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string(43556) "Occasional Papers Californias Water Market, By the Numbers Ellen Hanak Prepared for presentation to the Department of Water Resources October 2002 Public Policy Institute of California The Public Policy Institute of California (PPIC) is a private operating foundation established in 1994 with an endowment from William R. Hewlett. The Institute is dedicated to improving public policy in California through independent, objective, nonpartisan research. PPICs research agenda focuses on three program areas: population, economy, and governance and public finance. Studies within these programs are examining the underlying forces shaping Californias future, cutting across a wide range of public policy concerns, including education, health care, immigration, income distribution, welfare, urban growth, and state and local finance. PPIC was created because three concerned citizens William R. Hewlett, Roger W. Heyns, and Arjay Miller recognized the need for linking objective research to the realities of California public policy. Their goal was to help the states leaders better understand the intricacies and implications of contemporary issues and make informed public policy decisions when confronted with challenges in the future. PPIC does not take or support positions on any ballot measure or state and federal legislation nor does it endorse or support any political parties or candidates for public office. David W. Lyon is founding President and Chief Executive Officer of PPIC. Raymond L. Watson is Chairman of the Board of Directors. Public Policy Institute of California 500 Washington Street, Suite 800 San Francisco, California 94111 Telephone: (415) 291-4400 Fax: (415) 291-4401 info@ppic.org www.ppic.org Contents Acknowledgments 1. INTRODUCTION 2. TRACKING THE WATER MARKET: DATA SOURCES AND CAVEATS 3. OVERALL MARKET TRENDS 4. WATER FOR THE ENVIRONMENT: A KEY FACTOR IN MARKET GROWTH 5. AGRICULTURE’S LEADING ROLE IN MARKET SUPPLY 6. MOST TRANSFERS ARE LOCAL OR REGIONAL 7. FROM FARMS TO CITIES: A KEY ELEMENT OF LONG-TERM AND PERMANENT TRANSFERS Conclusion References Appendix: Supplementary Tables iii 1 3 7 11 13 17 19 21 23 25 -i- Acknowledgements The author wishes to thank Antonina Simeti, research associate at the Public Policy Institute of California, for her substantial contribution to building the transfers database. Thanks also to the numerous individuals in the state and federal agencies and the local water agencies for making the source data available and helping to resolve discrepancies among sources. Responsibility for interpretation rests entirely with the author. - iii - 1. Introduction The development of a water market has become a key component of California’s water policy. A market permits the temporary, long-term, or permanent transfer of water from the existing rights-holders to other water users. These rights generally have been appropriated for many decades under the state’s “first in time, first in right” legal system. In an era when pricing has been advocated as a solution to a wide range of resource allocation issues, water transfers are seen as a way of adding flexibility to the state’s water supply—both to address temporary drought conditions and to accommodate longer term changes in the pattern of demand. The first policy document to advocate transfers as a part of California’s water future was the 1978 report of the Governor’s Commission to Review California’s Water Rights Law. The commission also advocated a number of changes in the Water Code to facilitate transfers, notably provisions to ensure the security of water rights for transferring parties and access to the use of conveyance facilities owned by third parties. Although many of the recommendations were accomplished in the years that followed, the 1980s saw little uptake in market activity. In the early 1990s, several events significantly changed the trading climate. First, natural conditions provided the occasion for a large-scale experiment in water trading when a multi-year drought prompted the state to initiate an emergency water bank in 1991. The following year, in response to findings that the federally run Central Valley Project (CVP) was having deleterious effects on the indigenous wildlife of the San Francisco Bay-Delta water system, the U.S. Congress passed the Central Valley Project Improvement Act (CVPIA). The CVPIA mandated that 800,000 acre-feet of project water (of a total of 7 million) be returned to instream uses to regenerate salmon runs. The CVPIA also contained provisions to facilitate water marketing and introduced a mechanism for the project to purchase additional water, if needed, for environmental purposes. In 1994, contractors of the State Water Project (SWP) concluded negotiations for the “Monterey Agreement,” which included a number of measures to make it easier for contractors to transfer water to one another. In 2000, state and federal authorities launched the Environmental Water Account (EWA), a program of water purchases for the environment under CALFED, a multi-agency state and federal program to restore health to the fisheries of the Bay-Delta system while securing water supplies to agricultural and urban users. The purpose of this paper is to document the evolution of the water market in response to the new trading environment. It draws on a new set of data developed by the author from a variety of state, federal and local sources -1- on individual water transfers from the early 1980s to 2001. 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. -2- 2. Tracking the Water Market: Data Sources and Caveats Monitoring the statewide water market is made easier by the fact that many transactions involve state or federal authorities in at least one of two ways: as direct purchasers (as in the drought water bank and the environmental programs) or as approvers of transactions among other water users. The State Water Resources Control Board (SWRCB) must approve transfers (changes in purpose or place of use) involving water rights established from 1914 onwards, the year the state’s “modern” Water Code was passed by the legislature. Transfers among contractors of the federal and state water projects, while generally not requiring SWRCB approval, must be authorized by the projects themselves, as the ultimate rightsholders. Finally, two other types of water which can be transferred without SWRCB approval—water held under “pre-1914” appropriative rights and groundwater—come under state or federal jurisdiction if either party’s conveyance facilities are involved, which is likely to be the case in most parts of the state. Although these agencies only recently developed a policy to pool data and monitor transactions collectively,1 it was generally possible to reconstruct past transfer activity.2 The full range of federal and state sources was tapped: the SWRCB, the California Department of Water Resources (DWR), the U.S. Bureau of Reclamation offices for the Central Valley Project and the Colorado River Project. For transactions falling outside of state or federal jurisdiction, the primary source used was the private publication, Water Strategist, and its forerunner, Water Intelligence Monthly, which track water markets in 14 western states. For the early years, an additional source was Lund, Israel, and Kanazawa (1992). Because there are often discrepancies between intended transactions and what is finally achieved, an intensive crosschecking exercise was conducted on the data, comparing sources and contacting the relevant water districts in the event of questions. We also had access to the transfer records of some large water districts in the state: Metropolitan Water District of 1 In 2001, the CALFED website posted a preliminary database of water transfers compiled from various sources. Known as “On-Tap,” this database provides considerable information but still contains many inaccuracies. The participating agencies intend to improve the quality of transfer monitoring for future years. 2 The one project area with incomplete records was the Friant Unit of the Central Valley Project, a group of contractors in the east side of the San Joaquin Valley, for which internal transactions were either incomplete or missing in some years. For these years (indicated by an asterisk in the appendix tables), we have adjusted the totals, setting internal Friant trades to their average share of the total market (7 percent) in years when data were complete. -3- Southern California, Westlands Water District, Kern County Water Agency, and Yuba County Water Agency. We attempted to retain only transfers that were actually carried out, in the amounts transferred from the point of origin, on a calendar year basis.3 The data presented below focus on annual flows of water resulting from three types of transactions: temporary transfers (under one year), longterm transfers (two years or more), and what we have termed “deferred exchanges.” Whereas transfers typically involve a one-way movement of water for monetary compensation, deferred exchanges refer to a promise that the buyer return water (in addition, in some cases, to a cash payment) to the seller at a later date. These exchanges often contain some flexibility regarding the year of repayment to allow for conditions of the water year. We have considered an exchange agreement to fall into this category as long as it does not require same or next year repayment. Like transfers, the agreements on deferred exchanges can be temporary or multi-year. State Water Project contractors make the most use of deferred exchanges, as project operating rules make these preferable to outright transfers in many instances. The annual flow data do not contain a fourth category, the permanent transfer of water rights or contract entitlements. Such transfers amount to an outright sale of the rights to use the specified amount of water in perpetuity or for the remaining duration of the contract in question. Because the actual amount accessible to the buyer under these rights or entitlements can vary with the conditions of the water year, it is not strictly appropriate to consider an annual flow of water transferred. We have therefore opted to present the data on permanent transfers separately. In the interests of consistency, two other types of transaction have been intentionally excluded from the database: short-term exchanges and transfers within certain localized user groups. Short-term exchanges are same- or next-year exchanges of water among users, generally done for purposes of timing or technical convenience. These include, for example, the annual exchanges between the San Benito Water District and the Santa Clara Valley Water District, which temporarily use a certain amount of each other’s water to gain flexibility. This practice is also common among the members of the Friant Unit of the Central Valley Project. In the San Joaquin Valley, short-term exchanges are also used to facilitate transfers between 3 Some inaccuracies in volumes transacted may nevertheless remain. It was not always possible to resolve discrepancies because of differences in record keeping among agencies and inconsistencies in accounting for carriage losses—the amount of water lost during conveyance. Some inaccuracies in the year of transfer also may remain, especially if a transfer arrangement was initiated late in the calendar year and some of the water actually was moved after December. -4- districts not hydraulically connected. An intermediate district (or districts) will use the water from the transferor in exchange for letting the transferee use its water. We have opted not to count these types of exchanges for several reasons. First, they are not tracked as well as transfers: frequently, only one of several possible sides of the exchange appears in the records. Second, unlike deferred exchanges, short-term exchanges do not alter the amount of water available to the buyer and seller over the season. Finally, in cases where exchanges are used to facilitate a transfer, counting them would amount to double- (or triple-) counting the volumes being traded. In several parts of the state, a considerable number of local transactions are not picked up systematically by any of our data sources. These include transfers among users within the same water districts, which some argue have long been a part of farmers’ water management practices. Given the difficulties of tracking these transfers, for which many districts do not maintain records, we have opted to exclude intra-district transactions from the database and to focus on the activity across parties with separate water rights or contract entitlements. It should be noted that the volumes involved in intra-district transfers can be substantial. In the Westlands Water District, one of the nation’s largest irrigation districts, U.C. Berkeley researchers have estimated that internal transactions amounted to 300,000— 400,000 acre-feet annually in the mid 1990s, or about one-third of the district’s total water supplies (Sunding, 2000). Many intra-district transactions are what might be called “convenience” transfers, in which participants sell water at certain times of the year and purchase it later, in a manner reminiscent of the temporary exchanges noted above. There are also some local transactions across districts that we have not been able to track systematically. Within the Kings River Water Association, a 28-member group that shares water rights on the Kings River, transfers can amount to as much as 20,000 acre-feet in some water years, depending on river conditions.4 There is also a substantial amount of transfer and exchange activity—as much as 100,000 acre-feet annually—among the 13 member agencies of the Kern County Water Agency who share a contract entitlement with the State Water Project. According to agency management, these transfers are essentially for convenience, facilitating the joint management of water from different sources (project, river, and groundwater) in different locations within the county. Within the Mojave Basin, where groundwater rights have been adjudicated, there is an active annual market among rightsholders that enables buyers to use more than their allotment. In 2002, these trades were estimated at over 30,000 acre-feet (Water Strategist, July/August 2002). Permanent transfers of drawing rights also occur within the basin. It 4 Personal communication, Tim O’Halloran, Kings River Water Association. -5- is likely that such local markets also are active in other adjudicated basins in Southern California. Finally, the paper will not report in any detail on groundwater banking, which, while not technically a transfer, frequently involves the movement of water among parties in manners akin to transfers. Storing, or “banking,” water in underground aquifers has been on the rise in California since the early 1990s. A number of water users have embarked on projects in which water is stored on behalf of the rights-holder by another party, at another more suitable location. These projects are by nature long-term arrangements that allow the rights-holder to respond to dry years by drawing down on stored reserves. Our records, limited mainly to the operations of the State Water Project contractors, show that close to 750,000 acre-feet were stored in such projects since the mid-1990s in various locations in Kern County. The first drawdowns occurred in 2001, a dry year. In some of the banking projects, a market exists for the permanent sale of storage rights—in effect, for ownership of a share of the bank facilities. Because banked water can be used in transfers, there are also direct links between banking projects and the annual water market. Transfers can involve not only water users with their own on-site banking projects, but also those banking at a distant location. A case in point was Santa Clara Valley Water District’s transfer of water banked in Kern County to the Environmental Water Account in 2001. -6- 3. Overall Market Trends A comparison of the annual volumes of water traded and rainfall trends since the mid-1980s makes it clear that the statewide water market got a “jumpstart” during the last multi-year drought (Figure 1). Market growth was largely driven by direct interventions of the Department of Water Resources. DWR began making dry-year purchases to offset lower deliveries to State Water Project contractors and wildlife refuges in 1988, the first year of the drought. These early operations, which involved only a handful of Sacramento Valley water districts (most notably the Yuba County Water Agency), quickly brought the total volume traded to over 500,000 acre-feet, three times the pre-drought levels. In 1991, when the dry-year market was opened up to any willing buyers and sellers, DWR purchased 820,000 acrefeet of water for resale, bringing the overall market volume to over 1.1 million acre-feet. Water banks and other dry-year purchases were also operated in 1992 and 1994. From 1988 to the end of the drought in 1994, state and federal dry-year purchases for resale and environmental uses Figure 1. Short and Long Term Water Transfers in California Since 1985 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 Acre-feet 0 18 17 16 15 14 13 12 11 Wet 10 9 8 Normal 7 6 5 Dry 4 3 Rainfall Index 22111111111111111009999999999999990099999999888889910987432109876565 Acre-feet traded Rainfall Source: PPIC water transfers database. For details see Appendix Table 1. Rainfall is measured by the Sacramento River 40-30-30 index. -7- accounted for over 40 percent of a market that had jumped from an average of 150,000 acre-feet to over 600,000 acre-feet per year. 5 Although the second half of the 1990s saw a succession of wet years, market activity remained strong, with volumes typically exceeding the drought year levels, especially by the end of the decade. The only dips in a generally upward trend occurred in the exceptionally wet years of 1995 and 1997, when many areas of the state experienced flooding. With annual trades now exceeding 1.2 million acre-feet—eight to ten times the levels of the mid-1980s—the market appears firmly established as a component of California’s water allocation process. It is also useful to consider the size and scope of the market from three other perspectives. First, at current levels, the statewide market represents only 3 percent of all water used by Californians for municipal, industrial, and agricultural purposes (DWR, 1998). Second, although there has been an increase in the number of long-term transfer agreements, the market continues to be dominated by short-term transactions, negotiated on an annual basis, which account for about 80 percent of the total volume transferred. Finally, the size and scope of the market are strongly influenced by the intervention of state and federal authorities. This influence stems not only from an important direct role in purchases, but also from the relative ease water users have in gaining approval for transfers within the confines of the state and federal projects. Since 1988, direct government purchases have accounted for nearly one-third of the total volume traded. Transfers among contractors within the same projects (SWP, CVP and the Colorado River Project) account for more than half of all water sold (Figure 2). Transfers within the CVP and the SWP have generally increased in response to the more flexible trading rules adopted by those projects in the early 1990s. The growth has been most pronounced within the SWP, for which internal transfers were rare prior to the Monterey Agreement. By contrast, the “open market,” a residual category defined broadly to include any transfers between water users not associated with the same project, accounts for only 15 percent of the water transfers recorded over the 14-year period. This share initially increased immediately after the drought, but it has been on the decline again recently, as direct government purchases for environmental programs have been on the rise. 5 The average market volume as measured by end user purchases is just over 500,000 acre-feet for the 1988-94 period. This discrepancy arises mainly because DWR’s purchases were higher than its resales to other users in some years. The gap was most notable in 1991, the first year of the water bank, when purchases exceeded resale volume by over 400,000 acre-feet. In several years in the 1990s, there were also smaller discrepancies between purchases and sales of water user pools, notably the SWP turn-back pool, described in the text, and the Sacramento River Water Contractors’ Association, a pool run by some CVP contractors. -8- Figure 2. Share of Water Transfers by Type of Market Within Colorado River Project 16% Within SWP 10% Direct government purchases 31% Within CVP 28% "Open market" 15% Share of total transfers, 1988-2001 (total volume 11 million acre-feet) Source: PPIC water transfers database. For details, see Appendix Table 1. -9- 4. Water for the Environment: A Key Factor in Market Growth The composition of final demand for water sold reveals that market growth in the aftermath of the drought has been largely driven by environmental concerns. The influence of environmental policy is most readily seen by comparing the patterns of water purchases during the multiyear drought (1988-94) and in the more recent period (1995-2001), when rainfall has generally been above normal (Figures 3a and 3b). The most obvious element of the new role for the environment is the rise in direct purchases for instream uses and wildlife refuges, through federal and state programs and most recently the CALFED Environmental Water Account (EWA). As one of the targeted beneficiaries of DWR’s drought purchases, the environment already accounted for 12 percent of demand during the 1988-94 drought. Since 1995, this share has doubled on average; it reached a third of total demand in 2001, the first full-fledged year of the EWA. On an average yearly basis, environmental purchases have increased by 155,000 acre-feet, out of a total market gain of 430,000 acre-feet. The less obvious component of environmentally related demand is the rise in purchases by San Joaquin Valley farmers. Although this group’s change in market share is less dramatic (moving from 37 percent to 44 percent over the two periods), its increase in volume (228,000 acre-feet per year) accounts for over half of total market growth. Much of this growth can be linked to the changes introduced under the CVPIA in 1992, which mandated that a portion of project water be returned to instream uses. Since then, the CVP’s agricultural service contractors located south of the Delta received full project deliveries in only the two very wet years, 1995 and 1997. One outcome has been the development of an active water market, as certain contractors (most notably Westlands Water District) seek to offset reductions in deliveries via purchases. Within the San Joaquin Valley, CVP service contractors’ market share of purchases has risen from 63 percent to 87 percent across the two time periods. The corollary of this growth has been a decline in the relative importance of municipal and industrial water users. Whereas cities were the main recipients of traded water during the 1988-94 drought with 42 percent of all purchases, their share since 1995 has been halved. With the exception of 1991, when purchases nearly reached 500,000 acre-feet, volumes have remained relatively flat, at around 200,000 acre-feet per year. The modest role of urban demand contrasts with the frequently voiced assumption that a water market would develop primarily as a response to population growth and the ability of urban dwellers to pay more than agricultural users for - 11 - water.6 As we will see below, cities are more significant players in defining the market for long-term and permanent transfers of water. This pattern suggests that their role may increase as this part of the market develops. Figure 3a. Annual Volumes Purchased by Type of End User 1,00 0,00 0 900,000 800,000 700,000 Acre-feet per year 600,000 500,000 400,000 300,000 200,000 10 0,00 0 0 1988-1994 Mixed uses Other farm ers SJ Valley farm ers Environm ent Citie s 1995-2001 Figure 3b. Market Share of End Users 10 0 % 90% 80% 70% 60% 50% 40% 30% 20% 10 % 0% 1988-1994 M ixed us es Ot her f armers S J Valley f armers E nvironment Cit ies 1995-2001 Source: PPIC water transfers database. For details, see Appendix Table 2. 6 See Vaux and Howitt (1984) for an early exposition of the economic arguments in favor of a water market in California. - 12 - 5. Agriculture’s Leading Role in Market Supply Economists have typically assumed that agriculture would be the leading source of supply, and this assumption is confirmed by the data. In most years, agricultural water users provide at least 90 percent of supply. It is nevertheless interesting to note that the post-Monterey introduction of “turn-back” pools within the State Water Project has made a significant amount of urban agency water available to agricultural users in wet years. Under the program, SWP contractors are able to sell back amounts of project water they will not need if there are willing SWP buyers.7 From 1998 to 2000, the turn-back pool generated 200,000 acre-feet or more of water per year, or roughly one-fifth of total market supply. Given the primacy of agricultural supply, it is not surprising to find that the main source regions are the Central Valley (served by the CVP, the SWP, and several large, autonomous, surface water projects) and the agricultural valleys to the south served by the Colorado River project (Table 1). In most years, the Central Valley has furnished about three-fourths of the total volume transferred. Within this region, there are pronounced shifts depending on the nature of the water year. From 1988 to 1994, Sacramento Valley farmers and districts supplied about 45 percent of all water sold. Although this share fell considerably after 1994 (in some years, to under 10 percent of the statewide market), the region again provided over 40 percent of the water in 2001, the first dry year experienced since the previous drought. In the interim, the market shifted to the San Joaquin Valley, which established a vibrant intra-regional market to supply water-short districts within the region. In every normal to wet year since 1993, the first year of CVPIA implementation, San Joaquin Valley farmers and districts have furnished at least half of the total amount transferred. It is common for agricultural districts in this region to restrict out-of-district transfers to cases where land in the recipient district is owned or leased by same farmer. The two Central Valley regions are the principal suppliers of environmental water (Table 1). There has been a major source shift from north to south of the Delta since the early 1990s drought, with the institution of restoration programs along the San Joaquin River system, supplied by area water districts. The Kern County water users have also been major suppliers of the EWA. Most environmental water is used in the region of purchase, the main exception being EWA purchases of water north of the Delta, which are used to facilitate the delivery of project water to users to the south while protecting Delta fisheries. 7 Because the sale price is fixed below the level of per acre-foot charges incurred by the seller for project water, the pool’s attractiveness to sellers is relative, not absolute: it enables them to pay less than full price for contract amounts in excess of current needs. - 13 - Table 1. Regional Sources and Destinations (Acre-Feet) Sales by Water Users Sacramento Valley San Joaquin Valley Southern California SF Bay Area Other Total sales* 1988-1994 1,924,937 1,363,037 970,942 87,195 3,055 4,349,166 1995-2001 1,057,064 3,715,039 1,577,597 82,575 88,694 6,520,969 Purchases by Water Users Sacramento Valley San Joaquin Valley Southern California SF Bay Area Other 135,079 1,450,917 1,187,157 313,197 6,152 515,509 3,253,292 1,234,555 43,505 14,993 Purchases of Environmental Water - % from Sacramento Valley - % from San Joaquin Valley 408,672 74% 25% 1,484,255 17% 81% Total purchases* 3,501,174 6,546,109 Exports (imports) of Non-Environmental Water Sacramento Valley 1,488,725 San Joaquin Valley (190,683) Southern California (216,215) SF Bay Area (230,738) 288,383 (739,455) 343,042 9,070 Source: PPIC water transfers database. For details, see Appendix Tables 3 and 4. Note: The bulk of the difference between total purchases and total sales in the first period is the surplus purchased by DWR and distributed through means other than resales. There were also some small discrepancies in both periods between purchases and sales of user pools. See footnote 4 in text. The Southern California region, defined broadly to include both the desert counties and the coast, generates most of the remaining quarter of total supply. The largest single source has been the Imperial Irrigation District, which has operated a 110,000 acre-feet per year long-term transfer with the Metropolitan Water District of Southern California (MWDSC) since 1988. In the mid-1990s, there was also a large two-year transfer to the MWDSC by the Palo Verde Irrigation District, another agricultural contractor on the Colorado River Project. - 14 - With the exception of the early 1990s drought, when several Bay Area cities made substantial purchases, no other region has played a significant role in the market on either the supply or demand side. The Bay Area’s share in demand has dropped from 9 percent of the total in the drought years to only 1 percent in the more recent period. This region’s share in supply is about 2 percent. - 15 - 6. Most Transfers Are Local or Regional We have already seen that the San Joaquin Valley is both a major supplier and purchaser of water. The market in Southern California is also primarily regional in nature (Table 1). The only “exports” are the transfers by municipal agencies to the SWP turn-back pool, purchased by San Joaquin Valley agricultural districts. In the Sacramento Valley, the only region in the state where water users purchase significantly less than the volume sold, exports are concentrated in dry years. In years with normal to high rainfall, two-thirds of the water is transferred to other water users within the region. Another way of seeing the shares of local and regional markets is to look directly at the source of water obtained by users. Figure 4 shows this breakdown, for non-environmental water only, according to the location of the selling party in relation to the buyer.8 Figure 4. Non-Environmental Water Purchases by Location of Selling Party 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990-1994 (525,000 af/year) 1995-2001 (720,000 af/year) Seller in other region (through bank or pool) Seller in other region (direct) Seller in same region Seller in same county Source: PPIC water transfers database. 8 The first period of reference in this figure is 1990-94 (instead of 1988-94) because detailed county breakdowns are more accurate from 1990 on. - 17 - Nearly one quarter of total volume is purchased from parties in the same county, and another half from parties in the same region. Interregional transfers account for the remaining 25–30 percent of the market.9 Of this total, a relatively small fraction (one-fifth) results from transfers negotiated directly between parties in different regions; the lion’s share moves through banks and pools run by DWR. This pattern highlights again the very important role played by the government agencies in California’s water market. When the agency acts as an intermediary, it is able to facilitate the movement of water across the Delta. Interregional transfers between districts without agency involvement face significant complexities. Agency input has been crucial in successful district-to-district transfers across regions—for instance the 2001 “forbearance program” of the CVP contractors, which moved 160,000 acre-feet from Sacramento Valley water users to the Westlands Water District. 9 Because this graph presents data from the standpoint of end user purchases, it only includes the water bank volumes that were actually resold in the first period, not the full amounts acquired by DWR. - 18 - 7. From Farms to Cities: A Key Element of LongTerm and Permanent Transfers From 1985 to 2001, our records show 14 approved long-term transfers, and as many permanent transfers of surface water rights or entitlements. At least ten additional transfers are currently pending approval. As noted, longterm transfers have generally accounted for about one-fifth of volumes traded since the late 1980s. Volumes traded surpassed the 250,000 acre-feet mark for the first time in 2001. Contract duration runs from a low of two years to a high of 35, with an average of 15. The permanent transfers, bunched at the end of the decade, total another 175,000 acre-feet. These mainly concern the transfer of SWP contract entitlements under the Monterey Agreement (representing close to 130,000 acre-feet), and the transfer of pre-1914 water rights among parties within Kern County. The striking aspect of these transfers is that they almost all involve shifts of water from agricultural to urban uses. The handful of exceptions includes two long-term deferred exchanges between districts with a large municipal customer base (Solano County Water Agency and the Mojave Water Agency; Placer County Water Agency and Northridge Water District), and several long-term transfers from agricultural districts to the environment (most notably, as part of the negotiated agreement for the restoration of the San Joaquin River). Only two long-term transfers between agricultural districts appear, one in the Sacramento Valley and one in San Joaquin, and two permanent transfers of contract entitlement among agricultural users (both in the San Joaquin Valley). Thus, agricultural users remain the largest single source of demand for water in today’s market, but they conduct their purchases almost entirely through temporary arrangements. In light of the rapid population growth rates being experienced in the state, it is not surprising that municipal agencies are taking the lead in negotiating long-term and permanent arrangements for water supply. Legislation passed in 2001 requiring local governments to demonstrate adequate water supplies for development should increase urban demand for long-term water transfers. - 19 - Conclusion Jumpstarted by a prolonged drought in the late 1980s and early 1990s, California’s water market has now become a firmly established feature of the state’s water allocation process. The market remains largely intra-regional in nature, with most transfers across regions directly intermediated by the state’s Department of Water Resources. The market is also highly segmented, with over half of the volumes traded among contractors of the large state and federal water projects and another third involving direct purchases by state and federal agencies for drought relief and environmental mitigation. Outside of drought years, when urban agencies have been important buyers, the main sources of demand have been directly and indirectly linked to environmental concerns. Direct purchases for the environment (for instream uses and wildlife reserves) have accounted for over one-third of the increase in purchases since 1995. The other growth sector has been agriculture in the San Joaquin Valley (accounting for over half of market expansion), as farmers whose contractual water deliveries have been cut in the context of environmental mitigation programs have turned to the market for replacement water. Municipal agencies are the principal buyers of long-term and permanent contracts. Their role promises to increase as this part of the market—still modest—develops in the years ahead. - 21 - References California Department of Water Resources (DWR), California Water Plan Update (Bulletin 160-98), November 1998. Lund, Jay R., Morris Israel, Richard Kanazawa, “Recent California Water Transfers: Emerging Options in Water Management,” Center for Environmental and Water Resources Engineering, Department of Civil and Environmental Engineering, University of California Davis, Report 92-1, November 1992. Sunding, David, “The Price of Water…Market-based Strategies are Needed to Cope with Scarcity,” California Agriculture, Vol. 54, No. 2, pp. 56–63, MarchApril 2000. Vaux, H.J. and Richard E. Howitt, “Managing Water Scarcity: An Evaluation of Interregional Transfers,” Water Resources Research, Vol. 20, No. 7, pp. 785–792, July 1984. - 23 - Appendix: Supplementary Tables Appendix Table 1. Short and Long-Term Water Transfers in California, by Type of Market (Acre-Feet) Year Direct Total % Long- Government Transfers term Purchases 1985 78,781 0 3,308 1986 156,669 0 0 1987 168,143 0 0 1988 320,872 34 119,031 1989 513,731 21 239,000 1990 566,633 19 131,409 1991 1,139,653 10 864,315 1992 565,551 24 217,983 1993 547,090 37 1,703 1994 721,916 24 302,852 1995 454,095 25 54,090 1996 825,185 13 69,216 1997 1,038,980 11 291,500 1998 653,054 21 60,748 1999 1,078,299 13 229,059 2000 1,281,305 14 276,290 2001 1,257,118 22 584,349 Within Within CVP CO Within River SWP Project 52,216 15,489 0 147,447 7,950 0 70,622 6,171 0 87,141 300 110,000 *152,584 2,691 110,000 *177,142 3,561 110,000 *102,202 2,696 110,000 *155,786 4,919 138,301 *213,782 197 202,989 *218,400 1,726 174,688 182,829 4,500 110,000 270,282 207,496 110,000 216,159 66,144 110,000 145,026 201,810 110,000 *368,348 241,390 110,000 369,759 286,305 110,000 440,252 18,240 110,000 "Open Market" 7,768 1,272 91,350 4,400 9,456 144,521 60,440 48,562 128,419 24,250 102,676 168,191 355,177 135,470 129,502 238,951 104,277 Source: PPIC water transfers database. Note: In years indicated by an asterisk, volume adjusted to account for incomplete data on the Friant Unit of the CVP (see footnote 2 in text). - 25 - Appendix Table 2. Water Purchases by Type of End User (Acre-Feet) Municipal Total & SJ Valley Other Mixed Year Purchases Environment Industrial Farmers Farmers Purpose 1985 78,781 3,308 5,000 44,518 3,768 22,187 1986 156,669 0 5,000 69,589 13,740 68,340 1987 168,143 0 44 43,741 10,350 114,008 1988 320,872 119,031 110,500 38,878 12,366 40,097 1989 357,283 39,000 131,043 157,021 30,219 0 1990 453,576 1,500 146,735 260,562 33,779 11,000 1991 703,329 64,612 477,292 104,892 6,863 49,670 1992 530,305 101,726 198,473 188,592 12,163 29,351 1993 546,266 1,703 208,208 293,838 42,517 0 1994 615,397 81,100 203,997 249,215 27,830 53,255 1995 511,904 111,899 112,667 279,331 8,007 0 1996 825,185 72,216 220,308 503,548 29,113 0 1997 1,037,808 293,000 191,402 439,322 14,084 100,000 1998 554,411 61,748 215,956 211,029 65,678 0 1999 1,078,379 229,459 173,988 556,980 72,592 45,360 2000 1,281,305 276,290 169,826 507,841 94,146 233,202 2001 1,257,117 445,543 261,922 388,401 112,776 48,475 Source: PPIC water transfers database. Note: For discrepancies between total transfers (Appendix Table 1) and total purchases by end user listed here, see footnote 4 in text. - 26 - Appendix Table 3. Transfers by Region of Origin and Region of Destination (Acre-Feet) Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sales by Water Users San San Sacramento Joaquin Southern Francisco Valley Valley California Bay Area 8,693 55,183 9,887 5,018 13,740 131,682 6,247 5,000 93,450 68,478 6,171 44 131,397 78,975 110,500 0 301,023 102,708 110,000 0 252,328 191,525 110,000 11,700 700,720 271,572 113,206 53,905 218,521 193,659 142,364 11,007 17,910 290,446 208,084 5,650 303,038 234,152 176,788 4,933 22,097 321,331 110,000 667 57,773 459,704 224,078 20,267 164,375 721,311 136,958 9,991 79,349 257,385 294,778 4,000 107,251 620,324 305,932 9,650 105,571 760,142 377,611 6,000 520,648 574,842 128,240 32,000 Other 0 0 0 0 0 1,080 250 0 25,000 3,005 0 63,363 6,345 17,542 35,142 31,981 1,388 Purchases by Water users (Non-Environmental Water) San San Sacramento Joaquin Southern Francisco Valley Valley California Bay Area 7,943 61,762 0 5,018 13,740 137,929 0 5,000 10,350 74,649 0 44 12,366 78,975 110,500 0 30,219 157,021 110,000 21,043 34,879 260,562 110,000 35,535 6,013 154,562 325,736 152,156 12,641 203,089 152,364 45,509 11,867 293,838 202,989 30,219 27,094 302,870 175,568 28,735 10,007 279,331 110,000 667 33,113 506,548 215,641 667 114,084 440,827 190,730 667 68,378 212,129 207,156 6,000 75,582 603,348 168,380 2,000 82,334 771,343 124,926 26,412 132,011 439,766 217,722 7,092 Other 750 0 0 0 0 100 250 122 5,650 30 0 0 0 0 10 0 14,983 Source: PPIC water transfers database. - 27 - Appendix Table 4. Source Regions for Environmental Water Purchases (Acre-Feet) San San Sacramento Joaquin Francisco Year Valley Valley Bay Area 1988 119,031 0 0 1989 39,000 0 0 1990 1,500 0 0 1991 64,612 0 0 1992 52,525 20,000 4,736 1993 0 1,703 0 1994 0 81,100 0 1995 69,899 42,000 0 1996 16,660 55,556 0 1997 45,517 247,483 0 1998 10,748 51,000 0 1999 21,559 207,900 0 2000 9,795 266,495 0 2001 80,000 335,543 30,000 Source: PPIC water transfers database. - 28 - PUBLIC POLICY INSTITUTE OF CALIFORNIA Board of Directors Raymond L. Watson, Chair Vice Chairman of the Board The Irvine Company William K. Coblentz Partner Coblentz, Patch, Duffy & Bass, LLP Edward K. Hamilton Chairman Hamilton, Rabinovitz & Alschuler, Inc. Walter B. Hewlett Director Center for Computer Assisted Research in the Humanities David W. Lyon President and CEO Public Policy Institute of California Cheryl White Mason Chief, Civil Liability Management Office of the City Attorney Los Angeles, California Arjay Miller Dean Emeritus Graduate School of Business Stanford University Ki Suh Park Design and Managing Partner Gruen Associates A. Alan Post Former State Legislative Analyst State of California Constance L. Rice Co-Director The Advancement Project Thomas C. Sutton Chairman & CEO Pacific Life Insurance Company Cynthia A. Telles Department of Psychiatry UCLA School of Medicine Carol Whiteside President Great Valley Center Harold M. Williams President Emeritus The J. Paul Getty Trust and Of Counsel Skadden, Arps, Slate, Meagher & Flom LLP Advisory Council Clifford W. Graves Vice Chancellor, Physical Planning University of California, Merced Elizabeth G. Hill Legislative Analyst State of California Hilary W. Hoynes Associate Professor Department of Economics University of California, Davis Andrés E. Jiménez Director California Policy Research Center University of California, Berkeley Rudolf Nothenberg Chief Administrative Officer (Retired) City and County of San Francisco Manuel Pastor Professor, Latin American & Latino Studies University of California, Santa Cruz Peter Schrag Contributing Editor Sacramento Bee James P. Smith Senior Economist RAND PUBLIC POLICY INSTITUTE OF CALIFORNIA 500 Washington Street, Suite 800 San Francisco, California 94111 Phone: (415) 291-4400 Fax: (415) 291-4401 www.ppic.org info@ppic.org"
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string(43556) "Occasional Papers Californias Water Market, By the Numbers Ellen Hanak Prepared for presentation to the Department of Water Resources October 2002 Public Policy Institute of California The Public Policy Institute of California (PPIC) is a private operating foundation established in 1994 with an endowment from William R. Hewlett. The Institute is dedicated to improving public policy in California through independent, objective, nonpartisan research. PPICs research agenda focuses on three program areas: population, economy, and governance and public finance. Studies within these programs are examining the underlying forces shaping Californias future, cutting across a wide range of public policy concerns, including education, health care, immigration, income distribution, welfare, urban growth, and state and local finance. PPIC was created because three concerned citizens William R. Hewlett, Roger W. Heyns, and Arjay Miller recognized the need for linking objective research to the realities of California public policy. Their goal was to help the states leaders better understand the intricacies and implications of contemporary issues and make informed public policy decisions when confronted with challenges in the future. PPIC does not take or support positions on any ballot measure or state and federal legislation nor does it endorse or support any political parties or candidates for public office. David W. Lyon is founding President and Chief Executive Officer of PPIC. Raymond L. Watson is Chairman of the Board of Directors. Public Policy Institute of California 500 Washington Street, Suite 800 San Francisco, California 94111 Telephone: (415) 291-4400 Fax: (415) 291-4401 info@ppic.org www.ppic.org Contents Acknowledgments 1. INTRODUCTION 2. TRACKING THE WATER MARKET: DATA SOURCES AND CAVEATS 3. OVERALL MARKET TRENDS 4. WATER FOR THE ENVIRONMENT: A KEY FACTOR IN MARKET GROWTH 5. AGRICULTURE’S LEADING ROLE IN MARKET SUPPLY 6. MOST TRANSFERS ARE LOCAL OR REGIONAL 7. FROM FARMS TO CITIES: A KEY ELEMENT OF LONG-TERM AND PERMANENT TRANSFERS Conclusion References Appendix: Supplementary Tables iii 1 3 7 11 13 17 19 21 23 25 -i- Acknowledgements The author wishes to thank Antonina Simeti, research associate at the Public Policy Institute of California, for her substantial contribution to building the transfers database. Thanks also to the numerous individuals in the state and federal agencies and the local water agencies for making the source data available and helping to resolve discrepancies among sources. Responsibility for interpretation rests entirely with the author. - iii - 1. Introduction The development of a water market has become a key component of California’s water policy. A market permits the temporary, long-term, or permanent transfer of water from the existing rights-holders to other water users. These rights generally have been appropriated for many decades under the state’s “first in time, first in right” legal system. In an era when pricing has been advocated as a solution to a wide range of resource allocation issues, water transfers are seen as a way of adding flexibility to the state’s water supply—both to address temporary drought conditions and to accommodate longer term changes in the pattern of demand. The first policy document to advocate transfers as a part of California’s water future was the 1978 report of the Governor’s Commission to Review California’s Water Rights Law. The commission also advocated a number of changes in the Water Code to facilitate transfers, notably provisions to ensure the security of water rights for transferring parties and access to the use of conveyance facilities owned by third parties. Although many of the recommendations were accomplished in the years that followed, the 1980s saw little uptake in market activity. In the early 1990s, several events significantly changed the trading climate. First, natural conditions provided the occasion for a large-scale experiment in water trading when a multi-year drought prompted the state to initiate an emergency water bank in 1991. The following year, in response to findings that the federally run Central Valley Project (CVP) was having deleterious effects on the indigenous wildlife of the San Francisco Bay-Delta water system, the U.S. Congress passed the Central Valley Project Improvement Act (CVPIA). The CVPIA mandated that 800,000 acre-feet of project water (of a total of 7 million) be returned to instream uses to regenerate salmon runs. The CVPIA also contained provisions to facilitate water marketing and introduced a mechanism for the project to purchase additional water, if needed, for environmental purposes. In 1994, contractors of the State Water Project (SWP) concluded negotiations for the “Monterey Agreement,” which included a number of measures to make it easier for contractors to transfer water to one another. In 2000, state and federal authorities launched the Environmental Water Account (EWA), a program of water purchases for the environment under CALFED, a multi-agency state and federal program to restore health to the fisheries of the Bay-Delta system while securing water supplies to agricultural and urban users. The purpose of this paper is to document the evolution of the water market in response to the new trading environment. It draws on a new set of data developed by the author from a variety of state, federal and local sources -1- on individual water transfers from the early 1980s to 2001. 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. -2- 2. Tracking the Water Market: Data Sources and Caveats Monitoring the statewide water market is made easier by the fact that many transactions involve state or federal authorities in at least one of two ways: as direct purchasers (as in the drought water bank and the environmental programs) or as approvers of transactions among other water users. The State Water Resources Control Board (SWRCB) must approve transfers (changes in purpose or place of use) involving water rights established from 1914 onwards, the year the state’s “modern” Water Code was passed by the legislature. Transfers among contractors of the federal and state water projects, while generally not requiring SWRCB approval, must be authorized by the projects themselves, as the ultimate rightsholders. Finally, two other types of water which can be transferred without SWRCB approval—water held under “pre-1914” appropriative rights and groundwater—come under state or federal jurisdiction if either party’s conveyance facilities are involved, which is likely to be the case in most parts of the state. Although these agencies only recently developed a policy to pool data and monitor transactions collectively,1 it was generally possible to reconstruct past transfer activity.2 The full range of federal and state sources was tapped: the SWRCB, the California Department of Water Resources (DWR), the U.S. Bureau of Reclamation offices for the Central Valley Project and the Colorado River Project. For transactions falling outside of state or federal jurisdiction, the primary source used was the private publication, Water Strategist, and its forerunner, Water Intelligence Monthly, which track water markets in 14 western states. For the early years, an additional source was Lund, Israel, and Kanazawa (1992). Because there are often discrepancies between intended transactions and what is finally achieved, an intensive crosschecking exercise was conducted on the data, comparing sources and contacting the relevant water districts in the event of questions. We also had access to the transfer records of some large water districts in the state: Metropolitan Water District of 1 In 2001, the CALFED website posted a preliminary database of water transfers compiled from various sources. Known as “On-Tap,” this database provides considerable information but still contains many inaccuracies. The participating agencies intend to improve the quality of transfer monitoring for future years. 2 The one project area with incomplete records was the Friant Unit of the Central Valley Project, a group of contractors in the east side of the San Joaquin Valley, for which internal transactions were either incomplete or missing in some years. For these years (indicated by an asterisk in the appendix tables), we have adjusted the totals, setting internal Friant trades to their average share of the total market (7 percent) in years when data were complete. -3- Southern California, Westlands Water District, Kern County Water Agency, and Yuba County Water Agency. We attempted to retain only transfers that were actually carried out, in the amounts transferred from the point of origin, on a calendar year basis.3 The data presented below focus on annual flows of water resulting from three types of transactions: temporary transfers (under one year), longterm transfers (two years or more), and what we have termed “deferred exchanges.” Whereas transfers typically involve a one-way movement of water for monetary compensation, deferred exchanges refer to a promise that the buyer return water (in addition, in some cases, to a cash payment) to the seller at a later date. These exchanges often contain some flexibility regarding the year of repayment to allow for conditions of the water year. We have considered an exchange agreement to fall into this category as long as it does not require same or next year repayment. Like transfers, the agreements on deferred exchanges can be temporary or multi-year. State Water Project contractors make the most use of deferred exchanges, as project operating rules make these preferable to outright transfers in many instances. The annual flow data do not contain a fourth category, the permanent transfer of water rights or contract entitlements. Such transfers amount to an outright sale of the rights to use the specified amount of water in perpetuity or for the remaining duration of the contract in question. Because the actual amount accessible to the buyer under these rights or entitlements can vary with the conditions of the water year, it is not strictly appropriate to consider an annual flow of water transferred. We have therefore opted to present the data on permanent transfers separately. In the interests of consistency, two other types of transaction have been intentionally excluded from the database: short-term exchanges and transfers within certain localized user groups. Short-term exchanges are same- or next-year exchanges of water among users, generally done for purposes of timing or technical convenience. These include, for example, the annual exchanges between the San Benito Water District and the Santa Clara Valley Water District, which temporarily use a certain amount of each other’s water to gain flexibility. This practice is also common among the members of the Friant Unit of the Central Valley Project. In the San Joaquin Valley, short-term exchanges are also used to facilitate transfers between 3 Some inaccuracies in volumes transacted may nevertheless remain. It was not always possible to resolve discrepancies because of differences in record keeping among agencies and inconsistencies in accounting for carriage losses—the amount of water lost during conveyance. Some inaccuracies in the year of transfer also may remain, especially if a transfer arrangement was initiated late in the calendar year and some of the water actually was moved after December. -4- districts not hydraulically connected. An intermediate district (or districts) will use the water from the transferor in exchange for letting the transferee use its water. We have opted not to count these types of exchanges for several reasons. First, they are not tracked as well as transfers: frequently, only one of several possible sides of the exchange appears in the records. Second, unlike deferred exchanges, short-term exchanges do not alter the amount of water available to the buyer and seller over the season. Finally, in cases where exchanges are used to facilitate a transfer, counting them would amount to double- (or triple-) counting the volumes being traded. In several parts of the state, a considerable number of local transactions are not picked up systematically by any of our data sources. These include transfers among users within the same water districts, which some argue have long been a part of farmers’ water management practices. Given the difficulties of tracking these transfers, for which many districts do not maintain records, we have opted to exclude intra-district transactions from the database and to focus on the activity across parties with separate water rights or contract entitlements. It should be noted that the volumes involved in intra-district transfers can be substantial. In the Westlands Water District, one of the nation’s largest irrigation districts, U.C. Berkeley researchers have estimated that internal transactions amounted to 300,000— 400,000 acre-feet annually in the mid 1990s, or about one-third of the district’s total water supplies (Sunding, 2000). Many intra-district transactions are what might be called “convenience” transfers, in which participants sell water at certain times of the year and purchase it later, in a manner reminiscent of the temporary exchanges noted above. There are also some local transactions across districts that we have not been able to track systematically. Within the Kings River Water Association, a 28-member group that shares water rights on the Kings River, transfers can amount to as much as 20,000 acre-feet in some water years, depending on river conditions.4 There is also a substantial amount of transfer and exchange activity—as much as 100,000 acre-feet annually—among the 13 member agencies of the Kern County Water Agency who share a contract entitlement with the State Water Project. According to agency management, these transfers are essentially for convenience, facilitating the joint management of water from different sources (project, river, and groundwater) in different locations within the county. Within the Mojave Basin, where groundwater rights have been adjudicated, there is an active annual market among rightsholders that enables buyers to use more than their allotment. In 2002, these trades were estimated at over 30,000 acre-feet (Water Strategist, July/August 2002). Permanent transfers of drawing rights also occur within the basin. It 4 Personal communication, Tim O’Halloran, Kings River Water Association. -5- is likely that such local markets also are active in other adjudicated basins in Southern California. Finally, the paper will not report in any detail on groundwater banking, which, while not technically a transfer, frequently involves the movement of water among parties in manners akin to transfers. Storing, or “banking,” water in underground aquifers has been on the rise in California since the early 1990s. A number of water users have embarked on projects in which water is stored on behalf of the rights-holder by another party, at another more suitable location. These projects are by nature long-term arrangements that allow the rights-holder to respond to dry years by drawing down on stored reserves. Our records, limited mainly to the operations of the State Water Project contractors, show that close to 750,000 acre-feet were stored in such projects since the mid-1990s in various locations in Kern County. The first drawdowns occurred in 2001, a dry year. In some of the banking projects, a market exists for the permanent sale of storage rights—in effect, for ownership of a share of the bank facilities. Because banked water can be used in transfers, there are also direct links between banking projects and the annual water market. Transfers can involve not only water users with their own on-site banking projects, but also those banking at a distant location. A case in point was Santa Clara Valley Water District’s transfer of water banked in Kern County to the Environmental Water Account in 2001. -6- 3. Overall Market Trends A comparison of the annual volumes of water traded and rainfall trends since the mid-1980s makes it clear that the statewide water market got a “jumpstart” during the last multi-year drought (Figure 1). Market growth was largely driven by direct interventions of the Department of Water Resources. DWR began making dry-year purchases to offset lower deliveries to State Water Project contractors and wildlife refuges in 1988, the first year of the drought. These early operations, which involved only a handful of Sacramento Valley water districts (most notably the Yuba County Water Agency), quickly brought the total volume traded to over 500,000 acre-feet, three times the pre-drought levels. In 1991, when the dry-year market was opened up to any willing buyers and sellers, DWR purchased 820,000 acrefeet of water for resale, bringing the overall market volume to over 1.1 million acre-feet. Water banks and other dry-year purchases were also operated in 1992 and 1994. From 1988 to the end of the drought in 1994, state and federal dry-year purchases for resale and environmental uses Figure 1. Short and Long Term Water Transfers in California Since 1985 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 Acre-feet 0 18 17 16 15 14 13 12 11 Wet 10 9 8 Normal 7 6 5 Dry 4 3 Rainfall Index 22111111111111111009999999999999990099999999888889910987432109876565 Acre-feet traded Rainfall Source: PPIC water transfers database. For details see Appendix Table 1. Rainfall is measured by the Sacramento River 40-30-30 index. -7- accounted for over 40 percent of a market that had jumped from an average of 150,000 acre-feet to over 600,000 acre-feet per year. 5 Although the second half of the 1990s saw a succession of wet years, market activity remained strong, with volumes typically exceeding the drought year levels, especially by the end of the decade. The only dips in a generally upward trend occurred in the exceptionally wet years of 1995 and 1997, when many areas of the state experienced flooding. With annual trades now exceeding 1.2 million acre-feet—eight to ten times the levels of the mid-1980s—the market appears firmly established as a component of California’s water allocation process. It is also useful to consider the size and scope of the market from three other perspectives. First, at current levels, the statewide market represents only 3 percent of all water used by Californians for municipal, industrial, and agricultural purposes (DWR, 1998). Second, although there has been an increase in the number of long-term transfer agreements, the market continues to be dominated by short-term transactions, negotiated on an annual basis, which account for about 80 percent of the total volume transferred. Finally, the size and scope of the market are strongly influenced by the intervention of state and federal authorities. This influence stems not only from an important direct role in purchases, but also from the relative ease water users have in gaining approval for transfers within the confines of the state and federal projects. Since 1988, direct government purchases have accounted for nearly one-third of the total volume traded. Transfers among contractors within the same projects (SWP, CVP and the Colorado River Project) account for more than half of all water sold (Figure 2). Transfers within the CVP and the SWP have generally increased in response to the more flexible trading rules adopted by those projects in the early 1990s. The growth has been most pronounced within the SWP, for which internal transfers were rare prior to the Monterey Agreement. By contrast, the “open market,” a residual category defined broadly to include any transfers between water users not associated with the same project, accounts for only 15 percent of the water transfers recorded over the 14-year period. This share initially increased immediately after the drought, but it has been on the decline again recently, as direct government purchases for environmental programs have been on the rise. 5 The average market volume as measured by end user purchases is just over 500,000 acre-feet for the 1988-94 period. This discrepancy arises mainly because DWR’s purchases were higher than its resales to other users in some years. The gap was most notable in 1991, the first year of the water bank, when purchases exceeded resale volume by over 400,000 acre-feet. In several years in the 1990s, there were also smaller discrepancies between purchases and sales of water user pools, notably the SWP turn-back pool, described in the text, and the Sacramento River Water Contractors’ Association, a pool run by some CVP contractors. -8- Figure 2. Share of Water Transfers by Type of Market Within Colorado River Project 16% Within SWP 10% Direct government purchases 31% Within CVP 28% "Open market" 15% Share of total transfers, 1988-2001 (total volume 11 million acre-feet) Source: PPIC water transfers database. For details, see Appendix Table 1. -9- 4. Water for the Environment: A Key Factor in Market Growth The composition of final demand for water sold reveals that market growth in the aftermath of the drought has been largely driven by environmental concerns. The influence of environmental policy is most readily seen by comparing the patterns of water purchases during the multiyear drought (1988-94) and in the more recent period (1995-2001), when rainfall has generally been above normal (Figures 3a and 3b). The most obvious element of the new role for the environment is the rise in direct purchases for instream uses and wildlife refuges, through federal and state programs and most recently the CALFED Environmental Water Account (EWA). As one of the targeted beneficiaries of DWR’s drought purchases, the environment already accounted for 12 percent of demand during the 1988-94 drought. Since 1995, this share has doubled on average; it reached a third of total demand in 2001, the first full-fledged year of the EWA. On an average yearly basis, environmental purchases have increased by 155,000 acre-feet, out of a total market gain of 430,000 acre-feet. The less obvious component of environmentally related demand is the rise in purchases by San Joaquin Valley farmers. Although this group’s change in market share is less dramatic (moving from 37 percent to 44 percent over the two periods), its increase in volume (228,000 acre-feet per year) accounts for over half of total market growth. Much of this growth can be linked to the changes introduced under the CVPIA in 1992, which mandated that a portion of project water be returned to instream uses. Since then, the CVP’s agricultural service contractors located south of the Delta received full project deliveries in only the two very wet years, 1995 and 1997. One outcome has been the development of an active water market, as certain contractors (most notably Westlands Water District) seek to offset reductions in deliveries via purchases. Within the San Joaquin Valley, CVP service contractors’ market share of purchases has risen from 63 percent to 87 percent across the two time periods. The corollary of this growth has been a decline in the relative importance of municipal and industrial water users. Whereas cities were the main recipients of traded water during the 1988-94 drought with 42 percent of all purchases, their share since 1995 has been halved. With the exception of 1991, when purchases nearly reached 500,000 acre-feet, volumes have remained relatively flat, at around 200,000 acre-feet per year. The modest role of urban demand contrasts with the frequently voiced assumption that a water market would develop primarily as a response to population growth and the ability of urban dwellers to pay more than agricultural users for - 11 - water.6 As we will see below, cities are more significant players in defining the market for long-term and permanent transfers of water. This pattern suggests that their role may increase as this part of the market develops. Figure 3a. Annual Volumes Purchased by Type of End User 1,00 0,00 0 900,000 800,000 700,000 Acre-feet per year 600,000 500,000 400,000 300,000 200,000 10 0,00 0 0 1988-1994 Mixed uses Other farm ers SJ Valley farm ers Environm ent Citie s 1995-2001 Figure 3b. Market Share of End Users 10 0 % 90% 80% 70% 60% 50% 40% 30% 20% 10 % 0% 1988-1994 M ixed us es Ot her f armers S J Valley f armers E nvironment Cit ies 1995-2001 Source: PPIC water transfers database. For details, see Appendix Table 2. 6 See Vaux and Howitt (1984) for an early exposition of the economic arguments in favor of a water market in California. - 12 - 5. Agriculture’s Leading Role in Market Supply Economists have typically assumed that agriculture would be the leading source of supply, and this assumption is confirmed by the data. In most years, agricultural water users provide at least 90 percent of supply. It is nevertheless interesting to note that the post-Monterey introduction of “turn-back” pools within the State Water Project has made a significant amount of urban agency water available to agricultural users in wet years. Under the program, SWP contractors are able to sell back amounts of project water they will not need if there are willing SWP buyers.7 From 1998 to 2000, the turn-back pool generated 200,000 acre-feet or more of water per year, or roughly one-fifth of total market supply. Given the primacy of agricultural supply, it is not surprising to find that the main source regions are the Central Valley (served by the CVP, the SWP, and several large, autonomous, surface water projects) and the agricultural valleys to the south served by the Colorado River project (Table 1). In most years, the Central Valley has furnished about three-fourths of the total volume transferred. Within this region, there are pronounced shifts depending on the nature of the water year. From 1988 to 1994, Sacramento Valley farmers and districts supplied about 45 percent of all water sold. Although this share fell considerably after 1994 (in some years, to under 10 percent of the statewide market), the region again provided over 40 percent of the water in 2001, the first dry year experienced since the previous drought. In the interim, the market shifted to the San Joaquin Valley, which established a vibrant intra-regional market to supply water-short districts within the region. In every normal to wet year since 1993, the first year of CVPIA implementation, San Joaquin Valley farmers and districts have furnished at least half of the total amount transferred. It is common for agricultural districts in this region to restrict out-of-district transfers to cases where land in the recipient district is owned or leased by same farmer. The two Central Valley regions are the principal suppliers of environmental water (Table 1). There has been a major source shift from north to south of the Delta since the early 1990s drought, with the institution of restoration programs along the San Joaquin River system, supplied by area water districts. The Kern County water users have also been major suppliers of the EWA. Most environmental water is used in the region of purchase, the main exception being EWA purchases of water north of the Delta, which are used to facilitate the delivery of project water to users to the south while protecting Delta fisheries. 7 Because the sale price is fixed below the level of per acre-foot charges incurred by the seller for project water, the pool’s attractiveness to sellers is relative, not absolute: it enables them to pay less than full price for contract amounts in excess of current needs. - 13 - Table 1. Regional Sources and Destinations (Acre-Feet) Sales by Water Users Sacramento Valley San Joaquin Valley Southern California SF Bay Area Other Total sales* 1988-1994 1,924,937 1,363,037 970,942 87,195 3,055 4,349,166 1995-2001 1,057,064 3,715,039 1,577,597 82,575 88,694 6,520,969 Purchases by Water Users Sacramento Valley San Joaquin Valley Southern California SF Bay Area Other 135,079 1,450,917 1,187,157 313,197 6,152 515,509 3,253,292 1,234,555 43,505 14,993 Purchases of Environmental Water - % from Sacramento Valley - % from San Joaquin Valley 408,672 74% 25% 1,484,255 17% 81% Total purchases* 3,501,174 6,546,109 Exports (imports) of Non-Environmental Water Sacramento Valley 1,488,725 San Joaquin Valley (190,683) Southern California (216,215) SF Bay Area (230,738) 288,383 (739,455) 343,042 9,070 Source: PPIC water transfers database. For details, see Appendix Tables 3 and 4. Note: The bulk of the difference between total purchases and total sales in the first period is the surplus purchased by DWR and distributed through means other than resales. There were also some small discrepancies in both periods between purchases and sales of user pools. See footnote 4 in text. The Southern California region, defined broadly to include both the desert counties and the coast, generates most of the remaining quarter of total supply. The largest single source has been the Imperial Irrigation District, which has operated a 110,000 acre-feet per year long-term transfer with the Metropolitan Water District of Southern California (MWDSC) since 1988. In the mid-1990s, there was also a large two-year transfer to the MWDSC by the Palo Verde Irrigation District, another agricultural contractor on the Colorado River Project. - 14 - With the exception of the early 1990s drought, when several Bay Area cities made substantial purchases, no other region has played a significant role in the market on either the supply or demand side. The Bay Area’s share in demand has dropped from 9 percent of the total in the drought years to only 1 percent in the more recent period. This region’s share in supply is about 2 percent. - 15 - 6. Most Transfers Are Local or Regional We have already seen that the San Joaquin Valley is both a major supplier and purchaser of water. The market in Southern California is also primarily regional in nature (Table 1). The only “exports” are the transfers by municipal agencies to the SWP turn-back pool, purchased by San Joaquin Valley agricultural districts. In the Sacramento Valley, the only region in the state where water users purchase significantly less than the volume sold, exports are concentrated in dry years. In years with normal to high rainfall, two-thirds of the water is transferred to other water users within the region. Another way of seeing the shares of local and regional markets is to look directly at the source of water obtained by users. Figure 4 shows this breakdown, for non-environmental water only, according to the location of the selling party in relation to the buyer.8 Figure 4. Non-Environmental Water Purchases by Location of Selling Party 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990-1994 (525,000 af/year) 1995-2001 (720,000 af/year) Seller in other region (through bank or pool) Seller in other region (direct) Seller in same region Seller in same county Source: PPIC water transfers database. 8 The first period of reference in this figure is 1990-94 (instead of 1988-94) because detailed county breakdowns are more accurate from 1990 on. - 17 - Nearly one quarter of total volume is purchased from parties in the same county, and another half from parties in the same region. Interregional transfers account for the remaining 25–30 percent of the market.9 Of this total, a relatively small fraction (one-fifth) results from transfers negotiated directly between parties in different regions; the lion’s share moves through banks and pools run by DWR. This pattern highlights again the very important role played by the government agencies in California’s water market. When the agency acts as an intermediary, it is able to facilitate the movement of water across the Delta. Interregional transfers between districts without agency involvement face significant complexities. Agency input has been crucial in successful district-to-district transfers across regions—for instance the 2001 “forbearance program” of the CVP contractors, which moved 160,000 acre-feet from Sacramento Valley water users to the Westlands Water District. 9 Because this graph presents data from the standpoint of end user purchases, it only includes the water bank volumes that were actually resold in the first period, not the full amounts acquired by DWR. - 18 - 7. From Farms to Cities: A Key Element of LongTerm and Permanent Transfers From 1985 to 2001, our records show 14 approved long-term transfers, and as many permanent transfers of surface water rights or entitlements. At least ten additional transfers are currently pending approval. As noted, longterm transfers have generally accounted for about one-fifth of volumes traded since the late 1980s. Volumes traded surpassed the 250,000 acre-feet mark for the first time in 2001. Contract duration runs from a low of two years to a high of 35, with an average of 15. The permanent transfers, bunched at the end of the decade, total another 175,000 acre-feet. These mainly concern the transfer of SWP contract entitlements under the Monterey Agreement (representing close to 130,000 acre-feet), and the transfer of pre-1914 water rights among parties within Kern County. The striking aspect of these transfers is that they almost all involve shifts of water from agricultural to urban uses. The handful of exceptions includes two long-term deferred exchanges between districts with a large municipal customer base (Solano County Water Agency and the Mojave Water Agency; Placer County Water Agency and Northridge Water District), and several long-term transfers from agricultural districts to the environment (most notably, as part of the negotiated agreement for the restoration of the San Joaquin River). Only two long-term transfers between agricultural districts appear, one in the Sacramento Valley and one in San Joaquin, and two permanent transfers of contract entitlement among agricultural users (both in the San Joaquin Valley). Thus, agricultural users remain the largest single source of demand for water in today’s market, but they conduct their purchases almost entirely through temporary arrangements. In light of the rapid population growth rates being experienced in the state, it is not surprising that municipal agencies are taking the lead in negotiating long-term and permanent arrangements for water supply. Legislation passed in 2001 requiring local governments to demonstrate adequate water supplies for development should increase urban demand for long-term water transfers. - 19 - Conclusion Jumpstarted by a prolonged drought in the late 1980s and early 1990s, California’s water market has now become a firmly established feature of the state’s water allocation process. The market remains largely intra-regional in nature, with most transfers across regions directly intermediated by the state’s Department of Water Resources. The market is also highly segmented, with over half of the volumes traded among contractors of the large state and federal water projects and another third involving direct purchases by state and federal agencies for drought relief and environmental mitigation. Outside of drought years, when urban agencies have been important buyers, the main sources of demand have been directly and indirectly linked to environmental concerns. Direct purchases for the environment (for instream uses and wildlife reserves) have accounted for over one-third of the increase in purchases since 1995. The other growth sector has been agriculture in the San Joaquin Valley (accounting for over half of market expansion), as farmers whose contractual water deliveries have been cut in the context of environmental mitigation programs have turned to the market for replacement water. Municipal agencies are the principal buyers of long-term and permanent contracts. Their role promises to increase as this part of the market—still modest—develops in the years ahead. - 21 - References California Department of Water Resources (DWR), California Water Plan Update (Bulletin 160-98), November 1998. Lund, Jay R., Morris Israel, Richard Kanazawa, “Recent California Water Transfers: Emerging Options in Water Management,” Center for Environmental and Water Resources Engineering, Department of Civil and Environmental Engineering, University of California Davis, Report 92-1, November 1992. Sunding, David, “The Price of Water…Market-based Strategies are Needed to Cope with Scarcity,” California Agriculture, Vol. 54, No. 2, pp. 56–63, MarchApril 2000. Vaux, H.J. and Richard E. Howitt, “Managing Water Scarcity: An Evaluation of Interregional Transfers,” Water Resources Research, Vol. 20, No. 7, pp. 785–792, July 1984. - 23 - Appendix: Supplementary Tables Appendix Table 1. Short and Long-Term Water Transfers in California, by Type of Market (Acre-Feet) Year Direct Total % Long- Government Transfers term Purchases 1985 78,781 0 3,308 1986 156,669 0 0 1987 168,143 0 0 1988 320,872 34 119,031 1989 513,731 21 239,000 1990 566,633 19 131,409 1991 1,139,653 10 864,315 1992 565,551 24 217,983 1993 547,090 37 1,703 1994 721,916 24 302,852 1995 454,095 25 54,090 1996 825,185 13 69,216 1997 1,038,980 11 291,500 1998 653,054 21 60,748 1999 1,078,299 13 229,059 2000 1,281,305 14 276,290 2001 1,257,118 22 584,349 Within Within CVP CO Within River SWP Project 52,216 15,489 0 147,447 7,950 0 70,622 6,171 0 87,141 300 110,000 *152,584 2,691 110,000 *177,142 3,561 110,000 *102,202 2,696 110,000 *155,786 4,919 138,301 *213,782 197 202,989 *218,400 1,726 174,688 182,829 4,500 110,000 270,282 207,496 110,000 216,159 66,144 110,000 145,026 201,810 110,000 *368,348 241,390 110,000 369,759 286,305 110,000 440,252 18,240 110,000 "Open Market" 7,768 1,272 91,350 4,400 9,456 144,521 60,440 48,562 128,419 24,250 102,676 168,191 355,177 135,470 129,502 238,951 104,277 Source: PPIC water transfers database. Note: In years indicated by an asterisk, volume adjusted to account for incomplete data on the Friant Unit of the CVP (see footnote 2 in text). - 25 - Appendix Table 2. Water Purchases by Type of End User (Acre-Feet) Municipal Total & SJ Valley Other Mixed Year Purchases Environment Industrial Farmers Farmers Purpose 1985 78,781 3,308 5,000 44,518 3,768 22,187 1986 156,669 0 5,000 69,589 13,740 68,340 1987 168,143 0 44 43,741 10,350 114,008 1988 320,872 119,031 110,500 38,878 12,366 40,097 1989 357,283 39,000 131,043 157,021 30,219 0 1990 453,576 1,500 146,735 260,562 33,779 11,000 1991 703,329 64,612 477,292 104,892 6,863 49,670 1992 530,305 101,726 198,473 188,592 12,163 29,351 1993 546,266 1,703 208,208 293,838 42,517 0 1994 615,397 81,100 203,997 249,215 27,830 53,255 1995 511,904 111,899 112,667 279,331 8,007 0 1996 825,185 72,216 220,308 503,548 29,113 0 1997 1,037,808 293,000 191,402 439,322 14,084 100,000 1998 554,411 61,748 215,956 211,029 65,678 0 1999 1,078,379 229,459 173,988 556,980 72,592 45,360 2000 1,281,305 276,290 169,826 507,841 94,146 233,202 2001 1,257,117 445,543 261,922 388,401 112,776 48,475 Source: PPIC water transfers database. Note: For discrepancies between total transfers (Appendix Table 1) and total purchases by end user listed here, see footnote 4 in text. - 26 - Appendix Table 3. Transfers by Region of Origin and Region of Destination (Acre-Feet) Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sales by Water Users San San Sacramento Joaquin Southern Francisco Valley Valley California Bay Area 8,693 55,183 9,887 5,018 13,740 131,682 6,247 5,000 93,450 68,478 6,171 44 131,397 78,975 110,500 0 301,023 102,708 110,000 0 252,328 191,525 110,000 11,700 700,720 271,572 113,206 53,905 218,521 193,659 142,364 11,007 17,910 290,446 208,084 5,650 303,038 234,152 176,788 4,933 22,097 321,331 110,000 667 57,773 459,704 224,078 20,267 164,375 721,311 136,958 9,991 79,349 257,385 294,778 4,000 107,251 620,324 305,932 9,650 105,571 760,142 377,611 6,000 520,648 574,842 128,240 32,000 Other 0 0 0 0 0 1,080 250 0 25,000 3,005 0 63,363 6,345 17,542 35,142 31,981 1,388 Purchases by Water users (Non-Environmental Water) San San Sacramento Joaquin Southern Francisco Valley Valley California Bay Area 7,943 61,762 0 5,018 13,740 137,929 0 5,000 10,350 74,649 0 44 12,366 78,975 110,500 0 30,219 157,021 110,000 21,043 34,879 260,562 110,000 35,535 6,013 154,562 325,736 152,156 12,641 203,089 152,364 45,509 11,867 293,838 202,989 30,219 27,094 302,870 175,568 28,735 10,007 279,331 110,000 667 33,113 506,548 215,641 667 114,084 440,827 190,730 667 68,378 212,129 207,156 6,000 75,582 603,348 168,380 2,000 82,334 771,343 124,926 26,412 132,011 439,766 217,722 7,092 Other 750 0 0 0 0 100 250 122 5,650 30 0 0 0 0 10 0 14,983 Source: PPIC water transfers database. - 27 - Appendix Table 4. Source Regions for Environmental Water Purchases (Acre-Feet) San San Sacramento Joaquin Francisco Year Valley Valley Bay Area 1988 119,031 0 0 1989 39,000 0 0 1990 1,500 0 0 1991 64,612 0 0 1992 52,525 20,000 4,736 1993 0 1,703 0 1994 0 81,100 0 1995 69,899 42,000 0 1996 16,660 55,556 0 1997 45,517 247,483 0 1998 10,748 51,000 0 1999 21,559 207,900 0 2000 9,795 266,495 0 2001 80,000 335,543 30,000 Source: PPIC water transfers database. - 28 - PUBLIC POLICY INSTITUTE OF CALIFORNIA Board of Directors Raymond L. Watson, Chair Vice Chairman of the Board The Irvine Company William K. Coblentz Partner Coblentz, Patch, Duffy & Bass, LLP Edward K. Hamilton Chairman Hamilton, Rabinovitz & Alschuler, Inc. Walter B. Hewlett Director Center for Computer Assisted Research in the Humanities David W. Lyon President and CEO Public Policy Institute of California Cheryl White Mason Chief, Civil Liability Management Office of the City Attorney Los Angeles, California Arjay Miller Dean Emeritus Graduate School of Business Stanford University Ki Suh Park Design and Managing Partner Gruen Associates A. Alan Post Former State Legislative Analyst State of California Constance L. Rice Co-Director The Advancement Project Thomas C. Sutton Chairman & CEO Pacific Life Insurance Company Cynthia A. Telles Department of Psychiatry UCLA School of Medicine Carol Whiteside President Great Valley Center Harold M. Williams President Emeritus The J. Paul Getty Trust and Of Counsel Skadden, Arps, Slate, Meagher & Flom LLP Advisory Council Clifford W. Graves Vice Chancellor, Physical Planning University of California, Merced Elizabeth G. Hill Legislative Analyst State of California Hilary W. Hoynes Associate Professor Department of Economics University of California, Davis Andrés E. Jiménez Director California Policy Research Center University of California, Berkeley Rudolf Nothenberg Chief Administrative Officer (Retired) City and County of San Francisco Manuel Pastor Professor, Latin American & Latino Studies University of California, Santa Cruz Peter Schrag Contributing Editor Sacramento Bee James P. Smith Senior Economist RAND PUBLIC POLICY INSTITUTE OF CALIFORNIA 500 Washington Street, Suite 800 San Francisco, California 94111 Phone: (415) 291-4400 Fax: (415) 291-4401 www.ppic.org info@ppic.org"
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