Colorado Water : Newsletter of the Water Center of CSU Vol 27,5

With the theme, Economics of Water, this issue of the journal contained the following featured articles: Relative Costs of New Water Supply Options for Front Range Cities, Examining the Economics of Water Issues in Colorado, Reconciling Law and Economics in Water Administration, Overview of the "Colorado Review: Water Management and Land Use Planning Integration", Moving from Water Debate to Water Dialogue: A Process Design Experiment, and Introducing the Colorado Water Innovation Cluster. The authors represent various Colorado educational institutions, agencies, and firms. The Costs and Benefits of  Preventative Management for Zebra and Quagga Mussels documents the results of a simulation model to track the invasion of these species on the Colorado-Big Thompson (C-BT) system--a topic outside the scope of this post.

In his editorial, Reagan Waskom summarized current realities: water is cheap, scarce, dictated by political rather than economic forces, and distributed and transmitted through an increasingly aging and costly infrastructure. He wrote, "It has been estimated that the U.S. domestic water and wastewater sector is a $120 billion enterprise annually and the world water market is likely to approach $500 billion" (p.1). He predicted an increase of water prices, an expansion of markets, and economics forcing higher valued applications of water. Optimistically, he concluded that "the outcome is not likely to be cheaper water, but perhaps we will find more efficient ways to share water between agriculture, the environment, and our growing cities" (p. 1).

The first article, a condensed version of one posted at http://www.waterpolicy.info/, applied the cost per acre foot metric to evaluate the most effective methods of meeting future water shortages. Specifically, the authors considered "(1) increase water supplies through new projects (and/or the rehabilitation or expansion of existing projects); (2) purchase and transfer water rights from the agricultural sector; and/or (3) reduce demand through conservation and efficiency projects. For the first category, the authors included the cost projections of the Northern Integrated Supply Project (NISP) with its 6 permutations, the South Metro Water Supply Authority (SMWSA) Master Plan with its 15 permutations, and the Southern Delivery System (SDS) with its 7 permutations. For the second category, buy and dry, the authors utilized the transfers recorded of the Colorado-Big Thompson project from 1990 to 2009, of which 113 transpired. For the final group, conservation, the authors referenced the second report of the Statewide Water Supply Initiative (SWSI II) and a report to be published by the Great Western Institute for the Colorado Water Conservation Board on "Water Conservation Implementation Plans" (p.2).  From this data the authors calculated that the cost per acre foot for the first option had an estimated average cost of $20,764 to a low of $15,932. The second option, buy and dry, ranged from $21,000 at the beginning of the decade to $14,000 as a low. The last consideration, water conservation, had a cost per acre foot of from $11,098 to $5,200, the figure supported by the authors. Shortcomings of the author's approach included a number of current realities. First, for transmountain diversions, the author should have factored into their cost estimates the Million project of moving water from Flaming Gorge to the east slope. The second option, the buy and dry of agriculture,  omits the costs of legal fees in transferring water from ag to municipal use, the exclusion of opportunity costs, and social costs, the outcome of the demise of the agrarian community. The final option, conservation, should have examined the costs incurred by Nevada in the state's turf buyout program.

Examining the Economics of Water Issues in Colorado: An Equilibrium Displacement Mathematical Programming Model, an article that employed the Colorado Equilibrium Displacement Mathematical Programming (CEDMP) model to identify "solutions that maximize net social benefits to the agricultural sector (the sum of consumer and producer surplus)" (p. 4). The authors modified the model to incorporate water in addition to agriculture and limited the geography to Colorado. Crops and livestock--13 crops and nine livestock and their by-products, such as meat, milk and eggs--make up the agricultural production.  The variables of water, land, seed, technology, fertilizer, energy, and other required inputs. Of these, water and land have the most limited quantity. Models results forecasted the most fallowing of land in the South Platte basin, 133,000 to 266,000; 60, 000 to 100,000 in the Rio Grande basin; and 23,000 to 72,000 in the Arkansas. This change would reduce livestock out in all categories, cow, beef, hogs, sheep, broilers, and turkeys.

Charles W. Howe's article, Reconciling Law and Economics in Water Administration, dissects the advantages and disadvantages of the prior appropriation doctrine that governs water law in the State of Colorado. In the column of disadvantages, the prior appropriation doctrine favors senior rights, downstream owners who have low-value uses of water and punishes higher value junior rights, upstream holders, counter to free market forces. These occurrences expose the weaknesses of the call system in the state. Secondly, all water transfers undergo Water Court review,  inflating transaction costs. The State of Colorado prohibits speculation in the sale of water. However, the courts have not clearly defined the term, according to Howe. Consistent with the prior appropriation doctrine, legitimate transfers require "that a change of use filing must name a definite transferee who has a clear 'beneficial use' for the water" (p. 17). Strict adherence to this view has resulted in impeding transactions such as those to the front range and the Super Ditch project in the Arkansas basin. Furthermore, Howe argues that the courts have applied the principle of speculation erratically.

Howe concentrated on three areas of improvement in the prior appropriation system, "the likely inefficiency of river calls, (2) the related issue of excessive transaction costs in water filings, and (3) excessive applications of the non-speculation doctrine that rule out beneficial 'repackaging' of water rights'" (p. 18).
He suggested the following; a standardized method to measure consumptive use and time of use, simplification of water court procedures, and privatizing consumption--eliminating judicial review. Howe surmised that market forces would rectify call discrepancies. Finally, clarification by the courts on speculation, as it relates to beneficial use and a review of conditional rights, a form of speculation that allows the holder to maintain the status of the right indefinitely.

Colorado Water: Newsletter of the Water Center of Colorado State University. (September/October, 2010)
Volume 27(5). Co-sponsored by Colorado Water Institute, Colorado State University Agricultural Experiment Station, Colorado State University Extension, Colorado State Forest Service, and Colorado Climate Center.