Weatherford, Gary D.

English

Colorado Law

University of Colorado Law School Colorado Law Scholarly Commons Western Water: Expanding Uses/Finite Supplies (Summer Conference, June 2-4) 1986 6-3-1986 Water Transfers and Exchanges: Using the Market to Improve Water Use—A Legal/Institutional View Gary D. Weatherford Follow this and additional works at: https://scholar.law.colorado.edu/western-water-expanding-uses-finite-supplies  Part of the Administrative Law Commons, Agriculture Law Commons, Contracts Commons, Environmental Law Commons, Finance and Financial Management Commons, Hydrology Commons, Jurisdiction Commons, Law and Economics Commons, Legal History Commons, Marketing Commons, Natural Resource Economics Commons, Natural Resources and Conservation Commons, Natural Resources Law Commons, Natural Resources Management and Policy Commons, Property Law and Real Estate Commons, Public Policy Commons, State and Local Government Law Commons, Technology and Innovation Commons, Urban Studies and Planning Commons, Water Law Commons, and the Water Resource Management Commons Citation Information Weatherford, Gary D., "Water Transfers and Exchanges: Using the Market to Improve Water Use—A Legal/Institutional View" (1986). Western Water: Expanding Uses/Finite Supplies (Summer Conference, June 2-4). https://scholar.law.colorado.edu/western-water-expanding-uses-finite-supplies/13 Reproduced with permission of the Getches-Wilkinson Center for Natural Resources, Energy, and the Environment (formerly the Natural Resources Law Center) at the University of Colorado Law School.     Gary D. Weatherford, Water Transfers and Exchanges: Using the Market to Improve Water Use—A Legal/ Institutional View, in WESTERN WATER: EXPANDING USES/FINITE SUPPLIES (Natural Res. Law Ctr., Univ. of Colo. Sch. of Law 1986).  Reproduced with permission of the Getches-Wilkinson Center for Natural Resources, Energy, and the Environment (formerly the Natural Resources Law Center) at the University of Colorado Law School.  WATER TRANSFERS AND EXCHANGES: USING THE MARKETTO IMPROVE WATER USE--A LEGAL/INSTITUTIONAL VIEWGary D. WeatherfordWatershed WestBerkeley, CaliforniaWESTERN WATER: EXPANDING USES/FINITE SUPPLIESJune 2-4, 1986Natural Resources Law CenterUniversity of ColoradoSchool of Law\ _,n__.Gary D. Weatherford/-`	 Watershed WestWATER TRANSFERS AND EXCHANGES: USING THE MARKETTO IMPROVE WATER USE--A LEGAL/INSTITUTIONAL VIEWI.	 Introduction: Putting the Market in its Place--OneRelocation Mechanism Among ManyA. The Rellocation Phenomenon: Something Old, SomethingNewWater was allocated initially in the West as a freegood, but became subject to rellocation from thee"		earliest days of settlement through the transfer ofappropriative water rights, normally in connection withthe conveyance of the land to which the water right wasattached. Many western towns and cities so establishedor expanded their water supplies, and that legacy goeson.B. Rellocative Mechanisms: Some Illustrative CasesThere are numerous ways to reallocate the rights to usewater, some of which are market oriented, others ofwhich are more aligned with regulatory intervention.1. Voluntary Transfers of Water Right Interests forCompensationThe various kinds of water rights -- fee title,shares, contract rights -- are normallytransferable in whole or part, subject tooccasional constraints, such as public agencyreview and third party rights.a. SalesThe transfer of the total fee propertyinterest of a water right normally occurs inconjunction with a land conveyance, but aseverance is allowable in most westernstates.b. Leases for Set TermThe leasing of water rights for a season,year or many years is usually possible andprovides an attractive alternative to a sale,particularly where a risky venture orfixed-life use is involved.c. Dry Year or Emergency Option to LeaseAn option to lease senior rights underdrought or other emergency conditions canoffer flexibility and security to municipaland industrial water users. The pooling ofsuch options holds promise as a means ofhelping to drought-proof communities.Example: Utah city and farmers.d.	 Foregoing Priority for Shortage-SharingHolders of senior rights may be able toeffectively market their seniority byagreeing to share shortages during dryyears. Example: San Juan-Chama diversion.2.	 Conservation Offsets to Create Usable SurplusIf a municipal or industrial user buys or alreadyholds a junior water right and wants greaterassurance of supply under scarcer conditions, itmay be able to achieve that end by making waterconservation investments in a senior use, creatingsurplus available for the junior use. Example:Proposed contract between Metropolitan WaterDistrict and Imperial Irrigation District.r3. ExchangesAn agreement to exchange one water supply foranother temporarily, seasonally or permanentlycan leave all parties better off. Throughmultiple exchanges it may be possible in somesettings to serve remotely located new users.Example: Utah plans regarding Bear River.4. Contractual and Regulatory Drought PrioritiesWater delivery contracts in large projects canspecify reallocative priorities which take effectduring droughts. Municipal uses and orchards, forexample, can be preferred over annual crops.Example: California Water Project contracts andthe 1976-77 drought.5. Involuntary Transfers of Water Right Interestsa. Abandonment and ForfeitureAll or part of a water right can be lost to aholder who abandons or forfeits under statelaw, with the benefit inuring to junior rightholders, new appropriators or the public.b.	 Eminent DomainWhere authorized, public agencies andutilities can condemn existing water rights,transferring their title and use. Thisreallocation mechanism is constrained bypolitics and limited funds.C. The Changing Context of ChoiceThe conditions which influence the availability andchoice of a reallocative mechanism are changingmarkedly in many areas. Declining agriculturalcommodity prices, for example, have put some farmersbehind legislative and regulatory reforms making iteasier to transfer water rights.II. Legal-Institutional Factors Influencing the ReallocativeChoiceA.	 Transferability of the RightThe water right needs to be of a kind legally regardedas transferable. Most are so regarded, but some, such5as riparian rights in California, are not.B. Salvage RightsMore water can become available for reallocation whenright holders are allowed to transfer rights to waterwhich they conserve. This permits a user to yield upwater for money without relocation or dislocation.Califonrnia Water Code 1011.C. Acquisition, Transaction and Treatment CostsAsking prices for water rights vary markedly and canfluctuate. Additional expenses, such as thoseassociated with obtaining public agency approval of thechange in use and point of diversion, or with theupgrading of the quality of the water to meet the newintended use, bear on the decision of the would-bebuyer or lessee.D. Origin and Destination ConditionsIn large-scale transfers, the precondition of firstconserving existing supplies or of meetingarea-of-origin requirements can face the waterpurchaser. Example: California legislative6provisions, existing and proposed (Proposition 13;1982).E. Access to Plumbing and FacilitiesReallocation involves transporting water in a naturalor man-made distribution system. The feasibility of atransaction can turn on whether access can be gained toexisting water works controlled by a third party.Example: Proposed carriage of Yampa River water to SanDiego via the Colorado River Aqueduct; pending Katzbill in California, Assembly Bill 2746.F. Risk: Legal, Economic, Social and PoliticalUncertaintyUncertainties and risks underlie many waterreallocations. For example, the quantum or value ofthe right may later be determined to be less thenrepresented, the terms of an agreement may be sociallyor politically dishonored over time, a thrid partymay become injured and sue, or an unforeseen regulatoryrestraint may arise.III. Water Markets: Definitions, Examples, Opportunities andNeeded ReformsEnthusiasm over the belated judicial recognition of water asa commodity may be leading to some inflated expectations asto the extent and rate of private water marketing in theWest. Standards for comparison and analysis are needed.A. Definitional IssuesWhat definition of "market" is appropriate fordescribing what is happening or is expected to happenin the transfer of water rights in the West? How muchaccess, information, price equilibration, volume orprivatization is necessary for a "water market" toexist?B. Examples: Real and PotentialTo highlight the definitional problems, severalexamples of contemporary transfers or proposedtransfers, reflecting different features, can be cited.1.	 Colorado Front RangeWater right "units" covering Colorado Big Thompsonproject water in the Northern Colorado ConservancyDistrict are marketed through centralized listings8of bids and offers. Specialized brokers operatein the area. Appropriative rights are being soldin many instances through noncompetitivebargaining.2. New MexicoControversy surrounding the transfer of waterrights from within to without the Middle RioGrande Conservancy District, which encompassesAlburquerque, illustrates the role water districtscan play in transfers: Middle Rio GrandeConservancy District v. Cox.3. UtahThe Intermountain Power Project near Lynndyl,Utah, involved the acquisition of shares in localmutual water companies at a price of $1,775/acrefoot, with the sellers being responsible forobtaining approval or the change of use andarranging protection for third-party rights.4. ArizonaThe City of Scottsdale in 1984 purchased a largeranch and several farms totaling about 184,000acres for their water rights, paying $11.6million. The City of Tucson reportedly haspurchased more than 20,000 acres of farm land overrecent years, specifically for the water rights.Transfers of "grandfathered" grand water rightsare occuring in the active management areasestablished under the 1980 Groundwater Act. Thewater contracts for The Central Arizona Project,however, prohibit transfers for profit.5. CaliforniaShort-term transfers occurred during the 1976-77drought, reform legislation has encouragedtransfers, and there is an increasing willingnessamong some financially-pressed farmers to sell,but this has not yet led to significant increasesin water marketing. Transfer from San JoaquinValley to Los Angeles and San Diego areas appearmore promising than transfer from the SacramentoValley across the Delta to the south.6. Indian NationsThe permanent transfer of reserved rights is not10authorized. On-reservation leasing of water inconnection with farm land leasing, however, doesoccur and leasing for off-reservation use maybecome a reality selectively (e.g., Arizona andMontana).7.	 InterstateNotwithstanding Sporhase, some interstatetransfers (e.g., in basins covered by federallyapproved compacts which allocate surplus anddefine state entitlements in terms of consumptiveuse) face legal constraints.C. Selective Legal Reforms Needed to Accommodate andEncourage the Rise and Effectiveness of Water Markets1. Right to Market Conserved WaterThere has been a legal bias against the transferof conserved water in the West, but there areselective signs of change. Changes in attitudestoward both appurtenancy and the protection ofholders of rights in return flows can be expectedover time. Change in California law and policyduring the 1980's may be illustrative (California11Water Code, 109, 382-87, 1011, 1244, 1735-39).2. Right to Store and Transfer or Exchange RechargeWatersLegislation allowing one to retain rights to waterused for recharging aquifers can encourageconjunctive management and creative exchangearrangements.3. Right of Access to Public Storage and CarriageCapacityWhere water works are monopolized but under-used,procedures for allowing access to facilitatetransfers and exchanges, while safeguardingexisting users, ought to be considered.4. Redefinition and Enforcement of Beneficial Use,Reasonable Use, Abandonment and ForfeitureProvisionsTraditional water law contains workable doctrinesfor combating waste, which, if defined moreclearly in contemporary terms and enforced morevigorously, could increase the amount of water12available for transfer.5. Removal of Consumptive Use Requirement for StateEntitlementsIf state entitlements in interstate waters werenot dependent on in-state consumptive use,interstate transfers would be encouraged becausestates could obtain economic rents withoutdeveloping the water or while waiting to developthe water. Statutory or interstate compactprovisions would be required in the Colorado RiverBasin.6. Allowance of Profit in Sale or Lease of WaterRights in Federal Reclamation ProjectsResistance to the profitable transfers ofappropriative or contract rights exercised inFederal Reclamation projects persists because ofconcern over private windfalls made possible bypublic subsidy, although support for greatermarketability has been rising.7. Removal of Geographical Limits in Water DeliveryContracts13Protectionist areal boundaries are imposed uponthe right to transfer in some water deliverycontracts. such restraints may be modified orremoved through renegotiation.8. Redefinition of Anti-Speculation ProvisionsIn some settings the public interest may be servedby the passive holding -- pooling -- of waterrights to meet contingencies ranging from low orcontaminated drinking water supplies to lowfishery flows, perhaps demanding a redefinition ofthe anti-speculation provisions of some westernlaws.9. Other PossibilitiesOther legal incentives encouraging transfers,addressed particularly to water districts andagencies, ought to be considered.IV. The Challenge: Reallocating Water to Serve a Desirable Mixof Efficiency, Equity and Environmental Quality ValuesA. The Multiple-Value Context of Western Water Management14and the Myth of Single-Value Solutions -- Market orOtherwiseReallocation must variously serve the efficiency,equity and environmental quality values held by thepublic. Some of the current reallocation involvescorrecting historic neglect of efficiency andenvironmental quality, and the equitable claims ofIndians.B. Modes of Conflict and ConsensusWater marketing may marginally facilitate consensusbuilding and the management of conflict, but publicmodes of decision making will continue to dominatewater reallocation and management for the foreseeablefuture.C. Adaption of Laws and Institutions to ChangingConditions and ValuesThe transition from development to management,including reallocation, is dynamic, testing thecapacity of water institutions and water laws to adaptto forces which are largely outside their effectivecontrol.15

Water Transfers and Exchanges: Using the Market to Improve Water Use—A Legal/Institutional View

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Water Transfers and Exchanges: Using the Market to Improve Water Use—A Legal/Institutional View

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