promising options here and saved the ones I would choose to avoid for a later post.

Policy Instruments for a Thirsty Future

Water transfers can be structured in a multitude of ways that vary from state to state. The pure, permanent “buy-and-dry” transfer has the longest historical tradition due to the inflexibility of water law that is just recently beginning to open up. Many of these new “alternative transfer arrangements,” or ATAs, offer hope that the future may not look like the recent past when it comes to water transfers and third-party effects. Furthermore, there are mitigation measures that could be attached to “buy-and-dry” transfers by state policies, or states could restrict their use in such a way that makes them less appealing to growing municipalities. Due to the importance of regional context in water management decisions, it is certain that there is no single best answer for the lands west of the hundredth meridian. Just the same, there do appear to be some “worst answers” that go too far or fail the same sort of equity and consent tests that doom unmitigated permanent AMI transfers.

The first category of measures is the ATAs. These arrangements still transfer water from agriculture to cities voluntarily, but structure the transaction in some different way. The first, and most common, is temporary transfers in the form of water leasing. These have two forms; one is a straightforward lease while the other involves the sale of water to a city who then leases it back to a farmer until municipal needs grow. Both leases and lease-back provide a revenue stream to farmers (and, since the land is still working, to the community) without permanently retiring their operations. Farmers, at least in Colorado, seem willing to lease water far more cheaply than the sale price, so cities can receive a temporary but reliable supply with less capital outlay- perhaps until a permanent supply comes online.[1] Leasing can be appealingly efficient: in drought years, the opportunity cost of fallowing a farm field is at its lowest and the lease price can be higher than the value of agricultural produce.[2] A vigorous leasing market therefore benefits both urban and rural water users. Lease-back arrangements might be even better: cities generally have excess water on an annual basis because of the need to “drought-proof” supplies. Leasing that water out to farmers is an efficient use of this otherwise stored or wasted water.[3]

Orange states generally use appropriative law; blue states and green states use some form of riparian law; grey indicates hybrids. Note the correlation with dependence on irrigation in the West. Image courtesy Ridenbaugh Press.

Farmers in prior appropriation states (orange and grey) may fear losing their water rights (or some portion thereof) after leasing to a city because the law requires “beneficial use” of the water for the purpose for which it was appropriated. Image courtesy Ridenbaugh Press.

There is, however, at least one serious impediment under current governance regimes: “some agricultural water users are hesitant to admit they have excess water to transfer for fear they may lose their [water] right.”[4] States might encourage leasing of excess water (or entire water rights) by clarifying how leases will be treated with regard to future calculations of historical consumptive use, in the event that the farmer later wished to sell his or her full water right. To further encourage the practice, both California and Idaho operate “water banks” that take on leases from farmers who reduce or withhold irrigation, or who have surplus water, and act as clearinghouses for lease prices and quantities to reduce transaction costs and smooth the annual transfer of water from farmers to cities and even from farmer to farmer. Both programs have been very successful and might satisfy water managers in other states as well.[5]

Two ATAs that can appear as leases or sales deserve individual analysis. The first is dry-year option contracts, in which a municipality and a farmer or irrigation district enter into a long-term arrangement (as opposed to the annual leases discussed above) that gives cities the option of using water in dry years while the farmer would retain water in wet years. Option contracts, on their own, cannot fully replace permanent supply, so they are most effective when paired with the development of some new (junior) supply, which the city uses in wet years. Evidence suggests that these contracts are cost-effective and administratively feasible.[6] As with annual leases, dry-year contracts keep land in production during more years, reduce third-party effects in areas of origin, provide a steady revenue stream to irrigators, and lower costs for municipalities. States can encourage the adoption of option contracts by easing their path through the water court or permitting process; in some states it is as time-consuming and difficult to implement an option as it is a permanent transfer because both involve a change in type and place of use.

The second ATA deserving of individual treatment is rotational fallowing contracts. These act similarly to annual leases of excess water, except as a permanent or very long term arrangement. Under this strategy, a city pays an irrigator to reduce the amount of land they farm on a rotating basis. The water that is “freed up” by this reduction is transferred to the city. Like leasing and dry-year optioning, rotational fallowing is currently legal throughout the West, although it too shares the problem of how to calculate historical consumptive use. Very long term rotational fallowing arrangements have been enacted only in one place: Southern California.

The Colorado River winds its way through the fields of the Palo Verde Irrigation District, which agreed to transfer massive quantities of water to the California coastal cities. Image courtesy Lower Colorado River Multi-Species Conservation Program.

The Colorado River winds its way through the fields of the Palo Verde Irrigation District, which agreed to transfer massive quantities of water to the California coastal cities. Image courtesy Lower Colorado River Multi-Species Conservation Program.

In 2003, as the key plank in a plan to reduce the region’s reliance on the Colorado River, Los Angeles, its suburbs, and San Diego County committed to purchase up to 421,000 acre-feet of water per year for 75 years from irrigation districts in Imperial County; the farmers will supply much of this water by rotational fallowing on a grand scale.[7] All of the ATAs, permanent or temporary, seem like promising options for reducing the environmental and socioeconomic impacts of AMI water transfers. Requiring that transfers take one of these forms is certainly too burdensome, but Western states could effectively promote their use by addressing the consumptive use calculation issue, reducing transaction costs for ATAs below those of permanent transfers, and improving the information available to buyers and sellers through water marketing and water banking.

Some states allow the transfer of water made available by improving the efficiency of irrigation. This arrangement is known under different names in different places, but “salvaged water” is perhaps most common. Rather than rotating irrigation through fields annually or sending all of a water right to a city in some years, as under the previously-described ATAs, salvaged water does not reduce agricultural production in any year. Because agriculture is such a sizable water user and because irrigation in the arid West is often extremely inefficient (in terms of the ratio of the amount water consumed by crops to the amount diverted from a stream), improving efficiency across irrigation operations may yield significant savings without limiting agricultural areas or requiring development of new junior water rights.[8] But, as the saying goes, there are no silver bullets. While Southern California has “salvaged” over 70,000 acre-feet through the lining of canals,[9] salvaging is subject to diminishing marginal returns and salvaged water transfers are inconsistent with the water law doctrines of several states. In Colorado, for example, users have only the rights to water they can put to beneficial use; this retards efficient water use but guards against speculation. By improving irrigation practices, Colorado farmers merely reduce their own appropriations rather than free up some water to sell to others. Furthermore, salvaged water alters flow regimes in largely the same way that “buy-and-dry” does, to the detriment of downstream irrigators.[10] Salvaged water legislation is certainly not for every place, given the different principles underlying state water codes, but it is a transfer arrangement worth considering because of its potential to avoid the most serious impacts of AMI transfers without provoking development of new supply.

Colorado now requires transfers over a certain size be accompanied by revegetation- no one wants this scene. Image courtesy Hyoung Chang/ The Denver Post.

Colorado now requires transfers over a certain size be accompanied by revegetation- no one wants this scene. Image courtesy Hyoung Chang/ The Denver Post.

Attaching mitigation or compensation protocols to water transfers are generally considered separately from ATAs because the fundamental legal and economic structure of the transaction remains the same. Based on the impacts of “buy-and-dry” on rural communities, two such protocols warrant consideration by state legislatures. First, states could require cities to re-establish native grasses on dewatered lands. This would address the issues of soil erosion (and, via sedimentation reduction, water quality) and invasive weeds that are such nuisances to remaining farmers and a questionable treatment of the land itself. Colorado, for example, allows water courts to mandate revegetation at the expense of purchasing municipalities in transfers greater than 1000 acre-feet.[11] The results of this policy have been mixed, although they suggest that re-establishment is best when the city manages and implements the project rather than just paying for it and walking away.[12] The full additional costs to cities are unclear, because this policy is so untested, but it is unlikely to overwhelm the difference in marginal values between urban and rural water users that drives such transfers. It is also unclear how long into the future a city’s obligations extend, and what happens when a city is unsuccessful at complying with the revegetation requirement that forms a legally binding part of the water court decree or purchase agreement.[13] States that choose to implement such a requirement should not neglect these critical details.

The more obvious mitigation protocol would require monetary compensation to affected third parties, either public or private or both, by cities upon buying water. There is some limited evidence of third-party payments in action: Arizona requires financial compensation to rural county governments in lieu of lost property tax revenues, and Colorado can do the same through the water court process for transfers larger than 1000 acre-feet.[14] However, there is little evidence as to what level of payment adequately compensates a community for the loss of secondary economic activity from a water transfer- what proportion of the foregone revenues do they deserve, and for how long? Certainly, given the fluctuations of the farming life and the realities of private transactions, municipalities do not owe purveyors of farm equipment and business services their pre-transfer income in perpetuity. But given the seriousness of highly localized, permanent secondary effects on local businesses and governments, some transitional payments are in order. As with the cost of revegetation, these compensatory payments are unlikely to be large enough to halt transactions by overcoming the difference in domestic and agricultural water prices.[15] Mitigation protocols need further study to establish the appropriate amounts and recipients, and to establish how rural communities would spend their money, but they meet the criteria of improving equity and environmental outcomes without stepping between a willing buyer and his or her counterparty.

In the conclusion, to follow: a few policy options that go too far, and how our decisions about water transfers reflect our collective vision for the West itself.

[1] James Pritchett, Jennifer Thorvaldson and Marshall Frasier, “Water as a Crop: Limited Irrigation and Water Leasing in Colorado,” Review of Agricultural Economics 30 (2008): 440-43

[2] Jennifer Thorvaldson, Water Use in the Western U.S.: Irrigated Agriculture, Water Leases, and Public Preferences (Ph.D. dissertation, Colorado State University, 2010), 100.

[3] Nichols, Murphy and Kenney, 118.

[4] Thorvaldson, 98.

[5] Nichols, Murphy and Kenney, 118-19.

[6] Ari M. Michelsen and Robert A. Young, “Optioning Agricultural Water Rights for Urban Supplies During Drought,” American Journal of Agricultural Economics 75 (1993).

[7] Metropolitan Water District et al, Colorado River Quantification Settlement Agreement (2003), 40-47.

[8] Nichols, Murphy and Kenney, 140-41.

[9] Metropolitan Water District et al, 40-47.

[10] Furthermore, it is unclear in many states where salvaged water lies within the priority system after it is purchased by a municipality- as low as a brand new water right? As high as the original diversion? Somewhere in between? Nichols, Murphy and Kenney, 140-42.

[11] Ibid, 123-24.

[12] Sutherland and Knapp, 297.

[13] Ibid, 298.

[14] Metzger, 63.

[15] Ibid.


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