Announcements A Primer on Final Exam, Friday June 8, 8:30-11:30 Water in Annenberg Allocation

Next lecture (Wednesday): Sustainability, Part I

The World’s Water Resources

Gaining Streams: Losing Streams: Aquifer Feeds Surface Water Surface Water Feeds Aquifer

1 Issue # 1: How Should the Issue # 1: Competing Uses Government Allocate Water?

Issue # 2: Water Imbalance Water Allocation

What are the characteristics of a good water allocation system?

Riparian Rights System Prior Appropriation System

Water must be: Water must be:

„ Used on land that boarders the water source „ Unappropriated (“First come, first served”) „ Used within the watershed „ Diverted „ Put to “reasonable” use „ Put to “reasonable and beneficial” use „ (No waste) „ Permitted

2 A prior appropriation permit specifies: Prior Appropriation Doctrine: The Basic Western Law

„ How much water will be diverted „ No Fee „ Where it will be diverted „ Does Not Matter Where Used „ What water will be used for „ “Reasonable and Beneficial Use” „ Where it will be used „ No waste „ When it will be used „ First Come, First Served „ No Quantitative Limit „ Historically Difficult to Transfer

20 10 20 0 B B 30 cfs 30 cfs 10 A 10 A 10 cfs 10 cfs 10 5 5

0 0 Drought

D Allocation D 5 5 C 50 cfs C 50 cfs 20 cfs 20 cfs

So What Do You Think of The Importance of Prior Appropriation? Water Organizations

„ Encourages early and large withdrawals „ Municipal Suppliers „ Little likelihood that water will go to the most efficient use „ City agencies „ Public utilities „ Little incentive to conserve „ Agricultural Suppliers „ Inefficient allocation of water during droughts Agricultural Suppliers „ „ A & D keep all their water „ Irrigation districts „ B loses all of its water „ Water districts „ But 1st units of water probably more valuable than last

3 How Should a Water Supplier Typical Pricing Structure Price Its Water? „ Virtually always average cost „ Never marginal cost „ E.g., if existing water costs $200 per af and adding 25% more will cost $400 per af … „ All will be charged $240 „ (.8 x $200) + (.2 x $400) „ Often flat rate „ No metering „ Often subsidized „ E.g., property taxes

Susidies: Susidies: Federal Reclamation Program Federal Reclamation Program „ 50 year, zero-interest „ 50 year, zero-interest loan loan „ Cross subsidization „ Cross subsidization „ Irrigation $35 million „ Irrigation „ Flood control $50 million „ Flood control „ Recreation $15 million „ Recreation „ Energy subsidies

Total Cost: $100 million Final price < 20% real cost

Environmental Externalities: Changing the Hydroscape

4 Consequences: Damage to Salt Lakes Damage to Estuaries

Public Policy Responses to the Fish Loss Environmental Externalities

„ Judicial Responses „ Public trust doctrine „ Mono Lake „ Regulatory Responses „ “Public interest” test in issuing permits „ “Withdrawals” „ Endangered Species Act „ Taxes

Allocating Groundwater: The Problems of Overdrafting A Renewable/Depletable Resource „ Groundwater Depletion „ Salt Water Intrusion

5 The Problems of Overdrafting The Problems of Overdrafting

„ Groundwater Depletion „ Groundwater Depletion „ Salt Water Intrusion „ Salt Water Intrusion „ Lower Water Tables „ Lower Water Tables „ Increased energy costs „ Increased energy costs „ Surface Subsidence

The Problems The Problems of Overdrafting of Overdrafting „ Groundwater Depletion „ Groundwater Depletion „ Salt Water Intrusion „ Salt Water Intrusion „ Lower Water Tables „ Lower Water Tables „ Increased energy costs „ Increased energy costs „ Surface Subsidence „ Surface Subsidence „ Desertification „ Desertification „ Oases „ Oases „ Surface water loss

The Problems How Would You Allocate? of Overdrafting „ Groundwater Depletion „ Salt Water Intrusion „ Lower Water Tables „ Increased energy costs „ Surface Subsidence „ Desertification „ Oases „ Surface water loss „ Biodiversity loss

6 The Result: Groundwater Allocation Systems Groundwater Depletion „ Rules with No Limitations on Overdrafts „ Rule of Absolute Ownership „ Rule of Reasonable Use „ National Groundwater Resources „ Rules with Caps „ Recharge: 60 bgd „ Prior Appropriation „ Extraction: 75 bgd „ California „ 25% of Western Aquifers Being Mined „ But No Effective Enforcement

Groundwater Depletion Solving the Problem of Groundwater Is A National Problem Overdrafting „ Import Water „ California’s Central Valley Project „ Directly Restrict Groundwater Withdrawals „ Edwards Aquifer Authority „ Endangered Species Act „ Taxes and Subsidies

Meeting the Water Needs of the Options Nation’s Growing Cities

„ New Supplies „ Traditional sources „ Surface streams „ Groundwater „ New sources „ Desalination „ Recycled water „ Demand Management „ Water Marketing

7 Voluntary Conservation Dispersing Technology

„ Can be quite effective in „ Domestic distribution and domestic settings subsidy programs are very effective at reducing use „ But „ Low flow toilets: 10-11% „ Voluntary campaigns Voluntary campaigns „ Showerheads: 6-10% often require significant „ Household irrigation effort technology: 11% „ Effectiveness falls off „ And also cost effective over time „ But addresses only part of „ Unlikely to be enough for efficiency the “waste” problem

Government Mandates Price Changes

„ Can be extremely effective during an emergency „ Prices do affect use „ Metering „ High rate of compliance High rate of compliance „ 30% decline „ Examples: „ Price increases „ Goleta, California „ Southern California experience: „ Santa Barbara: 10% „ Maximum allotments „ Goleta: 26% „ Reduced use 30% „ Estimated elasticity: „ Santa Barbara, California „ -0.3 to -.05 „ Limited landscape „ Conservation is efficient irrigation „ But again means poor conserve „ Reduced use 15% more than rich „ Perceived as equitable „ Low income: 5.3% decline „ Middle income: 2.2% „ But often inefficient „ High income: 1.1% „ And high administrative „ And politically very unpopular costs in the long run

Popularity of Alternative Water Markets Conservation Approaches

3.5 „ Most Water Is in Agricultural Use 3 Today „ Water Markets Encourage 2.5 Conservation 100 90 „ Positive incentive 80 2 „ Provides needed capital 70 U.S. 60 „ Adjusts automatically to changes 1.5 Colorado Adjusts automatically to changes 50 % use in consumptive value of water 40 1 California „ And Can Reallocate Water 30 And Can Reallocate Water 20 Voluntarily to Urban Regions 10 0.5 „ Also used to reallocate water 0 among farmers Domestic Irrigation Mining Electric 0 „ And used by environmental Voluntary Get More Restrict Use Raises groups to reallocate water to Prices rivers

8 Water Markets The Legal Difficulties with Water Markets: „ But significant political Water Markets: opposition „ Markets benefit most profligate users Imperial Irrigation District – „ Water users often San Diego County Water Authority “hoard” „ Endowment effect Water Transfer „ Fear of changes in rules

Problem # 1: The Law – Problem # 2: Rent Seeking --How Can IID Transfer Conserved Water? Should Revenues Be Allocated?

„ Poorly defined water rights „ „ State water law Farmers „ Federal contracts and „ Traditionally “allocation reclamation law on demand” „ Special Colorado River law „ Other voters within the „ Junior claims Junior claims IID „ IID has been “wasting” water „ Conflict between markets and „ Other residents of regulation Imperial County

9 Problem # 3: Potential Community Problem #4: Is Any Water Really Being Concerns “Conserved”? „ Conservation versus Fallowing „ Economic Studies „ Short-term transfers generally have small impact „ Transfers of <20% water supplies generally have small impact

Approaches to Water Policy Problem #5: Currently 75 bgd flows from CA rivers. Of this, 25 bgd is withdrawn The Transportation Monopoly 1. New Supplies „ Traditional Sources (surface streams, groundwater) „ New Sources $800-1400 / af „ How Do You Get the „ Desalination Water to San Diego? „ Recycled water $600-1000 / af „ Colorado River 2. Decrease Use (Demand Management) „ Urge voluntary conservation Overall Aqueduct „ Government mandates Use „ Owned by MWD „ Rationing Problem „ Required conservation equipment „ Worried about losing customers in 3. Improve Allocation of Existing Supply Allocation „ Water Markets Southern California Problem

Water Subsidies and the Overall Water Subsidies and the Overall Use Problem Use Problem

MC MC mec soc mec soc MC MC

pag pag D D

qi*qi qi*qi Ag District i Ag District i

10 Allocation Problem

The Allocation Problem

Private Sector Participation Types of PSP arrangements

„ Service/management contract Different balances of: „ Lease „ Concession „ Asset ownership „ Build-operate-transfer „ Responsibility for capital investment „ Independent services providers „ Burden of commercial risk

11 Differences in To Privatize or Not Water Privatization Country/Region Percent Privatized (1997) Market failure vs. Government failure „ Western Europe „ 20 „ „ United States „ 14 „ 5 „ Central/East Europe „ 4 „ Latin America „ 3 „ Africa „ 1 „ Asia

Davis, J. Annual Reviews 2005

Conclusions

1. Overall, water markets will help some.

„ but political/physical limits to these markets imply that allocation problem will remain significant. „ and they don’t address the overall use problem

2. Some trends: „ Gradual increase in metering. „ Slow trend to move from AC pricing to MC pricing. „ A few new water markets. „ More invoking/establishment of laws to support government’s role in protecting instream needs for water (biodiversity, ecosystem function, recreation.

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