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State Water Market Needs Reform
Jelena Jezdimirovic, Ellen Hanak February 02, 2016

Water trading is an important tool for managing water scarcity. It enables water right-holders to voluntarily shift water—permanently or temporarily—to those who need it, making better use of existing supplies. Despite potential benefits, the approval process for trading water in California continues to be lengthy, cumbersome, and lacking in transparency. This is an especially big concern during droughts, when speed is important.

In California, water trading takes the form of short-term leases, long-term leases, and permanent sales. The figure below shows statewide estimates of volumes of water traded in recent decades, including the first three years of the latest drought.

Since the onset of the latest drought, total volumes traded appear to have tapered off, despite strong demand. Farmers facing scarcity have been willing to pay record-high water prices for their high-value crops. Prior to this drought, an acre-foot of water typically sold for less than $500, and sometimes less than $100. In the spring of 2014, a Kern County water district auctioned 12,000 acre-feet of stored groundwater to local users and got bids for more than 60,000 acre-feet at a price of $650 per acre-foot or more. In the summer of 2015, some San Joaquin Valley farmers were reported to have leased water for as much as $2,000 per acre-foot—more than most cities pay for municipal supplies.

But the slow approval process, along with tight supply conditions, limited volumes available for sale. While senior water-rights holders normally have more reliable and ample water supplies, the past several years have been so dry that the state decided to cut their water allocations for the first time since 1977. The cuts rippled throughout the market. For instance, the Metropolitan Water District of Southern California had planned to purchase around 100,000 acre-feet from Sacramento Valley rice growers, but that deal was contingent on the growers getting a full allocation. When the growers’ allocation was cut by half, the deal was significantly scaled back.

The drought has placed markets at the center of a conversation about ways to manage droughts and lessen the costs of scarcity. Many point to the example of Australia, which significantly expanded water rights trading in the midst of drought. Buyers and sellers register their shares with the help of brokers—often using online trading platforms—and trades are approved within a matter of hours or days, not the weeks and months that are the norm in California.

To reach Australia’s level of fast-paced trading, California would need to address many challenges. Clarifying and simplifying the review process for transfers is one priority. This will require improving information about water availability and how much can be safely traded without harming the environment or other legal water users. In addition, California will need to address infrastructure weaknesses that restrict moving water between buyers and sellers in some places.

Making these changes will require the cooperation of water users and state, federal, and local agencies. It won’t happen overnight, but we need to get started. Strengthening California’s water market will be key to effectively managing future droughts, a regular feature of our climate.

Chart source: Updated from E. Hanak and E. Stryjewski. California’s Water Market, By the Numbers: Update 2012 (PPIC, 2012).

Chart notes: The figure shows water traded between entities that are not members of the same water district or wholesale agency. It excludes volumes committed under long-term lease and permanent-sale contracts that were not physically transferred. Dry years are those classified as critical or dry for the Sacramento Valley

Learn more
Read our report What If California’s Drought Continues? (August 2015)
Read our report Allocating California’s Water: Directions for Reform (November 2015)

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