This study examines the issue of third-party effects of water transfers in California from the economic, institutional, and legal perspectives. It evaluates potential mechanisms for resolving the conflicts between those wishing to trade in water and the wider community. By drawing on a range of data sources, including original survey work, the analysis aims to answer the following questions: How has local resistance to water transfers affected California’s water market to date and what are the likely future effects? What distinguishes the cases where conflicts have been successfully resolved and the stalled deals? Are revisions of state water law a necessary or desirable means for dealing with third-party issues, or should solutions be left to local institutions?
The report begins by providing some background on the water market and on the extent of community response. Chapter 2 presents an overview of the statewide water market since the mid-1980s, drawing on a new dataset developed for this study. It shows the evolution of total volumes transferred and the composition of the market—by geography, types of water users, and shifts in end use—in response to the state and federal policy changes outlined above.
The next two chapters document the rise in local restrictions on water marketing, with a specific focus on the adoption of county ordinances. Chapter 3 summarizes the statewide trends and discusses some of the legal, economic, and operational issues that the ordinances
raise. Drawing on county-level economic indicators and qualitative information gathered from interviews with county officials and water users, Chapter 4 explores why certain counties have adopted export restrictions and others have not.
Chapter 5 examines whether and how local opposition affects the water market. This examination includes a review of the permitting process for exports in counties that have adopted restrictions and a statistical analysis of the factors influencing water transfer behavior at the county level.
The study then turns to the policy questions that arise from the economic effects of land fallowing and the physical effects on water users arising from transfers involving groundwater. Both economic theory and institutional practice provide justifications for mitigating negative effects of water transfers. In theory, any transfer that truly raises efficiency by moving a resource into a higher-value use will generate sufficient gains to enable the losers to be compensated, such that the well-being of all parties is enhanced or maintained. For transfers that affect the
availability of the physical resource to other water users, compensation is justified on grounds of efficiency as well as equity (Coase, 1960).
This principle already underlies the state’s policy to “make whole”
other surface water users affected by a transfer. More generally, it forms the basis for environmental mitigation of development projects.
Measures might include providing alternative sources of water supply to the affected party or devising some other form of financial or in-kind compensation. Compensation mechanisms are not always easy to devise and reach agreement on, however, particularly when the damages are unclear or difficult to quantify. Chapter 6 examines these issues as they apply to the economic effects of land fallowing, and Chapter 7
investigates the physical effects on water users of groundwater transfers and the related practice of groundwater banking.
Mitigating harm to groundwater users implies the existence of an effective system for managing groundwater resources more generally.
Because these resources are almost always shared by multiple parties, groundwater management usually requires collective oversight. In California, there is a vigorous debate concerning the appropriate level of governance for groundwater. At one extreme are those who argue that
groundwater should come under the jurisdiction of the state alongside surface water (Sax, 2002). At the other extreme are those who argue against any restrictions on individuals’ rights to pump.
The middle ground in this debate has sought solutions involving local institutions. Two potentially competing approaches have grown in popularity since the early 1990s—the establishment of groundwater management plans by local water entities overlying a shared basin and the coordination of groundwater management at the county level through groundwater protection ordinances. Chapter 7 examines the policy and institutional questions that arise from these approaches, with a particular focus on the role counties are and might be playing.
Chapter 8 concludes by summarizing the policy issues that face state and local governments in addressing third-party issues and the role local entities can and should play in the statewide water market.
2. California’s Water Market, by the Numbers
This chapter documents the evolution of the state’s water market from the mid-1980s to 2001, drawing on a new dataset on individual water transfers developed by the author from a variety of state, federal, and local sources. The data allow an analysis of volumes transferred by duration, region of origin and destination, initial and final use, type of transacting party, and affiliation (if any) with the large state and federal water projects. The discussion highlights two areas of particular interest.
First, to what extent has the market responded to the policy measures to encourage trading over the past two decades? Second, does the trading that has occurred correspond to expectations?