ECONOMIC IMPACTS OF ALTERNATIVE WATER ALLOCATION INSTITUTIONS IN THE COLORADO RIVER BASIN by James F. Booker and Robert A. Young Completion Report No. 161 ECONOMIC IMPACTS OF ALTERNATIVE WATER ALLOCATION INSTITUTIONS IN THE COLORADO RIVER BASIN by James F. Booker and Robert A Young Department of Agricultural and Resource Economics Colorado State University August, 1991 RESEARCH PROJECf TECHNICAL COMPLETION REPORT Supported by the U.S. Geological Survey Department of the Interior Under Award No. 14-08-0001-G1644 and by the Colorado Agricultural Experiment Station COLORADO WATER RESOURCES RESEARCH INSTITUTE Colorado State University Fort Collins, Colorado 80523 Robert C. Ward, Director FOREWORD The contents of this report were developed under a grant from the Department of the Interior, U.S. Geological Survey. However, those contents do not represent the policyof that agencyand the reader should not assume endorsement by the Federal Government. This research was supported bythe U.S. Geological Survey(USGS), Department of the Interior, under USGS award number 14-08·0001-Gl644. Support was also provided by the Colorado State University Agricultural Experiment Station. The views and conclusions contained in this document are those of the authors and should not be interpreted as necessarily representing the views of Colorado State University. The research was aided by the cooperation of numerous people in local, state and federal water agencies who assisted us by providing access to data and experience on the supply and demand for Colorado River water. We particularly wish to acknowledge the assistance of colleagues in the Department of Agricultural Economics, Colorado State University. Garth Taylor and Laurie Walters aided in preparing data and models used in deriving estimates for agricultural and municipal demand relationships. Dr. Edward Sparling helped in formulation of the mathematical models. ii TABLE OF CONTENTS FOREWORD .........................................•........................• ii ABS1RACf ••................•...................•••.......................••• viii EXECUTIVE SUMMARY. .......•................•....••..................•..•. .. IX CHAPlERS: 1 IN1RODUCflON 1 The Colorado River . • . .. 1 The Basin Water Resource 1 Basin Water Users..................................................•..... .• 2 Beneficiaries of Consumptive Uses ......................................•...•.. 2 Beneficiaries of Nonconsumptive Uses......................................... .. 2 Institutions for Allocation of Colorado River Water 3 Objectives ~ . .. 3 Methods 3 Benefit Estimation 4 The River Model . .. 4 Scope of Analysis and Model Assumptions ......................................... .. 4 Institutions, Efficient Allocation, and Models 5 Economic Valuation 5 Level of Analysis and Economic Actors . • • . .. 5 Hydrologic Modeling . .. 6 Model Sensitivity . • • . .. 6 2 THE COLORADO RIVER: DESCRIPTION, ALLOCATION, AND ALlERNATIVE mSTITUTIONS 8 Physical Characteristics 8 The Salinity Problem ...................................................... .. 8 Historical Development ...................... ....................... ........... .. 10 Institutional Setting. ........................................................ .. 10 Water Quantity ......................................................... .. 10 Water Quality: Salinity 11 Instream Values: Hydropower Production 11 Institutional Change and Colorado River Allocation 11 Water Marketing ........................................................ .. 12 Interstate Transfers 12 Economic Justification and Impacts of Water Transfers 13 Research on Colorado River Water Allocation ...........................•.......... 14 Reservoir Management 14 Economic Allocation for Consumptive Uses 14 Economic Allocation and Salinity Control ..................................... .. 15 Contributions of this Research 15 iii 3 IRRIGATED AGRICULTURE: WATER AND SALINI1Y 0 •••• 0 0 0 17 Grand Valley 0 •••• 0 •••••••••••• 0 •••••••••• "0 0 ••••• 0 •••• 0 ••••••••• 0 •••••••• 0 0 •• 17 Model of Water Demand and Salinity Production 0 •••••••••••••••• 0 •• 0 0 o. 17 ~ Data and Model Description 0 • • 0 •••••0••••••••••••••0••0•••00••00 o. 18 Returns to Water and Salinity Production 0 •• 0 •••••••••••• 0•••••••••••••••••••• •• 19 Present and Future Demand 0 •••••••••••••••••••••• 0 • • • • • •• 20 Discussion ............................... 0•••••••••••••••••••••••••••••00 21 Imperial Valley 0 0 • 0 ••• 0 ••••••••••• 0 •••• 0 •••••••••••••••••••• 0 0 •••••••••• 0 • • •• 23 Description ... 0 •••••••••••••••••••••••••••••••••••••••••••••••• 0 0 0 • • • • • •• 23 Demand for Irrigation Water 0 ••••••••• 0 • •• 24 Returns to Water .. 0 •••••••••••••••••••••••••••••••• 0 0 ••••••••••••• 0 • 0 • • •• 24 Future Demand Functions ..... 00•••••••••••••••••••••••••••••••••••••••••• •• 26 Extrapolation to Additional Agricultural Sectors 0 •• 0 0 0 • 0 • 0 •• 27 4 WATER FOR USE IN ENERGY PRODUCTION. 0 0 ••••••••••••• 0 ••••• 0 •• 0 0 0 0 • • • • •• 30 Hydropower Valuation and Production ... 0 •••••• 0 ••••••••••• 0 ••• 000••••••••••••• •• 30 Economic Value of Hydropower Production ... 0 ••••••••••••••••••••••• 0 • • •• ••• •• 30 Hydropower Production 0 •• 00••••••••••••••••••••••••••••••••••••••• •• 33 Water Use in Thermal Energy Production ' .. 34 Steam Electric Generation 0 •••••••••• 0 0 •• 0 • 0 0 0 •••••• 0•••••••••••••••• •• 34 Synthetic Fuels and Oil Shale 0 0 ••• 0 0 ••• 0 •••• 0 • • •• 34 Water Treatment and Salinity Impacts 0••••••••••••••••••••••• •• 35 Water Demand Functions for Energy Production ................................ .. 36 Future Demand 0 •••••••••••••••••••• 0 • 0 •••••••••••• 0 o. 36 5 SOUTHERN CALIFORNIA MUNICIPAL WATER DEMAND 0 • • •• 39 Household Water Demand Estimation ........................................... .. 39 Water Demand Models 0 ••••••••••••••••••••• 0 ••••••••• 0 •••••••••• 0 39 The Role of Income Effects . .. 39 Review of Previous Work 0•••••••••••••••••••••••••••••••••• •• 40 The Data Set 0 • • • • •• 41 Water Demand Models 0 • • • • • • • •• •••••• •• 42 Model Estimation .. 0 0 •••••• 0 •••••••••••••••••••••••••••••••••• 0 •••••• 0 • • •• 43 Application of Household Demand Functions to Municipal Demand 0 •• 0 44 Municipal demand for Colorado River water ................................... .. 47 Conveyance Costs . 0 ••••••••••••••••••• 0••••••••••••••••••••••••••••••••• •• 47 Treatment Costs 0•••••••••••••••••••••••••••••••••••••••• •• 48 Present and Future Demand for Colorado River Water 0 ••••••••••• 0•••••••••••••• •• 48 6 MUNICIPAL SALINITY DAMAGES FROM COLORADO RIVER WATER. 0 •• •••••••• •• 50 Previous Work .. 0 0 ••••• 0 •••••••••••••••••••••••••••••••••••••••••• 0 0 0 •• 0 • • • •• 50 Calculation of Annual Damages .. 0 •••••••••••••• 0' •••••••••••••••••••• 0 • • • • • •• 50 Household Damage Estimates 0 • •• 52 Total Damages from Colorado River Water 0 ••••••••••••••••••••••••••• 0 52 Discussion of Salinity Damage Estimates 0. 0 • • • • • • • • •• 52 Future Salinity Damages 0••••••••••••••••••••••••••••••••••••••• •• 52 Damage Estimates in Perspective 0••••••••••• •• 54 7 THE COLORADO RIVER INSTITUTIONAL MODEL 55 General Model Specification 55 Physical Constraints 0 ••••••••••••••••••••• 0•••••••••••••••••••• •• 57 General Objective Function ................................................ .. 59 iv Modeling of Institutional Scenarios 59 Group 1: Allocation in Compliance with Compact Priorities . • . .. 60 Group 2: Interstate Transfers for Consumptive Uses . • . .. 61 Group 3:Scenarios Incorporating Nonconsumptive Use Values 61 Discounting of Salinity Damages •................................•............... 61 Consumptive Use Requests ..............................................•...... 62 Flow .Assumptions .................................................•........ .. 62 Reservoir Releases ............................................•......•....... 62 8 MODEL RESULTS UNDER ALTERNATIVE INSTITUTIONAL SCENARIOS. ...•..... .. 65 Base Model Results: 1990 Demand, Lower Decile Flow •• ~ .......................... .. 65 Group 1: Allocation in Compliance with Compact Priorities . • . .. 65 Group 2: Interstate Transfers for Consumptive Uses . • . .. 70 Group 3: Scenarios Incorporating Nonconsumptive Use Values 71 Summary. ......................................................•...... .• 73 Additional Model Definitions 74 Group 1: Allocation in Compliance with Compact Priorities . .. 74 Group 2: Interstate Transfers for Consumptive Uses . .. 86 Group 3: Scenarios Incorporating Nonconsumptive Use Values 86 Sensitivity of Model Results . • . .. 86 Southern California Municipal Demand for Colorado River Water 86 Flow Levels . .. 87 Agricultural Consumptive Use Values 87 Hydropower Production and Salinity Dilution Values 88 Limitations of the Model Specification . .. 89 9 CONCLUSIONS AND POLICY IMPLICATIONS 90 Institutional Change and Allocative Efficiency ................ .. 90 Markets, Planning, and Models 90 Within-State Water Allocation 90 Interstate Water Allocation in the Colorado River Basin . .. 91 Water Allocation and Nonconsumptive Uses .................. .. 91 Public Goods and Colorado River Water Resources 92 Colorado River Users under Existing Institutions . .. 92 Consumptive Users 92 Nonconsumptive Users 92 Other Users 93 Winners and Losers under Institutional Change . .. 93 Impacts of Intrastate Water Transfers 93 Impacts of Interstate Water Transfers 94 Equity. ............................................................... .. 94 Concluding Remarks .... ................................................