17 May 2010

Turning water into gold

DJ tells me about an interesting development of water rights.

Dianne Feinstein has proposed (in S 1759) that water's "reliability" (a bureaucratic definition for priority and probability of delivery) change when its use changes, i.e., when water leaves an agricultural area with "lower reliability" and goes to an urban area, its reliability is increased. This is because urban deliveries have priority. This press release [pdf] opposes the legislation.

That creates an important arbitrage opportunity. Not only are the "water rights"* more valuable because urbans are willing to pay more; it becomes more valuable because there will be MORE OF IT.

Note that this applies to some water -- CVP water -- but not other water -- SWP water -- solely based on definitions within the delivery rights or contracts for that water. The fine print, the part that politicians and bureaucrats can change, is where the action is...

Thus, we can see how Westlands can sell its water rights* (with low reliability) to cities, to make much more money.

I'll note that rights sold in the Australian market do NOT get their reliability upgraded.

Bottom Line: "Regulatory arbitrage" can instantly change the value of water, by changing the definition of who can use it and for what. This development may allow Westlands to make a lot of money. I wonder if Feinstein knows that? \sarc.

* Westlands and other CVP contractors do not have rights; they have contracts. No difference, in my mind, if you can still sell them :)

Addendum: Valley enviros have written a comment letter [pdf]; I'll put a brief summary under the fold:

The more we've looked at this bill, the more it looks like a "Chinatown" bill which is designed to enable transfers of water from the North and South Central Valley to development in Southern California and other areas of the state.

What's wrong with transfers of CVP water to urban development? Plenty.

We simply don't want to transfer a lot of unreliable ag water to urban use, unless there are strict controls on increased demand for the water.

The CVPIA had at least some safeguards, but this bill repeals them, likely so that ag contractors selling their water can get a lot more for the sales.

If this transfer bill passes, the Bureau of Reclamation Water Shortage Policy will likely convert water transferred to urban use to urban drought year minimum deliveries, which would greatly harden demands for East and Westside San Joaquin water -- including the junior water rights Delta and Friant water.

This is terrible policy, not just for the Delta and the San Joaquin River restorations, but even for the agricultural contractors in the San Joaquin Valley.

And if a Peripheral canal does get built, it could facilitate massive transfers of North of Delta water South under a programmatic EA.

Repealing consumptive use provisions of CVPIA + subsidies for energy costs + subsidies for water costs = bad things.
And we wouldn't want that, would we?