Public Policy and Economic Analysis - Water

Overview:
  Policy issues surrounding water allocation in the western US have economic, legal and social dimensions. Rights to use surface water (e.g., to divert it from streams) are based on the "prior appropriations doctrine" of "first in time, first in right." In Oregon, irrigation uses represent more than 80 percent of water withdrawals. Not all water rights in the State have been fully adjudicated. With rising population and incomes, demand for water has increased and so too have the conflicts over water. One sources of conflict is between water diversions versus instream flows to ensure adequate aquatic habitats such as those deemed necessary for protection of endangered salmon and other native fish. Whereas markets are accepted, well-developed mechanisms for efficiently allocating land, labor and other resources, flexible transfer mechanisms such as water markets or water banks for transfers of water among alternative uses have only recently been introduced in Oregon. Water transfer mechanisms have the potential to greatly increase the efficiency with which water is allocated among agricultural uses, and also between agriculture and other uses. The introduction of water markets, however, is controversial in part due to concern that water leases or sales which take water out of agricultural uses will have permanent, adverse effects on the local agricultural economy and its rural communities.
Frequently Asked Questions (FAQs)
What is a water bank?
  A water bank is a mechanism designed to facilitate the transfer of water use entitlements from one location or use to another. A water bank functions like an intermediary, or broker, similar in some ways to a financial bank that acts as a broker or clearinghouse between savers and borrowers. In the case of water banks -- and unlike some brokers -- there is some kind of public sanction for its activities.

A valid water use entitlement can be "deposited" with the water bank, making it available for withdrawal by others for a fee. If the deposit is withdrawn from the water bank, the depositor is paid an amount corresponding to what the renter paid (less some fee for the services provided by the water bank). The incentive to deposit is in the hope of earning more from the renter than from using the water themself. Similarly, the incentive for the renter is in finding water at a low enough cost to make the rental attractive.

The bank or facilitator serves an important role, determining which water rights can be banked, and the amount of water corresponding to a given water right entitlement. It also decides who can rent, and establishes the process and terms for these agreements. In addition to this oversight, water transfers are generally also regulated by state laws.

The temporary transfer of water among irrigators within an irrigation district is nothing new. What distinguishes recent developments in this area from traditional forms is the transfer to uses outside an irrigation district, or for uses other than irrigation.
How common are water banks?
  The use of water banks is not widespread in the western U.S., but they have been in use in some locations for many years. In Idaho, for example, short-term rentals of water date back to the 1930s, with more formal, state-wide procedures being adopted in 1979. These state-run programs were established for the purpose of acquiring water rights "from willing sellers for reallocation by sale or lease to other new or existing uses." Since 1979 Idaho's very active water banks have administered transfers of both storage water and natural flow water rights in amounts exceeding 100,000 acre-feet annually in the 1980s.

The state of California established emergency drought water banks in 1991, 1992, and 1994 to assist in the development of a water rental market that could help reduce the unevenly distributed effects of the drought. The water bank handled 820,000 acre-feet of water in 1991, 159,000 in 1992, and 225,000 in 1994 (including surface, groundwater and stored water). The beneficial effects of the 1991 California water bank have been estimated at $104 million.

Water banking programs have also been established by the Texas Legislature, and several versions of an interstate water banking program have been developed for the Colorado River basin. In addition to these state-level and interstate programs, small-scale water banking programs can be found elsewhere (for example, in Washington State in the Columbia Basin Irrigation Project and the East Columbia Irrigation District). Indeed, the Oregon Water Resources Department approves between 200 and 300 water transfers annually (the majority being between irrigation diversion points, but some pertaining to instream uses), and the Oregon Water Trust has been buying and renting water rights to protect instream flows in many parts of Oregon for more than a decade.

Sources include:
Water transfers in the West: efficiency, equity, and the environment" National Research Council, National Academy Press, 1992.
Markets for Water: Potential and Performance. K.W. Easter, M.W. Rosegrant, and A. Dinar. Kluwer Academic Publications, 1998.
Water Banks in the West.L.J. MacDonell et al. Natural Resources Law Center, University of Colorado School of Law, August 31, 1994.
Other Resources and Internet Links
Oregon Water Resources Department
Oregon Water Trust
Columbia Basin Water Transactions Program
OSU's Center for Water and Environmental Sustainability

Publications, Presentations and Working Papers
 
Past and Future Water Conflicts in the Upper Klamath Basin: An Economic Appraisal by Brent B. Boehlert and William K. Jaeger
Conflicts over Water in the Upper Klamath Basin and the Potential Role for Market-Based Allocations by William K. Jaeger
Increasing streamflow to sustain salmon and other native fish in the Pacific Northwest by William Jaeger & Raymond Mikesell
Benefits to fish, benefits to farmers: improving streamflow and water allocation in the Pacific Northwest by William Jaeger & Bob Doppelt.
Water Allocation in the Klamath Reclamation Project, 2001 A report by Oregon State University and the University of California
Water Allocation Alternatives for the Upper Klamath Basin by William Jaeger, Chapter 19 of the OSU/UC "Klamath Report."
Klamath "Brief #1" on the economic value of irrigation water  by William Jaeger, January 2004
Klamath "Brief #2" on the potential benefits from water transfers by William Jaeger, January 2004
Klamath "Brief #3" on the impact of anticipapted energy price increases by William Jaeger, July 2004