Announcements Final Exam, Friday June 8, 8:30 Final Exam

AnnouncementsAnnouncements

Final Exam, Friday June 8, 8:30Final Exam, Friday June 8, 8:30--11:30 11:30 in Annenbergin Annenberg

Next lecture (Wednesday): Sustainability, Part INext lecture (Wednesday): Sustainability, Part I

A Primer on A Primer on Water Water

AllocationAllocation

The WorldThe World’’s Water Resourcess Water Resources

Gaining Streams: Gaining Streams: Aquifer Feeds Surface WaterAquifer Feeds Surface Water

Losing Streams:Losing Streams:Surface Water Feeds AquiferSurface Water Feeds Aquifer

Issue # 1: How Should the Issue # 1: How Should the Government Allocate Water?Government Allocate Water?

Issue # 1: Competing UsesIssue # 1: Competing Uses

Issue # 2: Water ImbalanceIssue # 2: Water Imbalance

Water AllocationWater Allocation

What are the characteristics of a good What are the characteristics of a good water allocation system?water allocation system?

Riparian Rights SystemRiparian Rights System

Water must be:Water must be:

Used on land that boarders the water source Used on land that boarders the water source Used within the watershedUsed within the watershedPut to Put to ““reasonablereasonable”” useuse

Prior Appropriation SystemPrior Appropriation System

Water must be:Water must be:

UnappropriatedUnappropriated ((““First come, first servedFirst come, first served””))DivertedDivertedPut to Put to ““reasonable and beneficialreasonable and beneficial”” use use

(No waste)(No waste)

PermittedPermitted

A prior appropriation permit specifies:A prior appropriation permit specifies:

How muchHow much water will be divertedwater will be divertedWhereWhere it will be divertedit will be divertedWhatWhat water will be used forwater will be used forWhereWhere it will be usedit will be usedWhenWhen it will be usedit will be used

Prior Appropriation Doctrine:Prior Appropriation Doctrine:The Basic Western LawThe Basic Western Law

No FeeNo Fee

Does Not Matter Where UsedDoes Not Matter Where Used

““Reasonable and Beneficial UseReasonable and Beneficial Use””No wasteNo waste

First Come, First ServedFirst Come, First Served

No Quantitative LimitNo Quantitative Limit

Historically Difficult to TransferHistorically Difficult to Transfer

C20 cfs

A10 cfs

B30 cfs

D50 cfs

20

10

5

5

10

0

20

C20 cfs

A10 cfs

B30 cfs

D50 cfs

10

10

5

0

0

5

DroughtAllocation

So What Do You Think of So What Do You Think of Prior Appropriation?Prior Appropriation?

Encourages early and large withdrawalsEncourages early and large withdrawalsLittle likelihood that water will go to the most Little likelihood that water will go to the most efficient useefficient useLittle incentive to conserveLittle incentive to conserveInefficient allocation of water during droughtsInefficient allocation of water during droughts

A & D keep all their waterA & D keep all their waterB loses all of its waterB loses all of its waterBut 1But 1stst units of water probably more valuable than lastunits of water probably more valuable than last

The Importance of The Importance of Water OrganizationsWater Organizations

Municipal SuppliersMunicipal SuppliersCity agenciesCity agencies

Public utilitiesPublic utilities

Agricultural SuppliersAgricultural SuppliersIrrigation districtsIrrigation districts

Water districtsWater districts

How Should a Water Supplier How Should a Water Supplier Price Its Water?Price Its Water?

Typical Pricing StructureTypical Pricing Structure

Virtually always average costVirtually always average costNever marginal costNever marginal costE.g., if existing water costs $200 per E.g., if existing water costs $200 per afaf and and adding 25% more will cost $400 per adding 25% more will cost $400 per afaf ……

All will be charged $240 All will be charged $240 (.8 x $200) + (.2 x $400)(.8 x $200) + (.2 x $400)

Often flat rateOften flat rateNo meteringNo metering

Often subsidizedOften subsidizedE.g., property taxesE.g., property taxes

SusidiesSusidies::Federal Reclamation ProgramFederal Reclamation Program

50 year, zero50 year, zero--interest interest loanloan

Cross subsidizationCross subsidizationIrrigationIrrigation

Flood controlFlood control

RecreationRecreation

Total Cost: $100 million

$50 million$15 million

$35 million

SusidiesSusidies::Federal Reclamation ProgramFederal Reclamation Program

50 year, zero50 year, zero--interest interest loanloan

Cross subsidizationCross subsidizationIrrigationIrrigation

Flood controlFlood control

RecreationRecreation

Energy subsidiesEnergy subsidies

Final price < 20% real cost

Environmental Externalities: Environmental Externalities: Changing the Changing the HydroscapeHydroscape

Consequences: Consequences: Damage to EstuariesDamage to Estuaries

Damage to Salt LakesDamage to Salt Lakes

Fish LossFish Loss

Public Policy Responses to the Public Policy Responses to the Environmental ExternalitiesEnvironmental Externalities

Judicial ResponsesJudicial ResponsesPublic trust doctrinePublic trust doctrine

Mono LakeMono Lake

Regulatory ResponsesRegulatory Responses““Public interestPublic interest”” test in test in issuing permitsissuing permits

““WithdrawalsWithdrawals””

Endangered Species ActEndangered Species Act

TaxesTaxes

Allocating Groundwater:Allocating Groundwater:A Renewable/A Renewable/DepletableDepletable ResourceResource

The Problems of The Problems of OverdraftingOverdrafting

Groundwater DepletionGroundwater Depletion

Salt Water IntrusionSalt Water Intrusion




Lower Water TablesLower Water TablesIncreased energy costsIncreased energy costs





Surface SubsidenceSurface Subsidence

The ProblemsThe Problemsof of OverdraftingOverdrafting





DesertificationDesertificationOasesOases






DesertificationDesertificationOasesOases

Surface water lossSurface water loss


Groundwater DepletionGroundwater DepletionSalt Water IntrusionSalt Water IntrusionLower Water TablesLower Water Tables

Increased energy costsIncreased energy costs

Surface SubsidenceSurface SubsidenceDesertificationDesertification

OasesOases

Surface water lossSurface water lossBiodiversity lossBiodiversity loss

How Would You Allocate?How Would You Allocate?

Groundwater Allocation SystemsGroundwater Allocation Systems

Rules with No Limitations on OverdraftsRules with No Limitations on OverdraftsRule of Absolute OwnershipRule of Absolute Ownership

Rule of Reasonable UseRule of Reasonable Use

Rules with CapsRules with CapsPrior AppropriationPrior Appropriation

CaliforniaCalifornia

But No Effective EnforcementBut No Effective Enforcement

The Result:The Result:Groundwater DepletionGroundwater Depletion

National Groundwater ResourcesNational Groundwater ResourcesRecharge: 60 Recharge: 60 bgdbgd

Extraction: 75 Extraction: 75 bgdbgd

25% of Western Aquifers Being Mined25% of Western Aquifers Being Mined

Groundwater DepletionGroundwater DepletionIs A National ProblemIs A National Problem

Solving the Problem of Groundwater Solving the Problem of Groundwater OverdraftingOverdrafting

Import WaterImport WaterCaliforniaCalifornia’’s Central Valley Projects Central Valley Project

Directly Restrict Groundwater WithdrawalsDirectly Restrict Groundwater WithdrawalsEdwards Aquifer AuthorityEdwards Aquifer Authority

Endangered Species ActEndangered Species Act

Taxes and SubsidiesTaxes and Subsidies

Meeting the Water Needs of the Meeting the Water Needs of the NationNation’’s Growing Citiess Growing Cities

OptionsOptions

New SuppliesNew SuppliesTraditional sourcesTraditional sources

Surface streamsSurface streams

GroundwaterGroundwater

New sourcesNew sourcesDesalinationDesalination

Recycled waterRecycled water

Demand ManagementDemand Management

Water MarketingWater Marketing

Voluntary ConservationVoluntary Conservation

Can be quite effective in Can be quite effective in domesticdomestic settingssettingsButBut

Voluntary campaigns Voluntary campaigns often require significant often require significant efforteffortEffectiveness falls off Effectiveness falls off over timeover timeUnlikely to be enough for Unlikely to be enough for efficiencyefficiency

Dispersing TechnologyDispersing Technology

Domestic distribution and Domestic distribution and subsidy programs are very subsidy programs are very effective at reducing useeffective at reducing use

Low flow toilets: 10Low flow toilets: 10--11%11%

Showerheads: 6Showerheads: 6--10%10%

Household irrigation Household irrigation technology: 11%technology: 11%

And also cost effectiveAnd also cost effective

But addresses only part of But addresses only part of the the ““wastewaste”” problemproblem

Government MandatesGovernment Mandates

Can be extremely effective Can be extremely effective during an emergencyduring an emergency

High rate of complianceHigh rate of complianceExamples:Examples:

Goleta, CaliforniaGoleta, CaliforniaMaximum allotmentsMaximum allotmentsReduced use 30%Reduced use 30%

Santa Barbara, CaliforniaSanta Barbara, CaliforniaLimited landscape Limited landscape irrigationirrigationReduced use 15%Reduced use 15%

Perceived as equitablePerceived as equitableBut often inefficientBut often inefficientAnd high administrative And high administrative costs in the long runcosts in the long run

Price ChangesPrice Changes

Prices do affect usePrices do affect useMeteringMetering

30% decline30% declinePrice increasesPrice increases

Southern California experience:Southern California experience:Santa Barbara: 10%Santa Barbara: 10%Goleta: 26%Goleta: 26%

Estimated elasticity:Estimated elasticity:--0.3 to 0.3 to --.05.05

Conservation is efficientConservation is efficientBut again means poor conserve But again means poor conserve more than richmore than rich

Low income: 5.3% declineLow income: 5.3% declineMiddle income: 2.2%Middle income: 2.2%High income: 1.1%High income: 1.1%

And politically very unpopularAnd politically very unpopular

Popularity of Alternative Popularity of Alternative Conservation ApproachesConservation Approaches

0

0.5

1

1.5

2

2.5

3

3.5

Voluntary Get More Restrict Use RaisesPrices

U.S.ColoradoCalifornia

Water MarketsWater Markets

Most Water Is in Agricultural Use Most Water Is in Agricultural Use TodayTodayWater Markets Encourage Water Markets Encourage ConservationConservation

Positive incentivePositive incentiveProvides needed capitalProvides needed capitalAdjusts automatically to changes Adjusts automatically to changes in consumptive value of waterin consumptive value of water

And Can Reallocate Water And Can Reallocate Water Voluntarily to Urban RegionsVoluntarily to Urban Regions

Also used to reallocate water Also used to reallocate water among farmersamong farmersAnd used by environmental And used by environmental groups to reallocate water to groups to reallocate water to riversrivers

0102030405060708090

100

Domestic Irrigation Mining Electric

% use

Water MarketsWater Markets

But significant political But significant political oppositionopposition

Markets benefit most Markets benefit most profligate usersprofligate users

Water users often Water users often ““hoardhoard””

Endowment effectEndowment effect

Fear of changes in rules Fear of changes in rules

The Legal Difficulties with The Legal Difficulties with Water Markets:Water Markets:

Imperial Irrigation District Imperial Irrigation District ––San Diego County Water Authority San Diego County Water Authority

Water TransferWater Transfer

Problem # 1: The Law Problem # 1: The Law ––Can IID Transfer Conserved Water?Can IID Transfer Conserved Water?

Poorly defined water rightsPoorly defined water rightsState water lawState water law

Federal contracts and Federal contracts and reclamation lawreclamation law

Special Colorado River lawSpecial Colorado River law

Junior claimsJunior claimsIID has been IID has been ““wastingwasting”” waterwater

Conflict between markets and Conflict between markets and regulationregulation

Problem # 2: Rent Seeking Problem # 2: Rent Seeking ----How How Should Revenues Be Allocated?Should Revenues Be Allocated?

FarmersFarmersTraditionally Traditionally ““allocation allocation on demandon demand””

Other voters within the Other voters within the IIDIID

Other residents of Other residents of Imperial CountyImperial County

Problem # 3: Potential Community Problem # 3: Potential Community ConcernsConcerns

Conservation versus Conservation versus FallowingFallowingEconomic StudiesEconomic Studies

ShortShort--term transfers term transfers generally have small generally have small impactimpactTransfers of <20% Transfers of <20% water supplies generally water supplies generally have small impacthave small impact

Problem #4: Is Any Water Really Being Problem #4: Is Any Water Really Being ““ConservedConserved””??

Problem #5: Problem #5: The Transportation MonopolyThe Transportation Monopoly

How Do You Get the How Do You Get the Water to San Diego?Water to San Diego?

Colorado River Colorado River AqueductAqueduct

Owned by MWDOwned by MWD

Worried about losing Worried about losing customers in customers in Southern CaliforniaSouthern California

Approaches to Water PolicyApproaches to Water Policy

1.1. New SuppliesNew SuppliesTraditional Sources (surface streams, groundwater)Traditional Sources (surface streams, groundwater)New SourcesNew Sources

DesalinationDesalinationRecycled waterRecycled water

2.2. Decrease Use (Demand Management)Decrease Use (Demand Management)Urge voluntary conservationUrge voluntary conservationGovernment mandatesGovernment mandates

RationingRationingRequired conservation equipmentRequired conservation equipment

3.3. Improve Allocation of Existing SupplyImprove Allocation of Existing SupplyWater MarketsWater Markets

Overall Use Problem

AllocationProblem

$800-1400 / af

$600-1000 / af

Currently 75 bgd flows from CA rivers. Of this, 25 bgd is withdrawn

Water Subsidies and the Overall Water Subsidies and the Overall Use ProblemUse Problem

Dpag

MCsoc

MC

qi* qi

mec

Ag District i

Water Subsidies and the Overall Water Subsidies and the Overall Use ProblemUse Problem

Dpag

MCsoc

MC

qi* qi

mec

Ag District i

The Allocation ProblemThe Allocation Problem

Allocation ProblemAllocation Problem

Private Sector ParticipationPrivate Sector Participation

Different balances of:Different balances of:

Asset ownershipAsset ownershipResponsibility for capital investmentResponsibility for capital investmentBurden of commercial riskBurden of commercial risk

Types of PSP arrangementsTypes of PSP arrangements

Service/management contractService/management contractLeaseLeaseConcessionConcessionBuildBuild--operateoperate--transfertransferIndependent services providersIndependent services providers

Differences in Differences in Water PrivatizationWater Privatization

Country/RegionCountry/Region

Western EuropeWestern EuropeUnited StatesUnited StatesCentral/East EuropeCentral/East EuropeLatin AmericaLatin AmericaAfricaAfricaAsiaAsia

Percent Privatized (1997)Percent Privatized (1997)2020141455443311

Davis, J. Annual Reviews 2005

To Privatize or NotTo Privatize or Not

Market failure vs. Government Market failure vs. Government failurefailure

ConclusionsConclusions

1.1. Overall, water markets will help some.Overall, water markets will help some.

but political/physical limits to these markets imply that but political/physical limits to these markets imply that allocation problemallocation problem will remain significant.will remain significant.and they donand they don’’t address the t address the overall use problemoverall use problem

2.2. Some trends:Some trends:Gradual increase in metering.Gradual increase in metering.Slow trend to move from AC pricing to MC pricing.Slow trend to move from AC pricing to MC pricing.A few new water markets.A few new water markets.More invoking/establishment of laws to support More invoking/establishment of laws to support governmentgovernment’’s role in protecting s role in protecting instreaminstream needs for water needs for water (biodiversity, ecosystem function, recreation.(biodiversity, ecosystem function, recreation.

Documents

Announcements Final Exam, Friday June 8, 8:30 Final Exam