Thoughts on Groundwater Valuation: Economic Methods & Issues

Kristin E. SkrabisOffice of Policy Analysis

US Department of the InteriorApril 2005

2

Disclaimer

The views expressed do not necessarily represent the formal policy positions of the US Department of the Interior, the Office of Policy Analysis, or the US government.

3

DOI’s Role on Groundwater Issues

• Where Interior’s rule is being used as an argument for/against groundwater valuation

• In support of states and tribes

• Where groundwater contamination connects to surface waters and further injures Interior’s explicit trust resources (e.g., migratory birds and their habitat)

• Where groundwater is part of DOI federal lands (e.g., BLM lands)

4

Identifying Categories of Groundwater Damages in NRDAR

There are several possible categories of damages for groundwater, including:

– Loss of clean drinking water (volume of water is not available to the public)

– Loss of ability to store water in the future (contaminants will persist and impair the state’s ability to manage water)

– Increased public utility and resource management costs– Loss of in-situ services (prevent subsidence, flood

control)– Loss of amenity value by the presence of contaminated

plumes

5

Areas of Disagreement

• Scarcity of water

• Price of water

• Role of replacement

Aquifer: a mysterious, magical and poorly defined area beneath the surface of the earth that either yields or withholds vast or lesser quantities of standing/flowing water, the quantity and/or quality of which is dependent on who is describing it…or how much money may be at stake. - Russ Radden, “Watershed Resources,” January 2002

6

Scarcity of Water

The water-diamonds paradox: Water is a necessity, so why are diamonds more expensive than water?

The area is rich in water, so who cares?– Uncertainty (decline in Ozark aquifer, future development?)– Intergenerational equity– Role of trusteeship (protect natural assets)

Good old days: Beer foamed and drinking water didn't. - Unknown

Supply

Demand

7

Price of Water

• Local consumer prices for drinking water

• Commercial rates

• Agricultural rates

• In-situ and future value

When the well is dry, we learn the worth of water. - Benjamin Franklin

8

Role of Replacement

Does a jug of water or pumping water from another aquifer satisfy the concept of replace, acquire, or restore under NRDAR?

– Remedial efforts to improve groundwater– Alternative provision of bottled water and wastewater treatment

facilities– Access to an alternative aquifer

Water is the only drink for a wise man. - Henry David Thoreau

I never drink water because of the disgusting things that fish do in it. - WC Fields

9

Groundwater Valuation Methods

• Market Price Methodology. Water is marketed, so value the injured volume of water by local market price (current method being used by Trustees).

– Explicitly listed as an acceptable method in Interior’s rule

(page 260 in 43 CFR).– Method tested on a fish kill case in Idaho v. Refrigerated

Transport, Inc. (88-1279, 1991 WL 22479 (D. Idaho Jan 24, 1991)).

– Used by New York, New Jersey, and Missouri in claims– Tested in New Mexico ex rel vs. General Electric, et al. (Case

Number CV 99- 1254 BSJ, Case Number CV 99-1118 BSJ).

10

Groundwater Injured to Date (Past Damages)

1. Calculate injured water volume: acres x depth (ft) x porosity = acre-feet of water

2. Convert to total gallons lost: acre-feet of water x 325,900 gallons/acre-foot

3. Total gallons lost x price/gallon = past damages

11

Groundwater Flux (Future Damages)

1. Q=kiA– Q is discharge (ft^3/day) – K = hydraulic conductivity (ft/day)– i = hydraulic gradient (dimensionless)– A = cross-sectional area (ft^2)

2. Q (ft^3/day) x 7.481 (gallons/ft^3) x 365.25 (days/year) = total gallons lost/year

3. Total gallons/year ÷ 0.03 discount factor x price/gallon = total future damages in perpetuity

12

Groundwater Valuation Methods (cont’d)

• Cost Estimating Methodologies. NRDAR cases are often settled for the direct and indirect costs to replace, acquire, or restore the equivalent resource.

– Explicitly listed in Interior’s rule (page 259 in 43 CFR). – Used by Massachusetts at the Charles George

Superfund site & by Montana at the Clark Fork Superfund Site.

– Feasibility, reliability, reasonable cost, and cost- effectiveness are all criteria for evaluation (page 258 in 43 CFR).

13

Groundwater Valuation Methods (cont’d)

• Hedonic Pricing Method. Theoretically, property values include amenity values (e.g., proximity to parks, good schools) beyond the physical house. Contaminated groundwater is expected to have an adverse effect on property values.

– Explicitly listed in Interior’s rule (page 260-261 in 43 CFR).

– Used to assess the damages from a contaminated plume under an undeveloped parcel in Puerto Rico.

– Used by Massachusetts for PCB contamination in New Bedford Harbor ($35 million).

14

Groundwater Valuation Methods (cont’d)

Other options include:

– Contingent valuation;– Conjoint analysis;– Habitat equivalency analysis; and– Resource equivalency analysis.

15

À la Carnac the Magnificent…

Answer:

Not a drop to drink.

16

Question:

What could happen if we don’t figure out how to cost-effectively restore or replace billions of gallons of contaminated groundwater,

OR

Haul in the 10 billion trillion trillion (a one followed by 34 zeros) carat diamond from 50 light-years away and solve the water-diamonds paradox.

An artist's conception of the diamond core of a dead white-dwarf star.