Water Markets DO NOT Already Exist in California: So Few Trades, So Few Actors…But That will Change (Aguanomics)

Jan.21, 2009 in Public Works, Water Industry, Water Rights

(Jan. 21, 2009, Aguanomics)

So, a few days ago Mike Wade said that “water markets” already exist in California, but facts appear to contradict that assertion.

As a businessman once said to me “Water markets? Great — where does the WSJ publish the price?”

In fact, water IS traded here and there in California, but there are so few trades, among so few actors, at such heterogeneous terms that it’s hard to conclude that a water “market” exists in anything like the form we are used to seeing with, say, oil or corn or houses.

Taking that disclaimer as given, let’s look at what data DO exist on water markets.

First is this 2002 PPIC paper [PDF] by Ellen Hanak. Here’s the money quotation:

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… 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.So 15 percent of 3 percent means that basically no water is reallocated in what would be considered arms-length transactions.

The reason, as Hanak indicates, is that the transactions costs of trades (paperwork, infrastructure, etc.) are so high. That’s perhaps why California’s Drought Water Bank looks likely to handle only 150-600TAF of water in a year of very high demand. (The State’s “developed” water supply is 40,000TAF, so that’s less than one percent.)

Note that the temporary nature of these water trades is not necessarily a problem. Few transactions would occur if the only option is permanent sale. Seasonal leasing of water (generally from agricultural to urban sectors) can be helpful in the short run, and cities would rather have some water for a season than none at all.

Second, there is a comprehensive database maintained by Zack Donohew and Gary Libecap, i.e.,

This is a dataset of [over 4,000] water right transactions in the western United States. The data are drawn from water transactions reported in the monthly trade journals the Water Strategist and its predecessor the Water Intelligence Monthly from 1987 through November 2008. The Water Strategist publishes a section called “Transactions” that lists, by state, water transfers. From these publications, all or a subset of the following are collected: the year of a water transfer; the acquirer of the water; the supplier; the amount of water transferred; the proposed use of the water; the price of the trade; and the terms of the contract.So there is some kind of data available, but prices are not often comparable (within season, there are differences in quality and transactions costs; across seasons, supply and demand shift quite a bit). So, no, there are no water markets in California (or much of the West, for that matter).

Note 1: My All-in-Auctions would change all this, btw, because water would be seasonally reallocated — by price — among all members of a given water organization (MWDSC, IID, CGID, et al.)

Note 2: If anyone has a good description of water markets elsewhere in the world (e.g., Chile, Colorado), then please email it to me!

Bottom Line: Most places in the world (!) do not have water markets. Because of this, most people do not know the “value” of water, water misallocation is hard to detect, and the social benefit from water is NOT maximized. Markets please!

(Original Article Here)