25 September 2009

Chino Auctions Water for Real Money

CS, JR and TS all asked my opinion on this report that the Chino Basin Watermaster is planning to auction 36,000 af of water. (The water is just an allotment, not an annual right; see the auction website.)

Given projected prices of $800-1,000/af, the auction will raise about $30 million. I am fully in favor of this development:
  1. It's for water in an adjudicated groundwater basin -- meaning little chance that the water will come from unsustainable overdrafting. Something I worry about with the $77 million sale.
  2. The sale is open to "local water agencies, Southland developers who under state law have to demonstrate there is enough water to supply new projects, and private investment groups that deal in natural resources." A big pool of competing developers means more competition and higher prices -- something that DWR failed to encourage with its beauty-contest guidelines for the Drought Water Bank.
  3. The water is coming from east of LA -- an area of heavy demand and (relatively) easy delivery infrastructure -- which means that bids are likely to be numerous and prices competitive.
  4. Best of all, the auction will help people understand the value of water. At $800/af, IID just let $144 million of water float away...
Bottom Line: The best way to ration scarce water is with prices and markets, and auctions are the best way to discover the price (value) of something that's hitherto been so abundant that we valued it at zero.

8 comments:

  1. "just an allotment, not an annual right" ... $800/af

    Please clarify. $800/AF/what ?

    The prevailing interest rate is roughly 1% ... present worth value is $80,000/AF.

    It would seem that the water must be available in perpetuity in order to solve development scenarios ...

    ReplyDelete
  2. Since you constantly talk about the need for functioning water markets, I would like it if you gave examples of the plusses and minuses of a water market. When would such a market, though well intentioned, fail in actual practice.

    Also, I thought of you being on a horse about markets, a water horse, you know a hippopotamus. Great image.

    ReplyDelete
  3. WaterSource/WaterBank27 September, 2009 04:02

    Eric,

    Great question regarding a "functioning water market" ...

    Here are a few things that have to be thought through ...

    The water product:

    Ownership
    Chain of title
    Records of use
    Need to Quiet Title
    Priority
    Historic delivery
    Historic consumptive use
    Legal limitations
    Historically enforced
    Historically ignored
    New Environmental restraints
    Minimum stream flows

    The Market Place:

    Internal in the district
    Severable from district restriction
    Historic Consumptive use confirmed
    Price Per year or in perpetuity
    Restraints on defined use(s)

    Supply & Demand

    Competition Actual or Imaginary
    Potential competitors
    procedure required
    price expected
    Governmental moritoriums in place
    Governmental moritoriums threatened
    Housing Developments
    Commercial

    Delivery System(s):

    Storage facility condition
    conveyance structure(s) condition
    Capacity ... space available timely
    Seepage and Evaporation losses

    Flexibility:

    Approval required by
    Courts
    State Agencies
    Receiving structures

    ReplyDelete
  4. @Eric -- read this book: http://aguanomics.com/2009/07/rivers-of-gold-review.html

    Water markets will fail when they do not take all costs into account. Besides the obvious (social costs), one also must consider transportation (infrastructure) costs, the transaction cost (regulations, etc.), information costs (water quality, loss measurement, etc.), political costs, and so on...

    It's possible to integrate "tribal values" into water markets and prices; naive economists fail to do so.

    ReplyDelete
  5. @David

    Could you please give an example of a situation in which a market, water or other, got very bureaucratic and dysfunctional and then became a working market? What were the causes that undid the normal bureaucratic need for power and regulations, even non functioning ones?

    ReplyDelete
  6. @Eric -- Airline deregulation in the US. The Soviet Union (choose any sector). GM vs. Toyota; USPS vs. FedEx; etc....

    ReplyDelete
  7. In all of your examples, I think, a more lightly regulated private company outcompeted its more heavily regulated competitor. The government regulators did not change their behavior but lost some control over the market.
    Is this right?
    Is this what you mean by a functioning water market?

    ReplyDelete
  8. @Eric -- no it's not right. It's more about incentives (make a profit or go out of business) than regulation.

    Regulation *does* matter for a functioning water market but you also need buyers and sellers with profit motives...

    ReplyDelete

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