Let Markets Allocate Water - With Brakes

THE Reclamation Era has ended in the West. We can no longer rely on the federal government to build new reservoirs to meet growing demands, which are primarily urban and environmental uses.

Instead, water to meet new demands will have to come from reallocating existing supplies. This means irrigated agriculture must give up some of the lion's share of the water captured through the legal doctrine of prior appropriation.

Essentially two issues have come to dominate the water agenda in many states: How should water be reallocated? And what happens to the users and communities who lose their water?

There are three ways to reallocate water. Courts can do it, as the California Supreme Court did when it invoked the public trust to limit Los Angeles diversions from the creeks that feed Mono Lake. Administrative agencies can shrink water rights by finding that a use is wasteful. Finally, water markets can reallocate water by transferring it from willing sellers to willing buyers.

The last option, water marketing, has the greatest potential to reallocate water fairly and efficiently. Large segments of the environmental community and urban water suppliers have embraced the concept. Reliance on water marketing, as opposed to government subsidy or regulation, reflects a general belief that markets are more effective in allocating scarce resources to meet the twin goals of efficiency and equity.

Markets respond to price signals to move resources from lower- to higher-valued uses. Markets respect existing property entitlements, and thus water-rights holders set the pace of transition and receive compensation when water is transferred. Sales of existing water rights can move needed water to both cities and environmentally sensitive areas. For example, transfers from an irrigation district east of Reno, Nev., are being used to restore a world heritage wildlife refuge. Water transfers will remain a central component of water policy in the next century.

THERE is, however, a need for caution about the use of markets to reallocate water to meet new demands. Water markets cannot be expected to resemble more conventional markets for a variety of reasons, including the concentration of large blocks of water in public and private entities, the long tradition of subsidized water, and the equally long tradition that water uses must support the maintenance of a wide variety of public values. Thus, transfers must be carefully evaluated. They can impose significan t costs - some concrete and others difficult to measure - on third parties. Small rural communities, Indian tribes, and ethnic communities - witness the Hispanic villages' dependence of acequia irrigation in northern New Mexico - are most at risk when large blocks of water are moved to new uses.

A recent study conducted by the Water Science and Technology Board of the National Academy of Sciences found that transfers have great potential, but emphasized that the goal of modern water policies should not be to promote transfers per se, but to use them to accomplish better overall water management.

To date, most analysis has concentrated on ways to lower the transaction cost of transfers. Often neglected, however, are the significant third-party effects often caused by transfers. If transfers are to achieve their potential, decisionmaking should bring third parties into the deliberations. This participation is necessary because water is a unique resource, different from other commodities, and markets alone cannot accurately reflect all the relevant values.

The board concluded that allocation processes should give third parties with water rights, and those without them, a legally recognized interest in transfers. States, the study recommended, should develop new ways to consider such interests. Expanded criteria and new processes are needed to evaluate transfers and to accommodate the diverse economic and cultural values associated with water use.

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