606 AgEc (day 16): 3/12/2009
7. Water Marketing
The term water marketing applies to natural water only unprocessed, except possibly for onstream storage does not apply to infrastructure the water pricing topic is better applied to wholesale and retail water marketers might sell, lease, option, bank, or be original
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Water Market Options
also called dry-year options The permanent owner of a water right agrees to temporarily give the buyer use of the right if a certain pre-set event occurs. The buyer ordinarily pays an up-front option price, plus possibly a recurring (e.g. annual) fee, and will pay an additional charge should the option ever be exercised. These payments are pre-set.
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Water Market Banking
The term water banking is sometimes used in nonmarketing ways, but for clarity, we will only use banking when trade is occurring. An intermediary contracts for water rights from some agents, and then agrees to contract from this assembled pool to other agents. thus far, these intermediaries have been public agencies or districts thus far, both sides of this activity have been leases
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AgEc 606 (day 16): 3/12/2009
Foundations of Water Marketing
Water property must rst be assigned, quantied, enforced, and tradable for any of this to happen. Which legal doctrines might qualify? surface or ground?
Where water rights have not been legally severed from land, we do not have true water markets. We might have land-based marketing in these cases for the prime purpose of water exchange, but such transfers are really water access transfers since quantied water property does not exist.
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Opportunities of Water Marketing
Closing the gaps between the MBs of natural water Accommodating the varying risk preferences agents have Because of these accomplishments, the demands for other scarcity strategies can be reduced.
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Challenges of Water Marketing
ow-caused interdependencies with third parties externalities underrepresented demand for nonrival water public goods inadequate private regard for depletion overdiscounting Responding to these challenges leads governments to select institutional blends of markets and administrative regulation. The resulting transaction costs inuence all trading more later on this.
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Three basic tool sets for practitioners
AgEc 606 (day 16): 3/12/2009
V1 = vi
1 1 = vi t d t=1 (1 + d)
V0 = vi
1+ d d
T V0 = vi
(1 + d) (1 + d)T d
1. for relating sales value (V) to recurring lease values (v)
(obtained from Chapter 3s appendix)
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Equivalent Single Price
ESP =
PV(economicterms) PV(waterterms)
2. for comparing differing contract terms, conservation investments, & other scarcity-ghting options
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w2
w* 2
w2
0
w*
b2
b1
MNB2 MNB1
$
$
v
v
0
w1
w* 1 w1
3. for thinking about why trade, price possibilities, net gains, effects of transaction costs, lots of things
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AgEc 606 (day 16): 3/12/2009
A Common Challenge: Return Flow Externalities
Rights are normally quantied as allowed diversions, Yet, diverters are more directly affected by their consumptive use And even converting all rights to consumptive use rights isnt a full x as the next graphic can demonstrate. Problems tend to be (but are not limited to): upstream transfers impacts on instream ows (nondiverting 3rd parties)
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Flows lots of potential third parties
I. Initial Conditions
Streamflow Urban Diversion Streamflow (Segment 1) Urban Diversion Streamflow (Segment 2) As Return Flow (60%) Bs Return Flow (75%) Streamflow (Segment 3) Agricultural Diversion Streamflow (Segment 4) Cs Return Flow (20%)
Source: Griffin & Boadu 1992.
II. III. C sells C sells 250af to A 100af to A
1000 1000 -600 400 -400 0 +320 +300 620
1000 -500 500 -400 100 +300 [phone] +100
A
-750 250
B
Harm
C
-400 220 +80
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Therefore, most jurisdictions have established a process whereby proposed trades can gain approval. A bureau or agency might be able to do this on its own, but western U.S. states have generally installed a process in which vested and potentially injured parties can voice their displeasure. Who is vested? Other diverters? Yes.
Instream users? Maybe. Or maybe this is ignored. maybe Or a state agency is supposed to ll this role. Or maybe trades are allowed if they wont broach minimum streamow standards. Or ...
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Submit Application
AgEc 606 (day 16): 3/12/2009
Agency Technical Review
Public Notice
Yes
Contested?
No
Negotiated Agreement?
Yes
No
Agency Hearing
Appeal?
Agency Ruling
Final unless Appealed
Judicial Review
Final Ruling
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Real, Live Water Markets
Three exceptional markets reviewed in text Colorado Big-Thompson Project Texas lower Rio Grande basin California 1991 Drought Water Bank They are unique markets in multiple ways They have produced many millions in net benets
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NCWCD
created in 1937 shares; not seniority no return ow obligations infers much reduced transaction costs for traders
1 ! 1 $ $12, 000 / af ! # & = $600 / af / yr d " .05 %
$600 / af ! ! 0.00307 ! = !$1.84 / 1000 ! gal
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AgEc 606 (day 16): 3/12/2009
across Texas
Marketing
Surface Water Ground Water
Linked via cost-forwarding, accounting policy, demand responses
X
Pricing
1. Correlative Rights on the lower Rio Grande
4. Rule of Capture ranching & contracting
2. Canal companies in the upper Gulf Coast
5. Edwards Aquifer pumping rights
3. Appropriative Rights in the rest of Texas
Wholesale
Retail
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River Authorities
Utilities, companies, districts, etc.
Utilities, districts, and other authorities
LRGV
marketing commenced ~1970 this part of basin uses correlative shares for nonmunicipal rights no return ow obligations or impacts sizable population growth has been assisted by this market ag shares have to be converted to municipal quantities
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California Bank
a several year drought sparked a policy change that allowed trade statewide due to manmade conveyances 1991 bank was a lease market brokered by DWR __________ sw leasing is no longer unusual in California mainly ag-to-urban and ag-to-environment in recent years great political sensitivity for secondary effects
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AgEc 606 (day 16): 3/12/2009
Area of Origin Issue
Areas of origin are regions (mainly agricultural) from which a water market would transfer water, unless such exports are prohibited. Permanently shifting water (or any resource) out of a region may limit that regions future development opportunities. Should trade be constrained so as to protect areas of origin?
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What should a water market count? Areas of origin & areas of receipt too? Traders Costs: Benets:
Seller
Other Direct
Return ow & water-linked agents s...