25 Sep 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.