April 9, 2002 PNW Water Institutional Development Richard Slaughter, Ph.D. Don Reading, Ph.D. Climate Impacts Group University of Washington

April 9, 2002 The Question Does it require crisis?

April 9, 2002 Alternative Models Miles, et al. Dependent variable - Regime effectiveness - outcomes: changes in human behavior Independent variables - problem structure (malign) - institutional (regime) setting - distribution of power -quality of leadership

April 9, 2002 Alternative Models Miles, et al. Dependent variable - Regime effectiveness - outcomes: changes in human behavior Independent variables - problem structure (malign) - institutional (regime) setting - distribution of power -quality of leadership Missing: Linkage between policy and outcomes

April 9, 2002 The Question How quickly and completely do existing institutions translate social costs into private costs?

April 9, 2002 The Question How quickly and completely do existing institutions translate social costs to private costs? Hypothesis: the more effective the linkages between social and private costs, the more efficient the institution

April 9, 2002 The Question How quickly and completely do existing institutions translate social costs to private costs? Hypothesis: the more effective the linkages between social and private costs, the more efficient the institution Linkage (transactions costs): 1. Specification of property rights 2. Information

April 9, 2002 Alternative Models North Dependent variable - outcomes: changes in human behavior Independent variables – institutional structure – transactions costs ° cost of acquiring knowledge, negotiating agreements ° cost of enforcing agreements

April 9, 2002 Alternative Models North Assumption: Market reflects all human economic interaction, will reflect existing marginal costs as constrained by transactions costs – Corollary 1: If policy directs a particular outcome (indirectly changing cost relationships), the market will reflect the change, producing unintended and sometimes perverse side-effects. – Corollary 2: The market will, at best, recognize only the discounted present value of future costs.

April 9, 2002 Institutional Innovation

April 9, 2002 When Do Innovations Occur?  Increased demand/Resource constraint — changes price relationships  New technology — allows use of a technology previously not feasible; reduces costs  Change in social priorities — new public policy; changes prices

April 9, 2002 Case Studies  Snake River  energy crisis  Klamath Basin

April 9, 2002 Klamath River Basin 2001

April 9, 2002 Expected Findings (Klamath)  Appropriation rights not defined in constitution or statues  Tribal rights  ESA and related statutes  Irrigation rights assigned by Bureau - Administrative allocation  Crisis continues …

April 9, 2002 Snake River

April 9, Fish FlushIrrigated AcresDroughtMilner CFSBrownlee CFSPlus 1 SDMinus 1 SD Snake River Development History Upper Snake: 345 diversions, 41 reaches, 700 water rights, 9 reservoirs

April 9, Fish FlushIrrigated AcresDroughtMilner CFSBrownlee CFSPlus 1 SDMinus 1 SD Ground Water Development/Desert Land Act 1877 Committee of Nine National Reclamation Act Jackson Lake Milner/ Twin Falls Project American Falls Carey Act 1894 Snake River Development History Upper Snake: 345 diversions, 41 reaches, 700 water rights, 9 reservoirs

April 9, 2002

Fish FlushIrrigated AcresDroughtMilner CFSBrownlee CFSPlus 1 SDMinus 1 SD Ground Water Development/Desert Land Act 1877 Committee of Nine National Reclamation Act Jackson Lake Milner/ Twin Falls Project American Falls Carey Act 1894 Snake River Development History Upper Snake: 345 diversions, 41 reaches, 700 water rights, 9 reservoirs

April 9, 2002 Snake River Development History Upper Snake: 345 diversions, 41 reaches, 700 water rights, 9 reservoirs

April 9, 2002 California Electricity Market

April 9, 2002 The mode of production of material life conditions the general process of social, political and intellectual life. In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. A CONTRIBUTION TO THE CRITIQUE OF POLITICAL ECONOMY, Karl Marx, 1859

April 9, 2002 Fill-up $25 Fill-up $50,000 Fill-up $8,500

April 9, 2002 FERC 888, Open Access Transmission Separate Transmission/Generation Merchant Plants WHOLESALE DEREGULATION

April 9, 2002 California Retail Deregulation Separate Generation and Distribution (Retail) – Market, not Utility Commission, Determines Supply Freeze Retail Rates – No Link Between Supply & Demand Utilities Must Buy in Pool – No Bilateral Contracts Uncertainty – No Generation Built Despite Demand Increases

April 9, 2002 ‘Causes’ ‘Causes’ of Price Spikes Supply & Demand Imbalance Drought – Northwest/California Exchange Natural Gas Prices Market Manipulation

April 9, 2002

Impacts Price Spikes Demand Side (Conservation)  Purchase Demand  Elasticity Supply Side  Planned Generation (Natural Gas – CC’s, CT’s)  Dam Operations to Maximize Power Output Not for Fish  ‘Temporary’ Generation  Contracts FERC Rules Change  July 2001 Price Caps, Generation Sale Requirement  California Eliminated Perverse Rules

April 9, 2002

MARKET ADJUSTMENTS THROUGH PRICE AND INSTITUTIONAL DECISIONS

April 9, 2002 Fill-up $25 Fill-up $50,000 Fill-up $8,500