1 Water in the West Richard Howitt Richard Howitt University of California, Davis Presentation at the Western Regional Joint Summer Meetings--Monterey July 10, 2006

2 Agricultural and total water usage in CA Agricultural water use Irrigated acreage Total human water use Millions of acres/ Millions of acre-feet applied water (AW) Source: Various CA water plans 9.9 m 9.5 m 35.6 m 34.3 m 42.4 m 43.2 m

3 Agricultural water usage through 2030  Market forces –Crop shifts –Irrigation efficiency  Opens potential for –Transfers –Basin recharge Source: California Water Plan Update, 2005 Acre-feet (millions) AW

4 Population growth through 2030: Most growth away from coast Inland Empire San Joaquin Valley Sacramento Metro Area Bay Area South Coast 1m 2m 3m Population growth, Source: Department of Finance, 2004 Other

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6 Per capita urban use has only recently begun to fall; inland use is much higher gallons per capita per day California Coastal Inland Source: various CA water plans

7 Urban demand growth is highly variable gpcd221 gpcd192 gpcd252 gpcd Current use levels Current trends Less resource- intensive More resource- intensive Projected demand growth, 2000 – 2030 with 14 million new residents Acre-feet (millions) 5.0 Source: California Water Plan Update, 2005

8 Other anticipated adjustments  Increased environmental flows (+ 1 maf?)  Reduced Colorado River use (- 0.8 maf)  Reduced groundwater overdraft (1-2 maf?)

9 State recognizes that many options available for generating new supplies Urban conservation Groundwater banking Recycled muni. water Surface storage Ag. land reductions Ag. use efficiency (net) Desalination Conveyance Cloud seeding Additional annual water available by 2030 for California (millions of acre-feet per year) Source: California Water Plan Update, 2005 ? Low end of range High end of range Maximum feasible (not costed)

10 Some incremental water sources are relatively low cost Cost/af Desalination (seawater) $800 - $2,000 * Ag. use efficiency $175 - $450* Ag. land fallowing $75 - $400 * Surface storage $150 - $2,500 * Recycled muni water $300 - $1,300* Conjunctive use & GW banking $110 +* Urban conservation $220 - $530 * * California Water Plan, 2005 * CALFED, 1999 * author estimates

11 Irrigation water application has hovered in range of 3.5 – 3.6 acre-ft/acre since 1960s Acre-feet/acre of applied water Source: various CA water plans

12 Agricultural efficiency is not well understood from a policy perspective  Usual view is that ag efficiency improvements do not achieve much since they reduce return flows, which are usable  Value of water depends on where it is located, and its quality  Efficiency investments can increase yields - do more than just reduce return flows

13 Infrastructure improvements may be more important than new storage  Huge disparities in regional water productivity, even within agriculture  North-south and east-west differences  Productivity differences persist due to nature of water rights and lack of conveyance opportunities  Almost total lack of private investment in water infrastructure  No regulatory apparatus for common carriers in water and no market for wheeling

14 Economic Value of Facility Changes ($/unit-yr)

15 Groundwater banking and conjunctive use can enhance supply at reasonable cost  Historical overdraft has created lots of storage space  Simple banking can create opportunities for arbitrage  Development of wellfields can also allow for more aggressive management of surface storage facilities  A major problem with groundwater storage is flexibility

16 Curbing urban outdoor use may be low-hanging fruit  Outdoor water use in rapidly growing inland regions often exceeds 50% of total use  Residential irrigation efficiencies very low  Urban utilities are exploring use of “smart” ET controllers – field trial savings 15-25%  Need better data on weather and water needs of landscape plants (CIMIS)

17 Urban recycling is promising  Urban conservation is desirable since it creates water in exactly the right place; no need for expensive conveyance  Recycled water can be used for landscape irrigation and industrial applications  Cost is relatively modest, ranging from $300 to $1,300/af

18 Water transfers are an important part of reconciling supply-demand imbalances  Wide variety of deals; permanent vs. temporary; firm vs. interruptible; fallowing vs. efficiency conservation  Great interest in agriculture to sell water; also lots of trades within agriculture  Suppose 3 maf transferred from ag to urban uses by 2030; at current prices, this is a $500 - $900 million annual market in California

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20 Overview (I)  Markets improve efficiency.  Transaction costs impede market formation: Physical (transport, externalities)Physical (transport, externalities) Institutional (legal barriers to trade)Institutional (legal barriers to trade) Third party impactsThird party impacts

21 Overview (II)  What factors drive water markets towards sales versus leases of water rights?  Leases seen as a second-best outcome due to legal restrictions on selling water between irrigation districts.  We examine additional factors: Meeting projected urban growth leads to sales.Meeting projected urban growth leads to sales. Incorporation of environmental externalities and third party impacts into the approval process leads to leases.Incorporation of environmental externalities and third party impacts into the approval process leads to leases.

22OBJECTIVE To test econometrically how different factors affect the decision to purchase or lease a water right: Physical scarcity (hydrological conditions)Physical scarcity (hydrological conditions) Financial scarcityFinancial scarcity Environmental laws/third party protectionsEnvironmental laws/third party protections

23 Lease and Sale Market Transfers ( ) State Lease / Sale Ratio CA ID NM MT AZ TX UT WY OR WA CO NV

24 Volume-Weighted Prices for Reported Water Transactions, StateLeaseSale Implicit Rate of Return ($/acre-foot/year) ($/acre-foot/year) ($/acre-foot) ($/acre-foot)(%) AZ ,036 1,036 6 CA ,131 1, CO ,531 4,531 4 ID MT 9 -na NM ,384 1,384 5 NV ,320 2,320 3 OR TX UT ,748 1,748 2 WA WY na na Total

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27 Model Specification (I) Prob ( X = 1 ) = F(α 0 + β 1 AGPRODN + β 2 AGLAND + β 3 BLD + γ 1 PDI + δ 1 ENVTL + δ 2 FISH + α1VOL + α2INC + α3TIME + ε)  The dependent variable is 1 if Sale, 0 if Lease.  Financial scarcity variables AGPRODN: Value of agricultural production AGLAND: Value of agricultural land BLD: Number of building permits issued annually

28 Prob ( X = 1 ) = F(α 0 + β 1 AGPRODN + β 2 AGLAND + β 3 BLD + γ 1 PDI + δ 1 THIRD + δ 2 FISH + α1VOL + α2INC + α3TIME + ε)  Physical scarcity variable PDI: Annualized Palmer Drought Index.  Environmental /third party impacts variable THIRD: =1 if third parties have standing in regulatory approval process (7.5 states). Getches, FISH: = 1 if fish and wildlife is a beneficial use under state law (7.5 states). Getches 1997, Model Specification (II)

29 Determinants of Water Trading Patterns in Western Water Markets ( ) VariableDescriptionCoefficient BLD Building Permits Issued 0.016*** PDI Palmer Drought Index 0.096*** THIRD Third Party Protections -3.82*** FISH Fish and Wildlife: Beneficial Use -1.76*** AGPRODN Value of Agricultural Production 0.215*** AGLAND Value of Agricultural Land *** VOL Transaction Volume (taf) INC Per Capita State Income 0.379*** TIME Time Trend *** ** significant at 5%; *** significant at 1%.

30 Concluding Remarks  Urban growth, agricultural value, environmental demands and climate change will change water use in the West, particularly for agriculture.  Adjustment by conservation, new technologies and reallocation requires economic incentives- water in the west is gradually becoming a commodity.  Water Markets can stimulate adjustment, subject to –environmental laws –the clear designation of fish and wildlife as a beneficial use.  Leases may be the best outcome, if they are a response to temporary need or laws which protect externalities.