Tag - prior appropriation

Water Markets - CAP Canal with mountains in distance. Photo credit wrrc.arizona.edu

Recent Water Market Activity in Arizona

Two articles published in Journal of Water reported on two recent surface water market transactions in Arizona.  Both transactions aim to transfer Colorado River surface water from less populous rural areas to the Central Arizona Water Conservation District (CAWCD).

As cities continue to grow so does their thirst for water and the need to look beyond to alternative or new sources of water.  Rising demand is often partially satisfied through groundwater mining or a heavy dependence on groundwater pumping.  When pumping becomes unsustainable or there are imposed regulatory restrictions, water transfers may be necessary for sustained growth and economic productivity.

With a significant portion of Arizona’s surface freshwater coming from the Colorado River (about 40% of total surface water withdraws; 2.8 million Acre-Feet/Year) the notion of transferring water as a long-term- strategy should raise concerns.  A 2017 study published by the USGS finds the river’s flow has diminished by about seven percent over the past 30-years due to rising temperatures and increased evaporative loss—among other factors.  To put this departure into context, this magnitude of decrease in Upper Colorado River Basin (UCRB) flow is approximately 24% of the allotment of UCRB flow to California, or 38% of the allotment to Arizona, or 353% of the allotment of UCRB flow to Nevada.

This article highlights two recent water transfers in various stages of completion.  Both aim to transfer water rights from rural western Arizona to the rapidly growing tri-county CAWCD.  The transfer destination is relevant—Arizona’s three largest cities, Phoenix, Tucson, and Mesa are all located in this region.

We take a snapshot look at the funding mechanisms behind the transfers and discuss some observations and challenges facing water market activity.

Central Arizona Water Conservation District (CAWCD) – The Town of Quartzsite

The Central Arizona Water Conservation District (CAWCD) Board of Directors has approved a 25-year renewable lease agreement to secure additional Colorado River water from the Town of Quartzsite.  Under the proposed agreement, CAWCD will lease the town’s 1,070 Acre-Feet/year 4th Priority Colorado River entitlement. Entitlement is another way of saying that there is a vested right to appropriate water of a given quantity, from a location for a beneficial use.

The water entitlement has not been used in the past due to high costs associated with constructing a pipeline that would need to span 20 miles to get water to where it’s needed. The deal will be structured this way—the CAWCD will make a one-time lease agreement payment of $30,000 and, during the initial term, will pay $1,700/AF.


Water Markets - Arizona Map including CAWCD Boundary and Mohave Valley

During the extension period, the price could increase to $2,470 Acre-Feet. The agreement must be approved by the Secretary of the Interior as part of the Bureau of Reclamation’s approval of the agreement.

The CAWCD was created in 1971 pursuant to state law to provide a means for Arizona to repay the federal government for the reimbursable costs of construction of the Central Arizona Project (CAP) and to manage, operate and maintain CAP.  Over time as water infrastructure, allocation and governance challenges change so have the statutory authorities and responsibilities of CAWCD.  A component of those authorities and responsibilities now includes the management of strategic and other reserves—hence sourcing additional water.

The CAWD covers a populated tri-county (Maricopa, Pinal, and Pima) in the southern region of the state and includes Phoenix, Tucson and Mesa.

Mohave Valley Irrigation and Drainage District

The Mohave Valley Irrigation and Drainage District (MVIDD) is set to purchase land and water from Water Asset Management LLC and Water Property Investor LP. The package is comprised of seven farms totaling 2,2023 and 13,929 Acre-Feet of Colorado River diversion rights.  Of the approximate 14,000 Acre-Feet, roughly 82% by volume are 4th Priority rights under subcontracts with MVIDD, while the remaining 18% are considered perfected rights.  Total cost is $34 million dollars.

As of March 6, the Mohave County Supervisors voted unanimously to approve $20,000 to file for court standing in opposition to the deal expressing concerns over asset stripping (water being removed from the county in this instance) their ability to provide for future needs.

According to a recent article in the Daily Miner the property transaction is currently in the due diligence period, which includes discussing the development of a rotational fallowing program with MVIDD, extending farm leases and reviewing the title report. Closing is contingent upon MVIDD approving the agreement.

Where Does the Funding Come From?

The funding for both market transfers will come from the Central Arizona Groundwater Replenishment District’s Water Rights and Infrastructure Account Reserves (CAGRD). The CAGRD Water Rights & Infrastructure Reserves, is governed by ARS §48‐3772(7)(d) and ARS §48‐3779(H) and includes both Committed and Restricted Funds and carried a $48 million dollar balance as of June 2017.  If you are still confused as to what exactly CAGRD does, here is the simple answer– the division of CAWCD that carries out the district’s groundwater replenishment authorities.

The real estate – water – nexus affects the timing and revenue of water supply projects. For CAWCD the housing market directly impacts the utility’s ability to generate revenue.  This revenue is important not only to carry out day-to-day activities but also to augment reserves that ultimately partially fund the CAGRD and its mission to build, operate and maintain underground storage projects.

Observations and Discussion

There are several interesting things worth noting about these two water market transactions. Foremost they underscore some of the truisms and challenges of water markets in the western US.  Water scarcity in the arid and semi-arid southwest is being exacerbated by population growth, rising temperatures and heavy reliance on groundwater. Water rights are typically transferred from rural and agricultural areas to metropolitan areas that are more densely populated.

Both transactions employ creative financing using complex institutional arrangements. Many transactions involve state or federal authorities either as direct purchasers or as regulators of transactions among other users. Water transactions are complicated and include jurisdictional externalities, including transactions costs, which are not considered into the price of water.

Water prices are localized.  When examining these two transactions the going price of Colorado River surface water diversions per acre-feet is $1700- $2440 regardless of priority status (perfected – 4th priority) with anticipated increases.

The Mohave Valley transfer highlights the fact that institutional investors are purchasing farmland as a water rights investment strategy—farmland with onsite access to water has demonstrated strong annual returns.

Public-Private Partnerships is a concern of rural communities because it brings up fears of the private sector asset stripping. In other words, strategic water resources planning and management of one geographic area may be at odds with the future needs and economic activity where the water is being transferred from. Some water transfers may be beneficial to rural communities. The Quartzsite water market transaction appears to provide the town with a path forward to generate additional revenue to improve water infrastructure including its distribution system and to address other needs. What’s still unknown are the long-term effects versus the short-term financial gains.


Water Markets - Wheel Line Irrigation Open Source Wiki Commons

Water Shortage and Economic Loss

Water certainty is important. Without water certainty, there are real declines in economic output and value added diminishes.

To illustrate the importance of certainty let’s focus on irrigation water shortages in a four-county region in Texas called the lower Rio Grande Valley. Before we get into the details of the case study let’s suppose for a minute you are a farmer growing a high-value specialty crop (i.e. vegetables, citrus or sugar cane in this study) that depends on the timing and availability of water use. As you plan for the current crop year, you and your neighbors are talking about the uncertainty of water supply and anticipated water shortages that will affect your ability to irrigate. How long would it take you to make a decision to change the type of crop you plan to grow if you have the option to switch to a different lesser valued crop, one that is less water intensive?

The answer always depends but is likely sooner rather than later because actions will be made based on the producer’s marginal cost curve, the cost to produce one more unit of a good at a given market price for that good. When water is in short supply the real cost of acquiring water goes up which impacts margins. For the larger economy, any uncertainty in the availability of water is significant because small changes can cause shifts in behavior (i.e. growing a lower value crop, water transfers) driven by anticipated water shortages. These farm-scale level decisions add up to a loss in economic productivity for much larger geographic areas.

Economic Loss in the Lower Rio Grande Valley

Most people don’t know may not know this fact, but the southern portion of the Rio Grande River is largely fed by rivers that originate in northern Mexico. Any shortage in the delivery of water impacts farming all through the southern border of Texas. A paper published by the Texas A&M AgriLife Extension estimated the economic impact of irrigation water shortages of Texas’ Lower Rio Grande Valley (LRGV), an area that relies heavily upon irrigated agriculture. The area suffered water shortages starting in 1992 when Rio Grande River treaty obligations were not met. The United States and Mexico have a long-standing treaty in place which governs available supply to both nations from the Rio Grande River waters. Surface water shortages began because Mexico started undersupplying the average minimum annual amount of 350,000 acre-feet (based on a 5-year cycle).

$395 Million Lost Economic Output

The Texas A&M analysis estimated the total economic loss of irrigated crop production lead to an estimated $394.9 million loss in economic output (2012 dollars). Likewise, the loss of irrigated crop production in the LRGV region generated a loss of $217.61 million in forgone value added. In terms of employment, the loss of irrigation results in an estimated loss of 4,840 jobs that depend on the production and sales of agricultural commodities for some portion of their income.

As large as these numbers are we should consider this is the loss for a small four-county region of the lone-star state. The analysis only includes the farm-level sale of crops, such as transportation, storage, processing, packaging, and marketing. The estimates based on the modeling used in this study are specific and limited to direct economic impact and do not consider losses external to farm production.  There are other economic costs wrapped up in water administration systems which are important to consider in the broader context of economic valuation.  For example, the opportunity cost of water abstraction, downstream or lower priority benefits lost to upstream demand. Similarly, secondary economic impacts of water transfers experienced by buyers or sellers.

Irrigation Dependent Farm Land

The Texas A&M study only focused on a small four-county spot in Texas. Why should you care if don’t live in the Lower Rio Grande Valley? Consider the economic impacts as you look at a map that shows how many western counties depend heavily upon irrigation (orange to red). All counties shown in red have a significant amount of cropland area all susceptible to the water uncertainty. Roughly one-third of the United States.


Water Markets - Map United States Acres of Irrigated Harvested Cropland


Public Policy Challenges

Also consider these western states are governed by institutional frameworks that were intended to address issues surrounding equitable apportionment—fair, reliable sharing of water within a specific historical context. The rules that govern water allocation vary location by location and tend to defer to historical evidence of production, not adaptive management. Diminishing snow packs, reduced streamflow and earlier spring-runoffs are further complicating the challenges of managing water.

How will regulating agencies and farmers address the issues of certainty?

Periodic severe droughts and population growth are not going away. Water scarcity issues such as irrigation water shortages will continue to get worse, not better in the arid and semi-arid part of this country. As water scarcity issues continue to become more common how will institutional frameworks respond to the economic losses associated with water shortages? At the farm-scale, what impact will the uncertainty of water have on cultural practices?  How will crop selection, the timing of planting and geographic distribution of where crops are grown shift over time in the context of available water supply?





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