22 Aug 2008

Economics of Water

Despite its weird title ("A Scoping-Level Analysis"), this overview report [PDF] discusses the efficient allocation of water in California (and elsewhere, I am sure). It covers a LOT of ground with bullet-point notes, but I found two interesting areas.

Tiered Water Rates:
Volumetric pricing is the minimum standard for urban water users. In 2006, 195 urban water agencies reported that 80 percent of their revenue was derived from volumetric charges (CUWCC, 2006). Black and Veatch (2006) report that volumetric pricing was used by 90.5 and 95.6 percent of respondents in 2001 and 2006, respectively.

Tiered water pricing is increasing, but was still not used by most respondents. From 2001 to 2006, use of tiered rates increased from 38.4 to 43.3 percent of respondents. Tiered rates were used by most respondents in most Central Coast and most Bay Area counties, but uniform rates were still most common in most central valley, southern inland and in some south coast (Los Angeles) counties. In other south coast counties (Orange and San Diego), non-tier rates were still used by about half of respondents. In April 2008 Assembly Bill 2882, designed to encourage public agencies to adopt conservation rate structures, passed by a large margin (Woodland Daily Democrat 2008).
Did you get that? 95 percent of water districts charge you more if you use more, but only 43 percent charge you more per unit, the more units you use. (None that I know of use the conservation pricing that I advocate -- probably because they cannot figure out how to rebate revenue in excess of costs. Wait, that's not too hard to figure out. Ahh, lazy? political opposition?)

Did you also notice that the places that face water shortages (OC is recycling sewage; SD is building a desal plant) are the ones that do NOT use tiered pricing? Do I need to draw you a picture?

Water Transfers:
For pre-1914 appropriative rights, water transfers are subject only to a finding of no injury to other legal water users, and the injured person must bring court action to halt the transfer. For post-1914 rights, water transfers require an application to the SWRCB and the application can be protested by an injured water user. Any transfer of post-1914 rights also cannot have an unreasonable effect on fish and wildlife, and two laws that consider economic impacts may apply.

Water Code section 382 provides authority for transfers of surplus water by local or regional agencies. If an agency utilizes this code section then the SWRCB may approve the transfer if it does not “unreasonably affect the overall economy of the area from which the water is being transferred.” Water Code section 1810 permits any public agency that owns a water conveyance facility to utilize unused conveyance capacity for transfers provided the use of the conveyance facility does not injure any legal user of water, unreasonably affect fish, wildlife or other instream beneficial uses and does not unreasonably affect the overall economy or the environment of the county from which the water is being transferred.
So, despite what our lawyer friends tell us about how water markets "exist", they do not function because it's a pain to get approval from the multiple agencies that can veto a decision (tragedy of the anti-commons) -- even without considering how many people can oppose a transfer on somewhat nebulous grounds.

A market cannot function if transactions costs eat up the gains from trade. That's why markets for water in CA (and elsewhere) are stillborn. The process needs to be streamlined (without disenfranchising too many people, of course).

Bottom Line: We have a long way to go before we achieve efficiency in water allocation like we have in the allocation of houses, gold, oil, etc. This analysis provides a useful checklist of issues to tackle.


  1. "Scoping level" comes from the California Environmental Quality Act. "Scoping" is the process by which an agency determines what issues need to be analyzed in an environmental impact report.

    Congratulations on understanding my point about water markets. The legal structures exist. Understanding why they're not used more requires a deep understanding of statewide and site-specific issues. Simply insisting on more "robust" markets is meaningless; if you want to participate usefully in this area you need to tell people like me how to streamline the process.

    Note that the administrative process was developed as an alternative to litigation. Given the importance of water, simply claiming that I, as an upstream superior right holder, have sold water to someone way downstream, and thus the junior holder has to leave that extra water instream, is unlikely to be sufficient. Proof is required (which requires things like measurements, determination of carriage losses, shortage criteria, etc.). Hence Water Code 1700 et seq.

    I'd honestly be thrilled to receive draft legislation from you, David. If I thought it was any good, I'd try to get it to Machado's staff, Kuehl's staff, Kightlinger, IID's GM, etc. Knock yourself out.

  2. By the way, this is far and away the best paper I've ever read on bringing economic analysis to bear on water allocation issues in California. For example, it's markedly more useful and thoughtful than Prof. Adler's paper.

  3. Francis -- apparently you missed my sarcasm. Legal structures that exist but are NOT USED are just as bad as a lack of structures. As you point out, the process needs to be streamlined.

    I don't understand your example. Since when do junior rights holders have ANY say in what senior holders do with their water? Perhaps you are thinking diversionary rights, but I am thinking consumptive rights.

    My streamlining suggestion:
    1) Establish a standardized "overhead" for transfers based on simple criteria that are right ON AVERAGE so an administrator can approve x AF of transfer between Seller i and Buyer j over distance y. "Customized" administration is NOT doing the job -- too long and too uncertain.

    Since you are the lawyer, perhaps we should sit down together. I'll start with this text -- "Those who have rights can sell them" -- and you can add the legalese.

    Adler was, of course, speaking of water markets in general, not wrt California.

  4. Junior rights have a say because of the no-harm rule. All legal users of water (including junior rts holders) have the right to protest a transfer on the grounds that the transfer will interfere with the exercise of their own rights.

    Fair enough, don't you think? Otherwise the transferor, by the act of transferring, is expanding its own rights to the detriment of another.

  5. No -- junior rights should NOT have a say in many things -- this gives them veto power out of proportion to their harm. The whole notion of "third party impacts" in water is foreign to ALL other areas of decision-making (e.g., bread makers cannot prevent a factory shutting down that will reduce employment and thus demand for bread). Junior rights holders have rights (by defn) but those rights should be extremely constrained and delinked from subjective (or debatable) measures of harm...


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