Introduction

In California, everyone needs water. Farms, cities, industry and the environment all rely on this essential element for life. But sometimes there is not enough water to go around. Geography limits supply. Drought limits supply. Environmental restrictions limit supply. Growth limits supply. Wasteful or unreasonable use limits supply. Court decisions can limit supply.

One way to try to alleviate water shortfall is by moving water from where there is more to where there is less. In California, such transfers of water are frequently accomplished using rivers and through the intricate network of reservoirs, aqueducts, pipes and canals, branching throughout the state, that compose the State Water Project (SWP) the Central Valley Project (CVP), and the Colorado River Aqueduct.

The state’s geography and hydrology stimulate significant transfers of water from the wet, northern portion of the state, to the dry, southern end where the majority of the population lives. Water banking and conjunctive use, other elements in alleviating shortages and both closely tied to water transfers, allow for the storage of water in underground aquifers for use in dry years. Semitropic Water Storage District, Arvin-Edison Water Storage District and the Kern Water Bank are already playing a role by storing water for water purveyors.

However, in spite of preparing for inevitable water shortages, California’s complex system of water rights, state and federal regulations and weather patterns can leave gaps in the water supply. Some propose alleviating those deficiencies through water marketing.

Water marketing is as it sounds – the process of buying, leasing or selling water or water rights to gain access to a water supply – and for most of us, this equation of supply and demand is nothing new. But water marketing is challenging because there is no formal water market. Instead, water marketing transactions are conducted between willing buyers and willing sellers without using a centralized statewide location. A 1999 report by the California Legislative Analyst’s Office entitled The Role of Water Transfers in Meeting California’s Water Needs calls for creating a central location to disclose information about transfers – both historical and current – not unlike what CALFED, the state/federal body in charge of “fixing” the Sacramento-San Joaquin Bay-Delta, is beginning to do with its On-Tap website. (See page 11)

California came closest to a water market during the Drought Water Bank in 1991, 1992 and 1994. But even that was not a true “free market” since there was only one buyer and seller, the Department of Water Resources (DWR), and the price for the water market was fixed. In light of the recent energy problems and many blaming deregulation, there is skepticism by some that an open water market will work.

Part of the problem, say those involved with marketing and transfers, is the lack of understanding about what exactly is marketable water, particularly over “paper water,” or water that a seller is legally entitled to but not water that has been historically used.

“Some people feel you should be allowed to transfer paper water,” said Jerry Johns, assistant division chief with the State Water Resource’s Control Board (State Board) Office of Water Rights, “but when you do that, you’re likely to be causing injury.” (See page 7.)

Most water marketing transactions are short-term (less than one year), between farmers (ag-to-ag) and within the same water district. Usually water is leased for a period of time, though the actual water right can be sold as well. Out of district, long-term transfers are more rare and, in some cases, illegal because of district, county, state or federal restrictions.

“One of the caveats as you open a market is that the economics are more favorable for an urban user than an agricultural user,” said Brian Hauss, supervisor of water resources for Westlands Water District. “Our growers cannot afford the prices for water that these municipal and industrial urban users are paying.”

With many of California’s urban centers growing rapidly, many are maxing out their water supplies. Traditional developed water supplies have been fully allocated and yet growth continues and during certain times of the year, environmental restrictions are placed on pumping. These issues are prompting many cities to search for alternative sources of water. As a result, many are looking to willing sellers in order to meet their water needs for the long-term and are increasingly turning to agriculture – the user of approximately 80 percent of the state’s developed water supply. A recent example of this is the 45-year transfer pending between Imperial Irrigation District and the San Diego County Water Authority.

But farm districts and cities aren’t the only ones looking to get a piece of the action. A slew of entrepreneurial companies, Western Water, Azurix and Cadiz Inc., are all vying for the ability to turn a profit by marketing water in the Golden State.

Metropolitan Water District of Southern California (MWD) recently has made an unprecedented move to open its facilities to help facilitate marketing by creating a uniform wheeling charge. The district also has initiated a competitive process to purchase options on up to 100,000 acre-feet of water for transfer into its service area during dry years and supply interruptions. This is the first time that MWD has solicited statewide water transfers in hopes of facilitating a competitive water market for dry-year needs. The agency also is considering a public/private partnership with Cadiz for a pending conjunctive use and water marketing deal. (See page 10.)

“The market has evolved from being one that is legislated and deliberated in Sacramento through lobbyists to one that is based on public process requiring environmental documentation and analysis,” said Adan Ortega, senior executive assistant to the general manager for external affairs at MWD. “It’s setting the benchmark in terms of how we are dealing with the market in California.”

But for many of the private companies, water marketing thus far has been anything but a cash cow. Most of the companies are finding substantial political, physical and even scientific hurdles hindering their involvement.

“I think we, within the water community, have constructed a public policy box where we’ve all acknowledged that transfers are critical and yet we’ve been very unwilling to look at what makes transfers possible and who and what interests prevent transfers from happening,” said Michael George, CEO and President of Western Water Co., a private wholesaler of water in California.

Overseeing transfers are agencies such as DWR, the U.S. Bureau of Reclamation (Bureau) and the State Board, which have established “rules” for marketing and transferring water. Similarly, the California Water Code has established guidelines for what is transferable water. Depending on the type of right associated with the water proposed for transfer, approval may be required from these regulatory agencies for changes in place or purpose of use.

In its 2000 Record of Decision (ROD), the CALFED agencies promote the CALFED Water Transfer Program to “encourage the development of a more effective water transfer market that facilitates water transfers and streamlines the approval process while protecting water rights, environmental conditions, and local economic interests.” The ROD calls specifically for new legislation that addresses problems plaguing the water market such as wheeling and permitting. Also included as part of CALFED is the Environmental Water Account, in essence, a way to benefit the environment by purchasing water to modify project operations. (See page 12.)

“Rather than building new dams to increase supply, we are working to reallocate water and use it more efficiently,” said Michael Cohen, a research associate at Pacific Institute.

Third-party impacts resulting from water transfers are of high concern. Groundwater overdraft, economic repercussions from land fallowing, impact on downstream users and changes to instream flows that can impact wildlife are just some of the potential repercussions from water marketing.

To top it off, the recent energy crisis in the state has raised the eyebrows of some when mention is made of establishing a more open water market.

This issue of Western Water provides a glimpse into current and potential uses for a water market. More background information is available in our Layperson’s Guide to Water Marketing.

NOTE: A complete copy of this 16-pager magazine is available from the Foundation for $3. Visit our on-line store and add the March/April 2001 issue of Western Water to your shopping cart. Or, contact us by phone at 916-444-6240.

Editor’s Desk

In California, it looks like we are headed for a dry year. The state luckily experienced a series of unusually wet years since the time of the last critical water shortage – the 1987 to 1992 drought. During these wet years, diverse stakeholders have made many agreements. The wet years have helped ease some of the immediate pressure for water and should allow for some long-term strategizing. It was during these wet years that the Bay-Delta Accord was signed and the CALFED Bay-Delta Program was born. Progress among stakeholders will be at risk if the state experiences a series of dry years and tensions rise.

We can’t predict the future. We can only prepare. The state Department of Water Resources has done just that for the recently formed Governor’s Advisory Drought Planning Panel. Among the actions suggested by the panel are further development of an effective market that facilitates and streamlines the approval process for water transfers and the continued development of the Environmental Water Account. So it seems timely that this issue of Western Water, written by Foundation Writer Josh Newcom, updates readers on the latest developments in California’s attempt to create an effective and fair water market.

The diversity of California’s water interests are well represented on the Water Education Foundation’s Board of Directors. I would like to take this opportunity to thank them for their service and the advice that they give – all without financial compensation.

We are especially grateful for the wise counsel of our president, Dr. Henry Vaux Jr., associate vice president of the Division of Agriculture and Natural Resources at the University of California.

Other board members and their affiliations: Gloria Anderson, League of Women Voters; Michael Armstrong, Marina Coast Water District; Jean Auer, Southern California Water Co.; Fred Cannon, Cal Fed Bank; Robert Clark, Central Valley Flood Control Association; Vernon Crowder, Bank of America; Dennis Diemer, East Bay Municipal Utility District; Harrison “Hap” Dunning, The Bay Institute of San Francisco; Donald Evenson, Montgomery Watson; Edward “Jerry” Gladbach, Castaic Lake Water Agency; Robert Hagan, University of California; Philip Hall, CH2M Hill; Gary Hansen, Colorado River Indian Tribes; Norris Hundley, University of California; Leslie Friedman Johnson, The Nature Conservancy; Homer Lundberg, Lundberg Family Farms; Tim Quinn, Metropolitan Water District of Southern California; Suzanne Redfern, Redfern Ranches; Anthony Saracino, Groundwater Resources Association of California; Jesse Silva, Imperial Irrigation District; Frances Spivy-Weber, Mono Lake Committee; Edward Tiedemann, Kronick, Moskovitz, Tiedemann & Girard; Gary Weatherford, Weatherford & Taaffe; and Walter Yep, Walter Yep Inc.

– Rita Schmidt Sudman

In the News

DWR Lights the Way for Power Purchases

Buying power is nothing new for the California Department of Water Resources (DWR). As the operator of the State Water Project, DWR is responsible for buying all the power needed to keep one of the state’s vital water arteries, the California Aqueduct, flowing. However, DWR’s power purchasing jurisdiction expanded enormously in late January when the Legislature passed emergency legislation endowing DWR with the responsibility of acquiring power to help meet the state’s electricity shortfall.

Initially, the state allocated $400 million in an emergency measure to meet statewide power needs, but that money evaporated in a little over a week, leaving the coffers for emergency power empty. In the meantime, DWR has shifted in its role as one of the state’s major water suppliers to also being the financier and purchaser for the state’s power needs.

Under the AB X1 Act, DWR can authorize revenue bonds (up to $10 billion) for purchasing power – the only branch of the state with the authority to do so. Reports are the state may be issuing the full $10 billion to offset the over $13 billion in debt accrued by power providers. In the meantime, revenue was temporarily pulled from several water projects around the state and placed in a special Treasury Office fund. Here is a list of the re-allocated moneys:

• $235 million from the Colorado River Management Account: $200 intended to line the All-American Canal as part of a water conservation deal critical to what is commonly known as the 4.4 Plan. The lining will allow Imperial Irrigation District to conserve water for sale to San Diego and also will be used to meet a 16,000 acre-foot water settlement with the San Luis Rey Indian Tribe. Also $35 million for conjunctive use programs in southern California;
• $135 million intended for use on water quality and environmental improvements in the Sacramento-San Joaquin Delta stemming from the $8.6 billion budget of CALFED;
• $70 million in statewide flood protection moneys.

The shift in funding for the canal lining, a cornerstone piece of the California water use plan for the Colorado River, may raise the eyebrows of some. But representatives from the San Diego County Water Authority, the recipients of the conserved and transferred water, say they’re not worried.

“Absolutely, we are concerned,” said Gordon Hess, a spokesperson for the authority, “but we’ve received assurances from state officials that they’re confident the funding will be restored. Gov. Davis has been very supportive of the Colorado River water use plan.”

To date, $302 million of the $440 million in re-allocated funds has been spent, according to Lucinda Chipponeri, DWR’s assistant director for legislation. Chipponeri said plans are to return the unspent $138 million to CALFED for the pressing needs of the Environmental Water Account. (See page 12 of main Western Water article.) Chipponeri said the spent re-allocated funds should be repaid in the upcoming weeks through a bridge loan program with the revenue bond program established in late May or early June.

– Josh Newcom