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WATER USE CONFLICTS IN THE WEST: IMPLICATIONS OF REFORMING THE BUREAU OF RECLAMATION’S WATER SUPPLY POLICIES AUGUST 1997 The Congress of the United States Congressional Budget Office Preface onflict among water users is part of the history of the American West. The conflicts have changed over the years but have not gone away. Environmentalists, who want C water to be left in the rivers to preserve threatened species, are now competing with urban and agricultural users for the West's limited water resources. Native American water rights, long ignored, are also receiving more attention. The federal government is a key player in western water. Through its Bureau of Reclama- tion, the government developed water supplies that literally made the desert bloom. Develop- ing new sources of water&deciding where the next big water project should be built&has long been the focus of the Bureau of Reclamation. But good options for the large-scale projects are extremely limited, and the federal government now focuses more on the fair and efficient allocation and use of existing supplies. Policy changes that could lead to better use of water are being put in place in parts of California served by the Central Valley Project, the largest water supply project in the United States. Policy changes introduced in California could serve as models for changes throughout the West. In response to a request from the Ranking Minority Member of the House Committee on Resources, this study analyzes the policy tools slated for use in California, estimates the costs of those reforms to agriculture in the state, and discusses the implications of using those policy tools in the rest of the West. Marca Weinberg, formerly of the Congressional Budget Office's (CBO's) Natural Re- sources and Commerce Division, wrote the study under the supervision of Jan Paul Acton and Roger Hitchner. Gary Brown, Coleman Bazelon, and Teri Gullo of CBO; Doug Elmendorf and Aaron Zeisler, formerly of CBO; and Gregory Amacher, Richard Wahl, Daniel Hellerstein, Benjamin Simon, Dennis Wichelns, Noel Gollehon, and Amy Matthews-Amos provided valuable comments and assistance. Michael R. Moore helped develop the agricul- tural model and also provided general comments. Sherry Snyder edited the manuscript, and Chris Spoor proofread it. Angela McCollough typed the many drafts. Kathryn Quattrone and Jill Sands prepared the study for publication. June E. O'Neill Director August 1997 Contents SUMMARY ix ONE INTRODUCTION 1 Background 1 The Changing Federal Role 2 Assessing Reform Efforts with a Case Study 2 TWO WATER USE IN THE WESTERN UNITED STATES 5 Types of Water Use 5 Conflicts Over Water Use in the West 8 The Role of the Bureau of Reclamation in Developing Water Supplies 11 THREE ISSUES IN REFORMING FEDERAL WATER POLICY 15 Tools for Reforming Federal Water Policy 15 Implications of Policy Combinations: Interactions and Redundancies 23 Matching Reform Objectives with Policy Tools 24 FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA'S CENTRAL VALLEY 27 The Central Valley Project and Its Stakeholders 27 The Central Valley Project Improvement Act 33 The Regulatory Environment for Implementing the CVPIA 38 FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 41 Empirical Framework 42 Results of the Empirical Analysis 44 Environmental Benefits and Issues in Estimating Their Values 52 vi WATER USE CONFLICTS IN THE WEST August 1997 SIX LESSONS FOR THE WEST 55 Regional Differences in Variables That Influence Farmers' Response to Reform 56 The Role of Key Variables as Predictors of Farmers' Response to Water Supply Policies 57 A Role for Flexibility 65 APPENDIXES A The Central Valley Project Improvement Act 69 B The Economics of Tools for Reforming Federal Water Policy 75 CONTENTS vii TABLES 1. Diversion of Surface Water for Various Uses in Western and Eastern United States, 1990 6 2. Potential Effectiveness of Selected Policy Tools for Alternative Conflicts and Reform Objectives 24 3. Selected Crops Produced with Water from the Central Valley Project as a Percentage of Total U.S. Production, 1987 28 4. Effect of the Central Valley Project Improvement Act on Agricultural Water Use and Revenues 44 5. Effect of the Central Valley Project Improvement Act on Urban Water Use 45 6. Ranking of Crops in the Bureau of Reclamation's Five Regions, by Acreage and Revenues, 1990 61 7. Regions' Dependence on Water Deliveries by the Bureau of Reclamation, 1989-1990 62 A-1. Applicable Charges to Finance the Restoration Fund, by Type of Water Use 72 viii WATER USE CONFLICTS IN THE WEST August 1997 FIGURES 1. Water Projects and Agricultural Regions of California's Central Valley 30 2. Cost of Environmental Water Allocations Under Average Water Supply Conditions, as Measured by Reductions in Agricultural Revenues 47 3. Total Amount of Water Delivered by the Central Valley Project, 1949-1995 50 4. The Bureau of Reclamation's Five Regions in the Western United States 56 5. Average Gross Revenues from Crops Irrigated with Water from the Bureau of Reclamation's Projects in 1990, by State 58 6. Agricultural Land Values for Irrigated and Dryland Uses in 1988, by State 59 7. Average Amount of Water Delivered to Districts in 1989 and 1990, by Region 64 B-1. The Effects of a Water Market on a Farmer's Decisions About Water Use 76 B-2. The Effects of Tiered Water Prices and a Water Market on a Farmer's Decisions About Water Use 78 B-3. Water Prices and Quantities with a Water Market and an Allocation for Fish and Wildlife 80 B-4. Water Prices and Quantities with CVPIA Provisions 82 BOXES 1. Water Districts 12 2. Terms Relating to Water Prices 21 3. Using Changes in Gross Revenues as a Measure of the Impact of Water Policy Reform on Agriculture 43 Summary he Bureau of Reclamation, an agency within the to analyze the magnitudes of costs and benefits that Department of the Interior, has spent billions of reform imposes on the agricultural and urban sectors in T dollars over the past 90 years to develop water California and to explore the implications of policy re- supplies for farmers in the western United States. form for the Bureau of Reclamation's projects through- Those federal water projects have "made the desert out the West. bloom," but the bureau's policies on supplying wa- ter—including subsidized prices, long-term contracts, and restrictions on the sale of water by farmers—have resulted in a rigid allocation of major water resources to Competition for Limited agriculture. That allocation often comes at the expense of urban, environmental, and Native American water Water Resources in the West users, and at a large cost to taxpayers. Conflicts over current and future allocations of surface Reform of federal water policies that have their water resources exist throughout the western United roots in the early part of the century could improve the States. Those conflicts typically involve historical pat- Bureau of Reclamation's ability to meet the demands of terns of use by irrigated agriculture on the one hand and today. Properly done, reform could improve economic increasing (or increasingly recognized) needs for urban efficiency in allocating water among commercial water and environmental uses on the other hand. Many uses, provide more water for public purposes such as western cities—including Los Angeles, Denver, and the environment or Native American tribes, and could Las Vegas—are experiencing rapid population growth address equity concerns regarding the portion of project that will increase pressure on water supplies that are costs that the federal government must pay. both uncertain and limited. Fish and wildlife species that depend on river ecosystems for their survival are In California, where conflicts between agriculture, declining in every major river basin in the West. A to- cities, and environmental interests over scarce water tal of 184 species listed as threatened or endangered or resources are severe, reform has been brought about by proposed for listing under the Endangered Species Act the 1992 Central Valley Project Improvement Act may be affected by the Bureau of Reclamation's opera- (CVPIA). In designing and passing the CVPIA, the tions. In addition, the water rights of many Native Congress created a potential model for reforming fed- American tribes have yet to be quantified and allocated. eral water policy. The act contains numerous provi- sions that encourage farmers who receive water from Historically, increased demand for water has been the Bureau of Reclamation's Central Valley Project met by developing additional supplies. However, rising (CVP) to use less, that facilitate the movement of con- economic costs and environmental sensitivities are served water to higher-valued uses, and that protect and likely to preclude future construction of major water enhance fish and wildlife populations in California's supply projects. Instead, reallocating water from exist- Central Valley. However, those reforms come at a cost ing uses—primarily agriculture—may be the best to agriculture. Passage of the act creates an opportunity x WATER USE CONFLICTS IN THE WEST August 1997 "new" supply of water for addressing urban, environ- dress economically inefficient water allocations, envi- mental, and Native American needs. ronmental problems associated with water develop- ment, tribal claims to water rights, reimbursement to the federal Treasury, or any combination of those ob- jectives. Broadly defined, the available policy tools The Role of the Bureau of include facilitating water markets, directly increasing water prices, directly reallocating water, and requiring Reclamation in Resolving that water conservation measures be carried out. Water markets, water price reform, and conservation programs Water Conflicts are tools that create incentives for farmers to reduce the quantity of water used in agriculture. Allowing farmers Participation by the Bureau of Reclamation will be nec- to sell water forces them to consider its value in other essary to alleviate water conflicts in many areas of the uses when making decisions about using water.

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