18 July 2008

All-in Auctions

How should we (re)allocate water among agricultural, urban and environmental users?

Last month I described a version of this mechanism, which I call the All-in Auction. The AiA works like this:
  1. Assign property rights to all those who claim them. Some claims are spurious, but many are valid. Rights are awarded in order of seniority.
  2. Establish minimum environmental flows.
  3. Allocate "wet rights" to water above the minimum (sustainable yield) according to property rights, e.g., if yield equals 80 percent of rights, holders of the weakest (most recent) 20 percent of rights get no allocation.
  4. Set aside some per capita allocation of water -- the "human rights" entitlement.
  5. Put remaining wet rights up for sale to all comers -- urban, agricultural or environmental -- in a unit-price auction.
  6. Those who hold rights can buy them back for nothing, i.e., pay auction price but receive auction price equals zero. Put differently, farmers (who own most water rights) can opt out by buying from themselves. The human rights component is likely to be less than cities current rights, i.e., cities will "buy back" that water.
  7. The auctions would be run every so often to allow water users to change their decisions -- reducing the cost from "bad decisions", risk and uncertainty.
I'll be working a lot with this mechanism, so stay tuned -- and comment!

Bottom Line: My AiA design puts all rights into play (maximum liquidity) without taking rights from the owners (they can buy them back). The result (should be -- watch this place) a maximization of efficiency and protection of equity.

6 comments:

Kevin Dick said...

I really like this design. First, it makes rights transferable which, as you've stated many times before, is a huge aid to efficiency.

But I think the second part is even more clever. It makes the value of each claim extremely salient in the owner's mind by forcing them to say, "I will pay myself more than that [the previous high bid]."

One thing I'm unclear on is the mechanics of seniority. I read your thesis, but I still don't really understand how a claim is "registered", so to speak. Can you recommend a source that explains this?

Douglas Knight said...

Since CA has ballot initiatives, why not simply expropriate the farmers?

Have you discussed public choice issues elsewhere on your blog?

Francis said...

kevin: water rights in California are registered with the State Water Resources Control Board. Probably the single most important decision is D-1603.

douglas: have several billion in loose change lying around? Expropriating a legally recognized right under state law gives rise to a claim for compensation under the Takings Clause of the 5th Amendment.

David: Interesting approach. Environmental flows come first (public trust doctrine and all that).

A critical issue you need to address is how finely to slice the right that is for sale: in theory you could slice right down to selling hourly flows at single digit cfs for every day of the year, starting at the highest point of diversion on each river and progressing downstream from there (eg, Farmer X says he'll take 3 hours of 4 cfs on May 13 at point-of-diversion xxxxx). You could end up with astronomical number of bids.

Return flows further complicate the determination of what's available for sale.

Who controls and decides the release criteria from all the storage facilities becomes really important. I suspect that all releases above those set by environmental/ESA requirements will end up being part of what's for sale.

Kevin Dick said...

Thanks Francis. I found this FAQ at their Web site pretty informative/disturbing:

http://www.waterrights.ca.gov/HTML/faqs.html#_Toc178761079

No wonder I didn't understand. And this is only one state. Dave, my respect for you has gone up another notch for attempting to bring order to this chaos.

Douglas Knight said...

Francis,
I'd mock you for believing in the rule of law, except that I did it first. Should Z worry about proposing to expropriate 20% of rights? Why not just grant everyone the right to resell water? This effectively expropriates the weakest claims, without having to admit it.

David Zetland said...

@douglas -- Francis is right. I'm not for expropriation. I am working wit public choice concepts -- that's why I do not mess with farmers' rights :)

@Francis -- I'll address enviro flows tomorrow, but -- yeah -- they tend to be trumps. Note that "taking some off the top" will hit those with the weakest rights first.

I'd time auctions to match flows. Daily auctions are possible if flows can change daily. Monthly, quarterly auctions for blocks of water will make more sense if there is more distance involved. I'm VERY interested in matching auction frequency with certainty on flows -- so that only wet water is sold.

The auctions would be for consumptive use, of course, and that's a known, tricky topic.

I'd think that some flows would be bought on the market to enhance stakeholder's benefits (e.g., salmon runs).