Does anyone actually want a spot market for water?

This is going to be a short post simply to ask the above question. It’s obvious to me that policymakers, academics and commentators are in love with the idea of a spot market for water- in other words, an instantaneous market that connects buyers and sellers of water and puts the resource to its “highest and best use.”

There are obvious spatial problems with this idea that I’ve addressed at some length here. Put briefly, unlike many other markets that we like to use as models, buyers and sellers of water have to be hydrologically connected by stream, pipeline, or canal. That the prices match is not sufficient.

This article by the RAND Corporation is the first proposal that I’ve seen that gets that. It proposes the use of sophisticated modeling to match supply and demand across time and space:

Large users would trade directly with the ISO [Independent System Operator], offering to lease out their existing rights temporarily or rent additional rights temporarily, perhaps for a period as short as a week. The ISO would clear the market with the help of computer models that reflect the hydrology and return flows, ensuring that supply met demand with real water, and that agreed-on environmental flows were met. This mechanism would automatically compensate upstream and downstream users who give up water, and transfer that water to where it had highest value.

The modeling effort required here is obviously unprecedented, but I’d instead like to focus on a simpler assumption these authors, and nearly every other market-based proposal for Western water reform, have made: Does anyone actually want to buy and sell water in real time? Anyone, that is, who actually uses water?

Nobody seems to have asked large farmers and utilities, but I suspect the response would not be nearly enthusiastic enough to prop up the market. Farmers’ planning horizon is a year: once the crops are in the ground, that’s an enormous investment. Conversely, if they plan to lease out water and miss planting season, they’re all set. A sudden collapse in water prices is unlikely to change anything.

Utilities are even less likely to participate: they build infrastructure and operating rules around their existing water rights portfolio, and alleviate risk by owning water that comes from the same place at the same time every year. Hoping that they rely on “the market,” amorphously defined, to deliver water at an uncertain price, to a different intake or reservoir each year, is probably futile. There’s a reason that existing trading in water happens almost exclusively either with one-year leases or permanent sales.

The modeling techniques proposed by RAND are a welcome addition to the water-reform conversation, but I think we as commentators need to step back from the intoxicating allure of water flowing back and forth according to prices on a board at the California Water Exchange, and think about how people in the field actually make their water planning decisions.

The flow of numbers... so... alluring... But let's calm down a little. Image courtesy UC Davis.

The flow of numbers… so… alluring… But let’s calm down a little. Image courtesy UC Davis.

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