The problem of water.

Libecap, Gary D.

Living with Water Scarcity

By David Zetland

124 pp.; Aguanomics Press, 2014

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As I write this, California is in the midst of a severe drought that the National Climate Assessment Review claims is a consequence of climate change (never mind that tree-ring data show that California long has experienced severe drought). Water has always been important in the West, but now it is one of the top political issues.

Challenges include how Co get urban users to conserve (e.g., replace landscaping with drought-tolerant varieties, install low-flush toilets), augment urban supplies (e.g., desalinization, recycling), shift some water use away from agriculture (where up to 80 percent is now consumed), and protect natural habitats (e.g., instream flows, endangered species, recreational use).

Those challenges can be addressed far more straightforwardly than is evident in most of the policy discussions. Solutions lie in strengthening existing private water rights, improving water measurement, and defining groundwater rights and the hydrological links between surface and groundwater use. Other possible steps include providing trading platforms, streamlining the regulatory process for water rights trading, and continuing adjustments in beneficial-use requirements for maintaining water rights to include environmental flows.

With clearly defined private rights, markets reallocate water to meet new demands, communicate opportunity costs, signal scarcity, and provide incentives for irrigators, urban dwellers, industrial users, and environmentalists to moderate demand and invest in conservation. Remedies can be quite simple because a water rights system is already in place. We need only clarify those rights where they are ambiguous, as I discuss below.

Unfortunately, this opportunity is not the one called for by advocates for greater state intervention, regulation, and management. For many, the public nature of water makes meeting resource challenges through markets inappropriate, and hence the corresponding demand for government action. Viewing water as a public resource rather than a private one limits entrepreneurial solutions to the problem of water. Pronouncing water a public resource places so many interests at the policy table that few creative solutions emerge--there are too many conflicting objectives and no clear way of arbitraging across them. Gridlock and waste are the results. This is Michael Heller's tragedy of the anticommons, whereby multiple gatekeepers block socially productive results.

Water in the West/ Where does the public nature of water come from? One source is that water is necessary for life, and in semi-arid and arid regions communities congregate around water sources and only there can natural habitats flourish. Hence, water supposedly is too critical to be entrusted to markets. State ownership, distribution, and management are the alternatives. These are the conditions faced in most of the world and they provide many of the examples of corruption, waste, and neglect that David Zetland cites in his new book, Living with Water Scarcity.

A strong claim for the public nature of water was made in Joseph Sax's influential 1970 Michigan Law Review article that called for water to be a public-trust resource, an issue I examine below. Another source is the recognition that multiple parties share the same water. For example, under the "prior appropriation" doctrine that grants water rights on the basis of time of claim in the U.S. West, initial water diverters may consume 50 percent or less of it, with the remainder percolating back to the source for subsequent use by others. Changes in consumption reduce return flows, possibly affecting third parties. This is the basis for regulation of water trades, and some states like New Mexico accomplish this more smoothly than do others like California where the process is more cumbersome.

The private nature of water arises because water is a productive input into virtually every human activity, from food production, to copper

mining, to Google Internet searches, to recreational fisheries and river rafting. Water can be measured and bounded, though that can be difficult because water is a fluid. Nevertheless, water can be partitioned among competing uses so as to avoid open access and the tragedy of the commons. Water can be traded. Where private water rights exist, water is conserved and effectively used far better than where private water rights do not exist, such as in many developing countries where water is a communal or state-owned resource. Accordingly, the problem of water is due to the lack of definition of water rights and missing markets, rather than a fundamental, unique characteristic of the resource.

Prior-appropriation water rights developed in the U.S. West through first possession in the same manner as private rights to mineral and agricultural lands. Claimants searched for stream locations where flows would last through much of the year, filed for ownership of sufficient water to meet their needs, and constructed diversion dams and ditches to transport water.

The water had to be put to beneficial use so that excess remained for others. Under this arrangement, mining and agriculture--the two early sources of the region's economic development--grew. Mutual ditch companies or irrigation districts were formed to coordinate infrastructure investment. Later, the Federal Bureau of Reclamation (BOR) provided dams, canals, and agricultural subsidies--a result of interest-group politics. After 1926 the BOR could only contract with irrigation districts for water delivery.

Urban areas also got into the act. Los Angeles built the Los Angeles Aqueduct and later the Colorado Aqueduct to transport water to the city, as did San Francisco from Hetch Hetchy. To obtain water, Los Angeles bought water rights from farmers in the Owens Valley, an exchange that has been misrepresented by critics of water markets. (See "The Myth of Owens Valley," Vol. 28, No. 2.) California's State Water Project largely is designed to bring water from the north to the highly urbanized south. Water potentially can be bought and sold along the system's vast infrastructure.

Rising urban use today, along with increased demands for stream-flow maintenance, calls for movement of water from historical agricultural uses to cities and the environment. Drought intensifies the need for reallocation. This does not have to be a problem, however. More water can be purchased. Unfortunately, what could be a straightforward process has been made more difficult by the refusal of many advocates to rely on existing water rights and by the failure of politicians and agency officials to smooth the regulatory process. As a result, formal water trades in California, for example, have been flat since roughly 2005 despite the drought, and throughout the West water marketing is far more limited than one would expect.

Why is that? It is because too many parties want additional water without paying for it, an objective legitimatized by the public trust doctrine. Accordingly, water does not flow routinely from one use to another through markets as demands and supplies shift. The failure to rely on markets means that opportunity costs are not fully reflected in new calls for environmental flows, in construction of desalinization plants and other supply-augmentation capital, and in farm planting and urban development decisions. Moreover, incentives for conservation or investment in water quality are diminished. Not all water would leave agriculture, but water of lower marginal value would move to other applications.

Missed opportunities/ In his book, Zetland had an opportunity to clarify the policy debate because he generally understands water and he writes well and engagingly. But it is an opportunity that was missed. Living with Water Scarcity is a short book of water parables--so many are presented that they do not explain Zetland's points well, and some that stress community ownership are both confused and unhelpful.

In the best part of the book, "Water for You and Me," Zetland examines private water uses, particularly urban water and the problems encountered when monopoly urban water supply organizations fail to price water effectively. He points to the absurdity of the Southern Nevada Water Authority in Las Vegas underpricing water while at the same time paying households to use less. He might have placed more emphasis on the power of pricing as evidenced in Phoenix and Tucson, where residents in Phoenix face flat prices and use over 50 percent more water per capita than do people in Tucson who face steep block-pricing schedules. One city looks like an oasis, whereas the other looks like the desert city it is.

Chapters 1-4 provide valuable arguments about why urban water management seems so out of sync with new supply and demand conditions and offer suggestions as to what might be done to improve things. Chapter 5, "Food and Water," and Chapters 6-10 in the second part of the book, "Water for Us," are far less carefully argued or thought out. Here Zetland allows the public nature of water to confound potential private solutions. Despite earlier criticisms of bureaucrats and politicians for inefficient water pricing, infrastructure investments, and distortive water subsidies, he is far too quick to call for community management of water in line with the public trust. The community is never defined, and why politics fails in one case but not another is not explained.

In Chapter 5, Zetland describes his strongest policy recommendation: farmers should be required to buy and sell water through an auction process so that they bear the full opportunity costs of the water they use. Minimum environmental flows are to be deducted following the recommendations of scientists, and the remaining water should be auctioned. On first glance, that all seems great, but then many objections come to mind. First, how will scientists weigh the value of competing uses or opportunity costs? A lack of cost-benefit analysis already occurs under the Endangered Species Act and few would find expansion of this practice a useful approach for water. Second, farmers are not the source of the problem. They are aware of opportunity costs, and most would be pleased to sell or lease water that could earn them more than they generate from agricultural production. Indeed, farmers in the Palo Verde Irrigation District in California have done just that by selling options to San Diego to draw on some of their water during drought-induced shortages.

The ability to trade water makes opportunity costs and scarcity values apparent to existing rights holders. Where agricultural trades have been blocked or made very costly arises when water rights are not clearly defined and community approval is mandated. This has occurred in the Imperial Irrigation District's effort to sell water to San Diego and the recent abortive effort of the Oakdale Irrigation District to lease water to the Westlands Irrigation District (California's largest). A similar setting exists in the Turlock Irrigation District where farmers pay $30 per acre-foot of water (325,000 gallons), but they could sell it for $2,000 per acre-foot or more to Westlands if they were allowed to do so. In all three cases, community members are granted a veto over proposed water transfers.

In these cases, water rights are so diffused and uncertain that no party (except farmers) bears the opportunity costs of failed exchanges. The solution is to define water rights more precisely. Those who seek to keep water in the community could buy it in competition with outsiders. Additionally, because distributional issues loom large in rural areas, a limited mitigation fund could be set up from some of the transfer revenues to compensate parties economically harmed. The Palo Verde trade to San Diego included such a fund, even though farmers had clear rights to sell. The practice of restricting trades is a broad one. Some 22 counties in California have enacted ordinances to block groundwater transfers out of the county.

Zetland calls for "getting rights right" via auction, but as shown above this is not the solution to the problem. Auctioning would confiscate existing prior appropriation rights, not strengthen them. No high-priority rights holder would find this remedy attractive, and the prospect would only shorten time horizons and dim assessment of opportunity costs. If auctions are mandated, water would be moved from existing owners into the political process. The brief book discussion does not make clear whether such auctions would be recurring, or how or if water secured through auction could be traded subsequently and for how long.

As generally outlined in the second part of the book, water would become a public or communal resource. The conditions under which communal management of any natural resource is successful and when it is not are not outlined. As Nobel economics laureate Elinor Ostrom's work has revealed, common management works best under settings where participants are few in number and fairly homogenous in resource objectives. That does not describe water. We have other empirical evidence. Consider the more than 370 million acres of so-called public lands in the continental United States that are under the supervision of the U.S. Forest Service and the Bureau of Land Management. Although environmental advocacy groups and others who seek political access and control over those lands benefit from this arrangement, most studies indicate that the public lands are less well managed and allocated across uses than are private lands. This government management experiment has been running for a long time, so why should we believe that greater political oversight of water would have a different outcome?

Zetland is concerned about protecting stream flows, but this is possible with markets. Private water rights are routinely traded for augmenting stream flows by Oregon's Freshwater Trust. Rights are respected, instream flows count as beneficial use to maintain the right, and environmentalists pay for the water desired for streams. Hence, state environmental mandates are not necessary to protect aquatic and riparian habitats. Moreover, more public control and management of water under the public trust doctrine is counter to trends with other natural resources where government regulation has been found wanting. In fisheries, individual transferable quotas and rights-based arrangements provide important advantages relative to command-and-control regulation. (See "Learning How to Fish," Vol. 37, No. 1.) Similarly, in air quality, a nationwide market in sulfur emission permits rapidly met clean air objectives at lower cost than did Clean Air Act regulations. Tradable development rights and conservation habitat credits have lowered the costs of achieving land use controls relative to government mandates. Why should water be different?

Sax's commons / As a legal principle, the public trust doctrine historically applied narrowly to the right of the public to access navigable waterways without being impeded by private riparian owners. Through the 19th century there was limited extension of the doctrine to public ownership of some tidelands and subsurface lakebeds. The much broader idea that the public had superior rights to non-navigable waters, wildlife, and other natural resources was outlined in Sax's 1970 paper, contemporaneous with the rise of the modern environmental movement.

Sax argued that the public trust doctrine could be employed as a powerful tool for judicial intervention for environmental regulation. The judiciary could direct public policy for protecting diffuse public uses from narrow private ones. The article energized legal scholars and advocacy groups to expand the doctrine and weaken private property rights. Under the public trust, the rights of the public are vested in the state as trustee, and the state administers, protects, manages, and conserves the resource. Any existing uses have only usufruct rights that can be withdrawn whenever the state deems that they are inconsistent with the public trust. The public trust doctrine, therefore, provides for a major extension of the police powers of the state. The counterfactual outcome of state administration is never made clear by advocates. Other than private property rights and markets, what political model do they have in mind that would make politicians and bureaucrats more responsive to shifts in resource demand and more concerned with efficient management and conservation? Advocacy groups and agency officials are critical of private property rights because if rights are well defined, those parties have little ability to direct the resource in a manner they desire unless they pay for it. This, however, is not a compelling argument for how to address the problem of water.

The most celebrated incorporation of the public trust doctrine came in 1983 when the California Supreme Court in National Audubon Society v. Superior Court ruled that the "core of the public trust doctrine is the state's authority as sovereign to exercise a continuous supervision and control over" the waters of the state to protect ecological and recreational values. The ruling expanded the role of the state in reallocation of water as public values changed; asserted that existing rights were nonvested and therefore could be reallocated without compensation; and affirmed broad, open standing to citizens to raise a claim of harm under the public trust against private water users.

The focus of Audubon was conflict over Los Angeles's water rights to the Mono Basin. The city acquired those rights in the 1940s and began major diversion of water in 1970. Owens Valley and the Mono Basin supplied 80 percent or more of Los Angeles's water that was so pure it required no treatment and its flow through the Los Angeles Aqueduct generated hydropower. Over time, however, Los Angeles's water diversions had substantial adverse effects on Mono Lake and its surrounding environment. That brought growing opposition. Advocacy groups such as the National Audubon Society, Friends of the Earth, the Sierra Club, and the Mono Lake Committee brought suit in 1979 to curtail Los Angeles's export of water under the public trust doctrine. The suit challenged the city's water rights. Ultimately, the California Supreme Court ruled in favor of the plaintiffs. The 1983 ruling, however, did not resolve the conflict; rather it opened the door for numerous parties to get involved and mandated the State Water Resources Control Board to intervene. The dispute took nearly 20 years to resolve, with multiple court cases and involvement by various constituent groups and government agencies. In the end, Los Angeles lost its ability to divert Mono Basin water. All the while during 20 years of conflict, Mono Lake's environment continued to worsen, streams remained dry, and riparian and aquatic habitats were unrestored.

The purchase of Los Angeles's water rights was the obvious policy alternative, but that remedy was not chosen. The case underscores how the public trust doctrine undercuts property rights; how costly it is to resolve disputes under it; and points out the absence of any clear metric, other than interest-group lobbying, for signaling changes in trust-resource values. Markets perform far more smoothly and less contentiously in communicating new values and in reallocating resources.

A major reason settlement was not reached in the Mono case was the many parties granted standing by the doctrine. It made Mono Basin water a common pool. When one plaintiff reached agreement with Los Angeles curtailing water diversions, other plaintiffs called for new, more extreme restrictions. There was a progressive rise in demands on the city. Another reason why litigation took so long was the nonvested nature of property rights under the doctrine. The city not only faced losses in water rights and associated high water replacement costs, but had to bear the costs of stranded, nondeployable capital in water export and hydroelectric generation. Los Angeles faced an all-or-nothing battle while advocates used the Mono case to elicit donor contributions. Those competing positions prolonged the process and blocked the more optimal, timely reallocation of Mono water that market transactions might have brought.

Although there was a lull in public trust efforts after 1983, those and other community management demands are rising today as drought places pressure on existing water supplies. If those demands play an important role in addressing the problem of water, as Zetland outlines in the second part of his book, then property rights and markets will be weakened further and solutions made far more costly and ineffective. That is not the best way for living with water scarcity.

GARY D. LIBECAP is a professor of corporate environmental management at the University of California, Santa Barbara.