Policy Study

Water Marketing in California

Past Experience, Future Prospects

Executive Summary

Administrative means, rather than market forces, were used to allocate much of the water developed by large-scale state or federally sponsored water projects in the western states. Over the past decade no state has enacted as much legislation specifically directed at facilitating voluntary market transfers of water as has California. Yet the state has witnessed very few such transactions. The transfer of over 100,000 acre-feet of conserved water between the Imperial Irrigation District and the Metropolitan Water District of Southern California, and the acquisition in 1991 by the state-operated drought water bank of over 800,000 acre-feet of water in the midst of a drought is ample evidence that market forces can work to the benefit of water users. However, there have been very few longterm transfers within the Central Valley of California or involving the federal Central Valley Project. Moreover, the drought-banking operation did not really operate on market principles, but rather was a state-administered program that established uniform prices for all participating purchasers and sellers and adopted certain unduly restrictive rules for participation.

The Department of Water Resources has approached transfers cautiously, the Bureau of Reclamation in California has failed to broadly implement Department of the Interior policies to facilitate transfers, most agricultural water districts have viewed the potential for water transfers only very tentatively (out of concern over the security of their water rights and potentially adverse affects on the districts and the local communities), and environmental interests have relied on legal challenges to water rights and legislative mandates, rather than water purchases, to further their goals.

Several recent actions may alter the balance in favor of more water transfer activity in the state. The federal Central Valley Improvement Act of 1992 may alter the balance. First, it contains a number of provisions intended to facilitate transfer of project water. Second, even though the state is not experiencing drought conditions for 1993, water agencies will experience reductions in water availability because of environmental restrictions imposed by the act and by endangered species requirements (if not also by the State Water Resources Control Board)-what some have termed a new “regulatory drought.” As a result, California water agencies should consider continuing the water bank in a form that incorporates more market principles and/or allowing privately negotiated transactions to serve the same function. Finally, the act establishes a fund by which state and federal government bodies can make market purchases of water for fish and wildlife purposes.