Markets and
Private Property
Rights to Groundwater
Zack Donohew
Bren School of Environmental Science and Management
University of California, Santa Barbara
Dan Searle Postdoctoral Fellow
The Conservation Leadership Council advances innovative, solutions-oriented, environmental and
conservation policies at the local, regional and national levels. This background paper is intended
to stimulate policy conversations and thought and does not necessarily represent policy positions
of the council or individual members of the council. More information about the CLC can be found
at www.LeadingWithConservation.org
Introduction
In the summer of 2009, in the third year of a drought, the
City of Austin’s newspaper, The Statesman, published a
story on private water companies with groundwater permits
seeking to sell water to communities that needed to secure
long-term water supplies. Their aim was to meet the rising
demand of a population projected to double in the next
50 years in the region.1 A lot of people were looking, but no
one was buying. The general manager of the Lower Colorado
River Authority (LRCA) put it this way: “Who’s going to invest
tens of thousands, if not millions, in wells, when the market
is so unsettled?”2
The unsettled issue in and across the United States and
the world is the security of property rights to groundwater.
In much of Texas, groundwater management is organized by
local groundwater conservation districts. These districts are
set at political boundaries, often county boundaries, which
do not align with aquifer boundaries. Inherently political
in nature, groundwater conservation districts are made
up of a board of elected or appointed officials who develop
management plans and have authority to permit the pump­
ing and export of water out of the district. Conservation
districts that seek to manage groundwater are put in a
difficult position. As the general manager of the Lost Pines
Groundwater Conservation District said in 2009, “We’re
probably going to get sued from two directions someday.
Either we turn someone down for a permit, and they sue us
because we’ve been too scrupulous. Or one day when a well
goes dry, we get sued by the landowner because we’re too
free with water.”3 Indeed, under a system of laws that do not
clearly define property rights, picking winners and losers in
a permitting process is a tough gamble.
Three years later, in 2012, with most of Texas still in a
drought, the LRCA board of directors voted to pursue the
purchase of 34,000 acres from an aluminum smelting com­
pany in the hope of exporting up to 45,000 acre-feet of
ground­water to the Austin region.4 It is uncertain how much
water LCRA will be permitted to export from the well sites.
In order to export groundwater, permits will have to be
mod­i­fied by the Post Oak Savannah Groundwater Con­serva­
tion District under which the water resides. But as LCRA’s
1
The regional water planning area of Austin is projected to grow from
1.4 million people in 2010 to 2.8 million in 2060. Texas Water Development
Board. 2012. Water for Texas 2012 State Water Plan. Accessed online
September 1, 2012 at: http://www.twdb.state.tx.us/waterplanning/swp/2012/.
2
Price, Asher, “Groundwater deals may land LCRA in a quagmire,” Statesman
(Austin, TX), Aug. 26, 2012.
3
Price, Asher, “Water speculators fishing for profit amid drought scare,”
Statesman (Austin, TX), Sept. 14, 2009.
4
An acre-foot is a unit of volume defined as an acre of surface area by a depth
of one foot. It is the equivalent of 325,851 U.S. gallons. Water planners esti­
mate that an acre-foot of water can satisfy two to four households per year.
current board chair Timothy Timmerman stated in an op-ed
in The Statesman, “Like the turtle, we can’t make progress
without sticking our necks out some. And we need to make
progress on increasing our water supplies.”5
Texas is one of many places worldwide faced with the
challenges of managing groundwater resources. Advance­
ments in well-pumping technologies enabled rapid growth
in groundwater exploitation during the twentieth century.
Globally, groundwater accounts for 43 percent of water
used to irrigate farmland today, and that percentage is
rising.6 In the United States, a third of public water supplies
and 42 percent of irrigated water come from groundwater
sources.7 Several characteristics of groundwater make
it an attractive option to users relative to surface waters
such as streams and reservoirs. Groundwater is often
of high quality and often does not need to be treated.
Groundwater users are less beholden to the whims of
drought-variable surface water supplies. Conveyance
systems are unnecessary when groundwater can be used
directly from the pump, which has allowed communities
and agriculture to flourish in places that historically had
little access to water.
Groundwater is a critical water resource in many parts
of the world. Consequently, the depletion of groundwater
threatens the long-term sustainable use of this resource and
causes other negative effects. Pumping groundwater beyond
what is naturally or artificially recharged lowers water tables,
which increases the energy cost to users to pump water
from an aquifer. Lowering a water table also can cause the
over­lying land to subside from the compaction of aquifer
materials, affecting aquifer permeability and capacity
to store groundwater. Subsidence is a serious issue in
California’s Central Valley, and urban areas such as Mexico
City, Bangkok and Shanghai.8 In coastal aquifers, ground­
water is susceptible to seawater intrusion. Groundwater
may also have hydrological connections to surface water
and wetlands that can be impacted by pumping.
Since an aquifer is a shared resource, each groundwater
pumper has an impact that cumulatively affects an aquifer,
other users, and the environment. Historically, groundwater
ownership has started from the position of the “rule of
capture,” a phenomenon that leads individual pumpers to
ignore the joint effects of pumping and creates incentives to
use groundwater before someone else does. Thus, it has
been the challenge of state and local governments to
manage groundwater resources.
5
Timmerman, Timothy, “Timmerman, River authority takes historic step,”
Statesman (Austin, TX), Aug. 21, 2012.
6
Siebert et al. 2010
7
USGS 2005
8
Konikow and Kendy 2005
Markets and Private Property Rights to Groundwater
2
This challenge stems from the fact that state laws gen­er­
ally define groundwater as a common property that is
shared by all current and potential future pumpers. Since
groundwater users do not take ownership of the resource
until it is extracted from the ground, they lack an incentive
to conserve groundwater for future use.
This is the setting in which governments operate when
deciding how to manage groundwater resources. In some
settings, rather modest management recommendations
are made, such as encouraging agricultural pumpers to use
efficient technologies and public education about the bene­
fits of conserving water. Alternatively, governments some­
times use the command-and-control approach in response
to critical overdraft. Caps on the total quantity of water
that can be pumped have been implemented in some states.
In other places, water extraction is restricted to a certain
quantity per acre.
This paper proposes to consider how a shift toward pri­
vate property rights can affect the allocation of ground­water.
By establishing groundwater rights based on man­age­ment
objectives, common-pool groundwater conflicts can be
minimized. Moreover, well-defined, transferable rights can
more efficiently distribute groundwater than a central
planner. A history of groundwater law is presented in the
next section, which establishes the rules and incentives
groundwater pumpers face under the current management
institutions. An explanation of how a market for ground­
water rights can be formed and operate is described. Finally,
California’s Mojave Basin Area is presented as an example of
groundwater rights formation and operation.
History of property
in groundwater
Property rights formation is costly. The institutions and
rules adopted to manage groundwater are responses to the
problems that arise from resource scarcity. In the absence
of conflict, it is unnecessary either to define ownership or
limit others’ access to groundwater resources. The economic
viewpoint is that property rights form when the benefits of
capturing the value of owning the resource and avoiding the
damages from complete open access are greater than the
costs of defining and enforcing the property right.9
What factors determine the magnitude of the benefits
and losses that motivate the formation of exclusive property
rights? First, changes in the relative price of the groundwater
can increase the value of ownership and also increase
competition to take ownership.10 For instance, an increase
in urban demand for water increases both the value of
capturing groundwater and the open-access problems
associated with greater competition. A second factor in
changing property rights are changes in production and
enforcement technology. Inventions in technology that
enabled deeper wells to be drilled and pumps that increased
well productivity increased the groundwater demand and
put more stress on aquifers. Likewise, new technologies for
monitoring groundwater pumping and better under­stand­
ing of hydrological and geologic processes increased the
gains from changing the property rights assignments to
avoid losses from competitive pumping.
Groundwater is often referred to as a common-pool
resource, which is true when more than one individual
is withdrawing water from an aquifer. A common-pool
resource, however, does not necessarily have to be a
resource held as a common property. Groundwater, as a
common-pool resource, can be organized into one or more
of several property regimes. It can be held as government
property, common property, private property, or owned by
no one at all.11
The rights defined in these property rights systems can
be placed into several categories. Legal scholars compare
the total combined rights to a bundle of sticks. The bundle
of sticks that are considered relevant to common-pool
groundwater resources can be separated into five rights:12
1. access—the right to drill a well
2. withdrawal—the right to pump a quantity of water
3. m
anagement—the right to transform the groundwater
resource and regulate the internal use patterns
4. e
xclusion—the right to determine who has rights to
access, withdraw, or manage the groundwater resource,
5. t ransferability—the right to lease and sell any of the
aforementioned rights.
One or more of these rights is present in the four
property rights regimes described here.
In the open-access regime, there is no right to exclude
users from the resource, and no property rights are assigned.
In groundwater, an open-access regime would be an extreme
form of the rule of capture where a person takes ownership
of the groundwater by extracting it from the ground.
A common property resource regime has a degree of
exclusivity that is absent in an open-access regime. Com­mon
10
Libecap (1989)
11
Ostrom (2010)
12
9
Demsetz (1967) and Coase (1960)
Schlager and Ostrom (1992) and Ostrom (2010). Schlager and Ostrom use
the term “alienation” in place of “transferability.”
Markets and Private Property Rights to Groundwater
3
property rights are vested in a group of users who are gov­erned
by rules that establish the rights of users and non-users.
Groundwater is often managed in a common property regime.
A private property regime narrowly defines rights to
individuals and firms, or other specific entities. A property
right is fully private when the resource ownership is welldefined, exclusivity can be monitored and enforced, and
the right is transferable in full or in part. Private ground­
water rights are defined as a quantity or share of a
groundwater stock or flow.
Government property regimes exist where national, state
or local governments or agencies control resource rights and
individual access. Water resources are government owned in
most states, while the right to use water is allocated to indi­
viduals and other entities.
These four property rights regimes represent the differ­
ent ways that resources can be managed and owned. The
bundle of rights to groundwater resources are determined
accord­ing to legal doctrines and regulations. These legal
doctrines have evolved over time through common law to
fit the pre­vailing conditions. Competition for groundwater
resources explains the evolution of groundwater doctrines
and regulations adopted by states to manage for scarcity and
eliminate common-pool disputes. In the United States, four
types of legal rules have developed to manage scarcity and
resolve disputes:
1. absolute ownership doctrine
2. the reasonable use doctrine
3. the correlative rights doctrine
4. the doctrine of prior appropriation.13
The absolute ownership doctrine is perhaps the oldest
rule establishing property rights to groundwater. When
states adopted the English common law system, that system
came with the absolute ownership rule derived from the
Latin maxim: cujus est solum, ejus est usque ad coelum et ad
infernos, “To whomever the soil belongs, he owns also to the
sky and to the depths.”14This principle was first applied to
groundwater in England in the 1843 case Acton v. Blundell
and established that a landowner is entitled to pump from
the ground an unlimited amount of water.15
Acton v. Blundell was a legal dispute stemming from
groundwater scarcity.16 Blundell was a coal mine operator
who had dug several pits within a mile of a well Acton used
to operate his textile mill. The coal pits caused Acton’s well
13
See Kaiser (2001). For a discussion of these rules and how they’re applied
across western states.
to go dry. He sued, citing the riparian doctrine that guar­an­
teed equal stream rights. The court ruled in favor of Blundell
and declared, in part, that if a landowner “intercepts or
drains off the water collected from underground springs
in his neigh­bor’s well, this inconvenience to his neighbor
falls within the description of damnum absque injuria17
[loss without injury], which cannot become the ground
of an action.”
Unable to observe groundwater processes and without
a good understanding of hydrological sciences, American
states readily adopted the absolute ownership doctrine,
also known as the rule of capture. For example, the of lack
of understanding of groundwater processes prompted the
Ohio Supreme to rule that “the causes which govern and
direct [groundwater] movements, are so secret, occult, and
concealed that an attempt to administer any set of legal rules
in respect to them would be involved in hopeless uncertainty,
and would, therefore, be practically impossible.”18
Territories and states in the West also adopted the rule of
capture, which, in terms of property regimes, comes closest
to being an open-access resource. Limited only by land
owner­ship over an aquifer, the rule of capture grants a land­
owner an unlimited quantity of water. At the same time, no
landowner is liable for harm inflicted on others’ sharing of
the common-pool groundwater.
As was apparent from the very beginning with Acton, the
absolute ownership doctrine is unsatisfactory for the injured
party. The states east of the 98th meridian with more precip­i­
ta­tion modified the absolute ownership doctrine to a “reason­
able use” rule that limited the rights of overlying land owners
in an effort to resolve conflicts more equitably.19 Also known
as the American rule, the reasonable use doctrine states that
overlying landowners have a co-equal right to a reasonable
amount of groundwater. The criteria for what constitutes
a reasonable use of water are judicially determined and,
there­fore, a degree of uncertainty exists in the pumping
rights of landowners.20 Moreover, the reasonable use doc­trine
does not necessarily eliminate common-pool prob­lems such
as well interference and overdraft. If a groundwater pumper
is injuring another pumper, or if they are mutually injuring
each other, so long as their ground­water use is reasonable,
there is no liability and no mecha­nism to adjust pumping
rights to solve common-pool problems.21 Eastern and Mid­
western states with more abundant water supplies, and, there­
fore, less conflict over groundwater pumping and third-party
17
The Latin phrase damnum absque injuria describes “a loss which does not
give rise to an action of damages against the person causing it” (Black’s Law
Dictionary, 2nd ed.)
18
Dunbar (1977) quoting Frazier v. Brown (1861)12 Ohio 294, 311.
14
Black’s Law Dictionary 341 (5th ed. 1979).
19
Kaiser (2001)
15
Acton v. Blundell (Ex. 1843) 152 Eng. Rep. 1223.
20
Anderson et al (1983)
16
Dunbar (1977)
21
Kaiser (2001)
Markets and Private Property Rights to Groundwater
4
injuries, have generally retained the reasonable use doctrine.22
Most western states, however, have turned to groundwater
rules that address the common-pool conflicts that arise
from limited water resources in arid and semi-arid climates.
California was the first state to develop a new allocation
rule in response to the negative effects and conflicts created
by unlimited pumping under the rule of capture. The corre­
lative rights doctrine was adopted by the California Supreme
Court in 1903 to manage groundwater allocation when and
where the supply is constrained.23 The correlative rights doc­
trine recognizes co-equal rights to overlying landowners. When
supplies are abundant, land owners may pump a reasonable
share of the common-pool. When supplies are insufficient
to meet total demand, however, the available groundwater
supply is apportioned between landowners’ based on
equitable factors such as the ratio of land over the aquifer.24
Under correlative rights, while overlying landowners are
co-equal with each other, they are superior in priority to appro­
priative rights holders. Much like appropriators of surface
water rights, groundwater appropriators are limited to pump­
ing groundwater in surplus of what overlying land­owners
pump. These are municipal and industrial water users that
use groundwater off the land parcel from which it is pumped,
and in some cases outside the groundwater basin altogether.
Besides being junior to overlying rights, appropriative rights
are defined by historical and continu­ous groundwater use.
In the bundle of sticks framework, groundwater rights in
the correlative doctrine define a common property regime
where access is more limited and pumping rights among
and across types of users are better delineated. Among
western states, however, only Nebraska followed California’s
lead by adopting the correlative rights doctrine.25
The prior appropriation doctrine for groundwater proved
to be more popular to address groundwater scarcity in
western states. Unlike the other groundwater doctrines that
tied water ownership to riparian lands, the prior appropri­
ation doctrine assigns water rights based on use. These
rights are typically assigned by a state agency through
permits that designate the quantity of groundwater that
may be withdrawn, the place, and the type of beneficial
use.26 When groundwater supply is less than the permitted
demand, allocations are determined by seniority rule of
“first in time, first in right.” Under this rule, senior water
22
States with a variation of the reasonable use doctrine include Alabama,
Arizona, Florida, Iowa, Kentucky, Maryland, Michigan, Nebraska, New
Hampshire, New York, North Carolina, Ohio, Pennsylvania, Tennessee, West
Virginia, and Wisconsin (Kaiser 2001).
rights holders’ permitted allocations are satisfied before
junior rights holders are permitted to pump.
New Mexico was the first state to adopt the prior appro­
priation doctrine to groundwater. The impetus for the doc­
trinal change was from the Federal Land Bank of Wichita,
which 13 years earlier had declined to grant loans to farmers
irrigating with groundwater from the Roswell Artesian Basin.27
Some farmers resorted to the installation of pumps,
others were forced to abandon their farms. The territorial
and state legislatures sought in vain to check the waning
artesian pressures by the passage of laws forbidding the
waste of water. Instead, they continued to decline and as
they did the area irrigated from groundwater contracted.
By 1916, the original area of the basin which had amounted
to 663 square miles had decreased to 499.28
The uncertainty of future water supplies and unwilling­
ness of banks to grant irrigated farmers loans led the Roswell
Chamber of Commerce to commission the U.S. Geological
Survey to study the hydrologic aspects of the groundwater
basin. Based on the recommendations in the report, the state
passed legislation to adopt the appropriation doctrine in
basins that were scientifically determined to be in overdraft.29
By 1965, fourteen of the seventeen western states had
adopted the appropriation doctrine to groundwater.30 The
exceptions are Arizona, which applies the reasonable use
doctrine and an appropriative permitting system for “Active
Management Areas,” California, which uses the correlative
rights doctrine, and Texas, which still operates under the
absolute ownership doctrine. Each of these states west of
the 98th meridian face a restricted water supply that often
cannot meet total demand for urban, agricultural, and
environmental uses. It is not surprising that each of these
states shifted away from the common law rule of capture
and reasonable use doctrine.
The need for legal reform occurred in the decades from
the 1930s through the 1960s in large part due to increases in
demand spurred on by technological innovation in irrigated
farming and reduction in supply due to the major drought
of the 1950’s. With the development of rotary well drilling,
turbine pumps, and the internal combustion engine, dry
land farmers drilled wells and switched to irrigated farm­
ing.31 Between 1940 and 1960, the number of acres irrigated
by groundwater increased fivefold in the western states.32
Irrigation is the dominant groundwater use today, just
as it was 50 years ago. As of 2005, two-thirds of fresh
27
Dunbar (1977).
23
Katz v. Walkinshaw (1903) 141 Cal. 116, 135.
28
Dunbar (1977)
24
Kaiser (2001) and Bachman et al. (2005).
29
Dunbar (1977, 671)
The correlative rights doctrine was also adopted in Arkansas, Delaware,
Missouri, and New Jersey (Kaiser 2001).
30
Dunbar (1977)
31
Musick et al (1988)
26
32
Dunbar (1977)
25
Anderson et al. (1983)
Markets and Private Property Rights to Groundwater
5
ground­water withdrawals were for irrigation, and another
18 per­cent went to public water supplies.33 Unlike in the
past, how­ever, water demand by the southwestern United
States is increas­ing due to population growth, and new
environ­mental values for recreation and species habitat are
necessi­tating the reallo­cation of water.34 At the same time,
hydroclimate analyses for the Southwest U.S. project that
droughts of Dust Bowl severity will be more frequent in just
a few decades.35
The question policy makers must ask is: are the institu­tions
that define and allocate water rights sufficient to optimally
manage groundwater? This paper argues that most ground­
water basins do not have the proper institu­tional or incen­tive
structures to ensure that groundwater extractions avoid
third-party injuries and are put to their highest and best
uses. Twentieth century legal doctrines are insufficient for
managing 21st century water resource challenges.
While the correlative and prior appropriation systems
have mechanisms in place for agencies to issue groundwater
permits and cap basin withdrawals, often, either for political
or practical reasons, such permitting is not actually done.
As a water law scholar noted, “Groundwater priorities are
seldom enforced in groundwater basins because strict
enforcement would virtually preclude new wells and
severely limit agricultural development and present intract­
able enforcement problems.”36 In states governed by the
reasonable use rule, groundwater transfers are sometimes
restricted to overlying parcels, which limits transferability.
If projections for diminishing and variable surface
water supplies hold true and aggregate demand for water
resources increases, the scarcity value of groundwater will
increase. For institutions to facilitate the allocation of
groundwater efficiently, groundwater users need the price
signal and incentives to allocate groundwater to its highest
and best uses. Therefore, property rights to groundwater
must be well-defined, enforceable, and transferable.
A functioning market for secure and transferable ground­
water rights solves the two biggest issues in groundwater
management. First, it can reduce or eliminate many of the
common-pool resource conflicts that occur under competi­tive
pumping. By vesting groundwater rights to users, the race
to the pump is eliminated. Second, by defining ground­water
rights that are transferable in time, place, and type of use,
rights holders will consider the opportunity cost of using the
groundwater resource. In economics, the oppor­tunity cost is
defined as the value of potential alternatives that are foregone
by the resource use. No conservation district board member
33
USGS (2005)
34
McCarl et al. (1999)
35
Seager et al. (2007)
36
Tarlock (2001).
or watermaster possesses the information necessary to
efficiently allocate scarce ground­water resources. However,
where groundwater rights can be transferred between willing
buyers and sellers, the price system signals to users where to
efficiently guide the dis­tribu­tion of groundwater resources.
If establishing private property rights to groundwater can
improve management, reduce conflict, and allocate ground­
water more efficiently, why has it not been done every­
where? The answer is that the cost of establishing private
property rights to groundwater can be prohibitive in terms
of both time and money. It requires time and money to
accurately estimate groundwater storage, recharge rates,
water table levels, lateral flow through the basin, and
connections with surface water flows. Estimates of historic
pumping have to be established and an allocation scheme
for the initial rights must be negotiated by stakeholders.
Unlike defining surface water rights, where rights are estab­
lished and then water is used for productive economic
activity, groundwater users have a long history of extraction
from the basin that includes capital investments and estab­
lished economic activity.37 In other words, ground­water
pumpers already have skin in the game and may be resistant
to a property rights system that curtails pumping in order to
reach a sustainable management goal.
Therefore, we should encourage the development of
well-defined and tradable groundwater rights where the
benefits of management, trading, and avoiding commonpool conflicts are greater than the costs of defining and
enforcing private property rights. This paper argues that
future economic and climatic conditions will increase the
benefits of forming private property rights to groundwater
in more places in the near future.
Property rights
to groundwater
Groundwater is commonly managed to reduce or eliminate
the common-pool conflicts and overdraft that arise in
competitive pumping. Well-interference can be controlled
with well-spacing regulations. Damages associated with
groundwater depletion, such as increasing pumping costs,
seawater intrusion, and ecosystem degradation, are often
solved with central management agencies restricting
pumping to prevent overdraft or developing management
plans and assessing fees to construct water-replenishment
projects. These piecemeal solutions may well address
specific common-pool management problems; however,
they fail to create an environment where groundwater is
37
Schlager (2006)
Markets and Private Property Rights to Groundwater
6
allocated and reallocated to the most valuable uses.
Developing private property rights to groundwater has the
benefits of improving management by eliminating the
common-pool incentives to think only about the shortterm, increasing the reliability of the resource, and providing
markets where groundwater can be reallocated to maximize
its value. To create an environment where markets can
improve water use efficiency and eliminate incentives to
waste, property rights to groundwater must be well-defined,
monitored and enforced, and transferable.
Shifting groundwater from common to private property
requires defining who has access to the resource, how much
can be withdrawn, and who manages it. The adjudication of
rights creates real property in groundwater. Producer’s
groundwater rights should be defined in terms of quantity
that may be pumped, from where groundwater is extracted,
and how the water is used.
Another characteristic of these well-defined rights is that
they are excludable. Those without groundwater rights are
prevented from pumping, and those with rights are
prevented from pumping more than the quantity of their
deeded rights. Pumping must be monitored to ensure
compliance, and compliance must be enforceable. Often,
a water agency, groundwater district, or state engineer
serves as the watermaster for the groundwater basin to
administer the management plan and monitor and enforce
ground­water rights.
Well-defined and enforceable rights create an oppor­
tunity for groundwater to be traded between buyers and
sellers. Transferability is the key ingredient missing from
most groundwater basins. Transferable property rights to
groundwater enable markets to move groundwater to higher
valued uses and quickly adjust to changing demands and
supply. Markets for both sales and short-term leases of
rights enable buyers and sellers to privately assess their
value of groundwater and their preferences for managing
the risks of water scarcity.
Protection of third-parties is imperative in defining and
trading rights. The public goods nature of some ground­
water resources requires consideration to environmental
interests. In other cases, the rights of other groundwater and
surface waters must not be infringed upon. At the same
time, restrictions on the transfer of groundwater rights
based on place of use, type of use, duration, and quantity
can be major impediments to a functioning market.
Establishing private property rights to groundwater makes
the most sense where changes in the supply and demand of
water resources are increasing water scarcity. Scarcity in the
common-pool setting creates the “tragedy of the commons”
problems associated with groundwater depletion. To over­
come these challenges, some type of groundwater manage­
ment must be instituted. By defining rights, the scarcity
value of groundwater will be identified through market
prices, and water users will buy and sell those rights in a
way that moves water to its highest-valued uses.
Transaction costs are often seen as a major obstacle to
adjudicating groundwater rights. To define groundwater
rights, information on the boundary of the basin must be
ascertained, as well as hydrological data gathered on the
capacity and movement of groundwater in and across
aquifers. Information on who is pumping within a basin
must also be determined. There are sometimes thousands
of users whose pumping records must be determined with
respect to historic quantity and type of use. Court and legal
fees to establish rights can also be substantial. From the
monitoring and enforcement side, metering systems may
need to be installed, and the administrative costs of a water­
master to oversee this process—including the approval of
transfers— must be calculated. However, many of these
costs would be incurred to institute any type of groundwater
management. Adjudicating groundwater rights is worth
the additional costs because, again, it allows the scarcity
of water to be reflected in the price for which rights are
traded. As we will see in the example with California’s
Mojave ground­water basin area, the value of tradable
rights is revealed by the level of market activity.
In a review of southern California groundwater manage­
ment, economist William Blomquist evaluated the costs of
management, comparing basins that limited groundwater
demand by adjudicating rights and the approach taken by
Orange Count, which left groundwater pumping unrestricted.38
Instead, the Orange County Water District (OCWD) manages
supply with artificial replenishment and checks seawater
intrusion with injection barriers. These management costs
are paid for with property and pumping taxes. A dozen miles
north of Orange County is the border of West Basin. West
Basin manages supply by both limiting demand through
the adjudication of rights and by augmenting supply.
Similar to Orange County, West Basin manages groundwater
supply through artificial recharge and combating seawater
intrusion with water injection barriers.
Comparing annual management costs for OCWD and
West Basin, Blomquist calculates that including the amortized
adjudication costs for West Basin, OCWD’s management
costs are twice as much.39 In lieu of not adjudicating or
restricting groundwater pumping, OCWD has had to address
overdraft problems by purchasing more replenish­ment
water, investing in spreading facilities, and aggressively
managing seawater intrusion.
38
See Chapter 6 of Blomquist (1992)
39
See Table 13.1 of Blomquist (1992). In 1985 dollars per acre-foot per year,
West Basin management costs were calculated at $77.40 compared to
$151.79 for Orange County Water District.
Markets and Private Property Rights to Groundwater
7
The choice of how to manage groundwater supplies
is an important issue that must be decided when defining
ground­water rights. One important decision is deciding
how to allocate both the stock of groundwater in an aquifer
and also the flow of groundwater that recharges an aquifer.
Groundwater flows are the long-term average annual
recharge in a groundwater basin or aquifer. Groundwater
stocks, on the other hand, are the quantity of water stored
in a basin or aquifer. Depending on the physical character­
istics of the aquifer and water scarcity, groundwater rights
are defined by what can be sustainably pumped or by a
desired depletion level or rate.
In groundwater management, the term sustainable yield,
sometimes used interchangeably with the term safe yield,
describes the quantity of groundwater that can be extracted
without causing undesirable results. Undesirable results
may include lowering of the water table, seawater intrusion,
land subsidence, water quality degradation, habitat desicca­
tion, and reductions in natural discharge to surface waters.
The sustainable yield is often thought of as equal to the
natural charge of a basin. This is not necessarily the case,
particularly where groundwater and surface water have a
significant hydrological connection. Assuming that there are
no unreasonable results from groundwater pumping at a
rate equal to the natural recharge of the basin, then the
sustainable yield is the quantity of rights that can be allo­
cated without having an impact on the groundwater stock.
Extracting more than the natural recharge over a longtime horizon, essentially, is equivalent to mining an aquifer
of its water. In some cases, the benefits of a managed
depletion of an aquifer are greater than the associated costs,
which may include increasing pumping costs and loss of
storage aquifer from soil compaction and land subsidence.
In Texas, for example, the legislature now requires ground­
water conservation districts that form Groundwater
Management Areas to choose “desired future conditions.”
These desired future conditions may include preferences
over groundwater levels, water quality, surface flows, and
the rate of extraction from a basin.40 These preferences are
then used in groundwater models to develop “managed
available groundwater” values for management planning.41
The initial allocation of groundwater right is an important
decision and one that is often ripe for dispute. Creating
private property rights to groundwater may not seem
necessary until a basin is in a state of sustained overdraft.
Therefore, a decision to limit groundwater production to
a basin’s sustainable yield would require an allocation of
pumping rights less than under unrestricted pumping.
Cooperation from groundwater users requires a belief that
40
Title 31, Part 10, §356.2 of the Texas Administrative Code
41
Mace et al. (2008)
instituting a management regime is in their economic
interest and that the allocation scheme chosen is equitable.
Allocations based on historical pumping rates recognize
capital investments and economic dependence on
groundwater. An average pumping rate based on a long-run
average helps minimize strategic pumping by users who
may anticipate a pro rata reduction in extraction in the near
future. Additionally, rights could be allocated proportional
to the area of landownership over an aquifer. Granting
exemptions to allocation restrictions for domestic ground­
water users and others with wells that produce up to a maxi­
mum determined amount can reduce the adjudication costs
while having a negligible effect on a groundwater basin.
Property systems
The system by which rights are allocated could take several
forms depending on the characteristics of the groundwater
basin and the management preferences of resources users.
Determinants of the characteristics of a property rights
system include the degree of water scarcity, the availability
of other water resources, the level of overdraft, variability
in annual recharge, and the decision to allocate rights to the
sustainable annual yield or to a level that changes the water
level. These conditions and decisions affect the choice of the
property rights system in two ways. First, these conditions
affect the system choice in terms of allocating rights to a
specific quantity of water—either annually or in total—or
to a proportional share of available groundwater. Second,
the conditions affect whether rights are allocated to annual
recharge flow—such as the sustainable yield—or to both the
recharge flows and the stock of water held in storage. Three
possible allocation systems are presented below that may
be preferable, depending on groundwater basin settings.
The most straight forward property rights system is,
perhaps, one that deeds a specific and fixed quantity of
groundwater. Such a system would provide rights holders
with certainty in their allowed annual extraction. Further,
quantified rights could be traded in full or divided. For such
a system to be effective, a reasonable amount of certainty is
needed in terms of both the expected annual recharge and
also the hydrological processes of the groundwater basin. If
these value are measured incorrectly at the time of adjudi­ca­
tion or if the natural conditions change and the basin remains
in a state of overdraft, such as climatic changes or aquifer
compaction, it could be the case that management goals
could not be met or rights could have to be altered. These
possibilities create property rights that are less secure prop­
erty rights and reduce the viability of a groundwater market.
A fixed quantity system may still be too rigid. If the deter­
mined sustainable yield used to allocate groundwater rights
Markets and Private Property Rights to Groundwater
8
turns out to be an overestimate, the overdraft problem has
not been solved. Conversely, consider a particularly wet year
with more recharge than is quantified in rights. Pumpers
may be prohibited from capturing this additional recharge
above and beyond their deeded rights. This could be a
missed opportunity to reduce costs by pumping more water
that year instead of securing more expensive supplemental
water elsewhere. Though the excess water may benefit all
users by raising the water table, some of that water may be
lost to natural discharge out of the basin.42 A fixed quantity
system might be effective if the management goal is to
deplete the resource stock and there is little or no natural
recharge. On the other hand, if the goal is to manage a basin
at the sustainable yield, a fixed quantity of groundwater
rights is best adopted when the hydrological conditions are
well understood and predictable.
Unfortunately many aquifers are not well understood.
Water is a variable resource in the ways that matter most
to users—timing, place, and quantity. Further, data on a
basin’s hydrology are incomplete. Therefore, flexibility in
annual groundwater production is beneficial in terms of
basin man­agement and resource use. This flexibility can
be achieved by allocating rights to pumping shares instead
of specific quantities of groundwater. In the pumping-shares
system, users own rights to a fraction of the total annual
basin ground­water production. While the proportion of a
user’s right remains constant from year to year, the quantity
of water that a producer is allowed to extract varies by the
deter­mined total allowable production. The pumpingshares system, therefore, avoids the problem of having to
accurately determine a basin’s safe yield at the time of
adjudi­cation, and avoids harm to the basin in years of drought
and allows users to benefit from increased extraction in
wet years.
Take a simple example where an individual has a right
to one percent of the total allowable production. If that total
allowable production is 50,000 acre-feet for the basin, that
pumper’s one percent share for the year is 500 acre-feet.
The total allowable production would be set by a water­
master. An obvious way to set the production amount would
be on an estimate of the recharge for that year. This estimate
could be made some time early in the calendar year to give
water user’s time to plan for their peak water demands in the
summer months.43 Importantly, it would allow enough time
for water market transactions to occur. Short-term leases
would permit buyers and seller to trade set quantities of
42
Blomquist (1992) describes how the early California groundwater
adjudications in Raymond, Central and West Basins fixed rights to specific
quantities, while later adjudications chose more flexible systems such as
proportional shares.
43
Vaughn and Emerson (1996) advocate a share system for the Edwards
Aquifer in Texas.
water once a total allowable production for the year was set.
Shares of groundwater pumping rights could be traded in
the forms of long-term leases and sales at any time.
A more complete version of a pumping-shares system
was sketched out 35 years ago by Nobel Laureate economist
Vernon Smith.44 He describes the defining characteristics,
as applied to the Tucson Basin in Arizona, as the annual
recharge and the stock. It follows, therefore, that in this
property system rights are defined by the annual recharge
flow and the groundwater stock separately.
The example of the Tucson Basin creates an initial allo­ca­
tion based on the historic pumping record of each ground­
water user and divided by the total amount pumped by
all users to create a share. Next, hydrological information
on the annual natural recharge and the total groundwater
stock that is recoverable in the basin is assessed. These three
factors—a user’s share of annual groundwater pumping, the
sustainable yield, and the groundwater stock—are used to
create two supplemental rights for an individual user. One
is a right to the annual recharge, or flow, of the basin. The
other right is to the groundwater stock.
Here is Smith’s example for the Tucson Basin in 1975,
beginning with the relevant factors. Groundwater users are
pumping 224,600 acre-feet from the basin annually. The
basin has a sustainable yield of only 74,600 acre-feet per
year. The sustained overdraft of groundwater leads to
common-pool problems such as increasing pumping costs
and to the removal of incentives to strategically leave water
in the basin for future use. The natural stock of groundwater
that could be economically recovered from the aquifer is
30 million acre-feet.
A user’s rights to the flow and stock of groundwater
would be determined as follows:
1. The share a user could annually pump in perpetuity
would be given by a user’s share of the competitive,
common-pool pumping and multiplied by the amount
of groundwater that can be sustainably yielded from the
basin. For an individual user i’s quantity of pumping in
the competitive, unadjudicated setting, is divided by
the total competitive pumping of all groundwater users,
which is 224,600 acre-feet. This proportion is multiplied
by the sustainable yield. In this case, the sustainable yield
is 74,600 acre-feet and user i’s share is
acre-feet.
,
2. S
imilarly, the quantity of groundwater stock user “i”
would be deeded, based on historic pumping, would be
user i’s quantity of pumping in the competitive, unadjudi­
cated setting, , and divided by the total competitive
pumping, 224,600 acre-feet. This proportion would be
multiplied by the amount of recoverable groundwater in
44
Smith (1977)
Markets and Private Property Rights to Groundwater
9
storage, 30 million acre-feet. This water right would equal
30 million *
acre-feet.
,
The flow and stock system is very similar, then, to the
pumping-shares system, with the added component that
groundwater rights are allocated to the groundwater stock as
well. Assigning rights to the entire groundwater stock does
not necessarily have to be the objective. If the objective is to
allow only a certain draw down of the water table, rights can be
assigned to only a proportion of the total ground­water stock.
Markets
The significance of each of these property rights systems
is that they facilitate market transactions. Deeded rights
to stock and flows create incentives for water rights holders
to consider the opportunity cost of how they use their water
and eliminate or reduce the incentives to sub optimally
pump groundwater. When rights groundwater flows and
stocks are secure, then users can strategically think about
how to use each type of right. Stock rights can be saved for
future used to mitigate the risk of drought and other water
scarcity. The argument can be made that the common pool
problem of increased pumping costs can be lessened in a
flow and stock property rights system. The security that a
portion of the groundwater stock is owned by a user elimi­
nates the incentive under the rule of capture to pump as
much as one can as fast as one can. However, the incentive
to get a portion of groundwater stock that is less expensive
to pump to the surface means rights holders will want to
consider how much groundwater stock other rights holders
are pumping and determine how much more it will cost
to pump their own share of the stock up as the water table
drops from overall depletion. So, then, the stock depletion
rate will be slower than under the common-pool setting but
not as efficient as if all pumpers coordinated their activity.45
No matter what type of property rights system is
adopted, other issues that can affect the incentives of
rights holders to use and trade water must be settled. One
important issue is how the unused portion of a user’s annual
right is treated. The unused portion of a groundwater can
recharge the basin to some extent. This stored water could
be pumped or traded in future time periods. This approach
has the shared benefit of raising the water table for all
pumpers. However, it also takes away storage space, which
also has value as a property right. Further, the hydrological
45
Anderson et al (1983) pose the question of how the deletion time path
diverges from the optimal. Gardner et al (1997) examine the problem individual
strategic behavior in laboratory experiments. They find that stock shares
increase efficiency from the common-pool depletion rate, but are still much
lower than the optimal rate of depletion.
characteristics may mean that the unused portion of water
leaves the basin by natural discharge. This issue is best
settled on a basin by basin basis. However, where storage
space is unallocated, and water is not leaving the basin
system, a user’s incentives to use or waste water should
carefully be considered based on their allowance to own
unused water in future periods.
Protecting third-parties from being harmed is a necessary
consideration in establishing and transferring groundwater
rights. This may require that transfers are limited to the
original consumptive right rather than the larger diverted
right. Similar to how surface water trans­actions are handled,
determining third-party effects should be handled by the
watermaster with a notice-of- hearing process.
Establishing a private property right to groundwater can
take many different forms, depending on the groundwater
management needs. Consider a recent groundwater
adjudication to examine common-pool problems and how
adjudicating a groundwater basin can improve management
and establish transferable property rights that enable a
robust market to reallocate water more efficiently.
Application: Mojave Basin
Area
The Mojave River Basin Area in California has operated with
a market for adjudicated groundwater rights for nearly 20
years. As in much of the western United States, agricultural
demand for water was most prevalent in the basin area. As
the region’s population grew, a reliable and long-term supply
was needed for municipalities. The reality faced by ground­
water users, however, was that the 100 miles of the Mojave
River stream beds are most often dry, leaving only the
ground­water basin as a natural water supply. Scarcity and
a need for reliable water supplies led to an agreement to
manage the basin and adjudicate rights to groundwater.
The effects of a groundwater market and management of
the basin area by the Mojave Water Agency are presented in
this case study. First, though, a description of the basin and
a history of its overdraft are presented.
The Mojave groundwater basin is located within San
Bernardino County, less than 100 miles northeast of Los
Angeles. The basin is 1,400 square miles in area and is
divided into six distinct but hydraulically connected sub­
areas. Cutting a path north and east through the basin is
the Mojave River, which is fed by rainfall and snowmelt from
the San Bernardino Mountains but is mostly a dry stream­
bed except for periods of flooding.46
46
USGS (2001)
Markets and Private Property Rights to Groundwater
10
Water demand comes from agricultural, industrial, and
urban users. The population in the Mojave Basin Area is over
350,000 and is expected to approach half a million by 2020.47
The region experienced rapid growth beginning in the
middle of the 1940s, which coincided with the regional
drought of 1945-1965.48 Shallow wells meant that irrigators
could easily pump groundwater and take advantage of the
desert’s long growing season. The crop of choice was alfalfa,
which consumes a lot of groundwater.49 By 1960, the basin
area population was just 60,000, but the combination of
urban and agricultural water demands had put all the basin
subareas into a condition of overdraft.
The development of the California’s State Water Project
(SWP) was underway at this time. The SWP included con­
structing the California Aqueduct to move water from
northern California to the semi-arid southern half of the
state. In 1960, the Mojave Water Agency (MWA) was formed
to contract with the state for an entitlement to SWP water.50
The MWA foresaw a problem getting water users to pay for
SWP water once it became available in 1972. Local ground­
water, though in overdraft, would be cheaper to produce
than paying for expensive SWP water. Therefore, the MWA
saw a need to determine groundwater rights for the basin.
The problem was presented in the 1964MWA annual report:
Hence the basic problem arises as to who is entitled to
the local supply, and who should pay for the more expensive
imported water. To make this determination it is appropriate
to determine what interest each existing and future pumper
has, as a matter of law, in the available local supply. The
traditional method of making this determination is to
file an action in the local superior court to determine the
rights of each of the users, and at the same time determine
whether any parties who are not now using the local supply
will in the future be entitled to use any portion of it.51
In 1966, the MWA filed a complaint in state court for the
determination of water rights to the Mojave Basin.52 Imme­
di­ately contentious among water users and even prompting
divisions among MWA board members, the court case
dragged on for ten years as users tried to reach a stipulated
agreement that would keep the case out of the courtroom.
Users had several complaints about the process. One issue
was whether water in the Mojave was ground­water or an
underground stream subject to prior appropri­ation. It was
disputed whether the basin was even in a sustained over­
draft or just in a severe drought. Also important was the
47
MWA (2004)
48
Blomquist (1992)
49
Blomquist (1992)
50
MWA (2004)
perception of equity. For groundwater users who were going
to have their water rights determined and, perhaps, need
to buy water from the SWP because of cutback in pumping,
there was a view that some major pumpers agreeing to
adjudication were being given water rights greater than their
historic pumping.53 In the end, MWA withdrew its attempt
to adjudicate the Mojave Basin, and the case was dismissed
in 1976.
In the absence of a determination of water rights,
ground­water users continued to competitively withdraw
water from the Mojave Basin. For the rest of the 1970s and
through the 1980s, MWA’s residents paid property taxes for
their share of the SWP’s capital costs; however, MWA sold
no water for which they held entitlement rights.54
By the end of the 1980s, the population in the region
expanded to 250,000, with much of the growth occurring
in communities in the upper reaches of the basin closest
to Los Angeles. It is estimated that, at its peak, overdraft in
the Mojave Basin was 200,000 acre-feet per year, while the
annual recharge is estimated to be 63,400 acre-feet in a
normal year and only 22,100 acre-feet per year on average
during a dry year. The effects were felt basin wide. Ground­
water levels dropped 50 to 100 feet in many wells.55 The total
storage capacity of the Mojave is estimated to be five million
acre-feet. Cumulative overdraft in the basin is estimated to
be over two million acre-feet.
The growth of cities in the upper reaches of the basin
and lowering water tables brought renewed water conflict
in 1990 when the City of Barstow and the Southern California
Water Company filed a lawsuit in state court against upstream
water users for the declaration of water rights. A full adjudi­
ca­tion was again underway a year later when MWA filed a
complaint to have the individual water rights of all pro­ducers
in the basin determined.
Unlike the first attempt at adjudication in 1964, efforts
to negotiate a solution to the overdraft problem and a settle­
ment of water rights were more productive. By the fall of
1993, 75 percent of groundwater pumpers agreed to a
Stipulated Judgment, representing 80 percent of the verified
water production.56 After six years of litigation and appeals,
agreements were reached with the non-stipulating parties.
MWA was appointed by the Court to be the Watermaster
for the Basin and administer the physical solution estab­lished
in the judgment. The physical solution to the over­draft
problem created five basin subareas, which are hydraulically
connected. The judgment requires that the historic esti­
mated annual averages of the natural flow between subareas
53
Blomquist (2012: 231-232).
Mojave Water Agency Annual Report, 1964, page 14. Quoted in Blomquist
(1992: 225).
54
Blomquist (2012: 236).
55
Mojave (2004)
52
56
Mojave (2012)
51
Mojave Water Agency v. Clarence L. Abbey et al.
Markets and Private Property Rights to Groundwater
11
be met. If the subarea flow is not met, the producers in the
upstream subarea basin must provide makeup water.57
Meeting the goals of ending overdraft in basin requires
reducing the total pumping in each of the basins. Rights
were determined for each of the producers based on their
historic pumping record for the five-year period, 1986-1990,
before the adjudication was initiated. The maximum annual
production during that period was used to establish a pro­
ducer’s Base Annual Production (BAP). The BAP determines
the proportional share of a producer’s rights in that subarea.
Within a subarea, all producers’ rights have equal priority.
The judgment also created a minimal class of water pro­
ducers, defined as producing less than 10 acre-feet per year,
who were dismissed from the judgment.
Ratcheting down water production in each of the sub­
areas is done by making a proportional reduction of each
producer’s BAP. The volume of water that can be pumped
in a year is the Free Production Allowance (FPA), which is
calculated as the proportion of a BAP right.
To allow flexibility and take advantage of the aquifer
storage system, producers may pump more than their FPA;
however, they are required to replace the excess water taken.
This can be accomplished by paying the Watermaster the
costs of acquiring replacement water or through trans­
actions with other rights holders.
In the first year of the judgment, a FPA of 100% BAP for
the basin was stipulated. Thereafter, each subarea was
required to lower their production by 5% of BAP for each of
the next four years, so that in 1998, of the 259,061 acre-feet
of BAP, only 80% or BAP, or 207,249 acre-feet were freely
produced. Every year since then, it is the watermaster’s
responsibility to adjust the FPA either up or down for each
subarea to reach the Production Safe Yield (PSY) for the
subarea. If the difference in Free Production Allowance and
PSY is greater than five percent of a subarea’s Base Annual
Production, the watermaster can recommend to the courts
a ramp down of free production allowance.
Groundwater producers who use only part of their FPA
in a year are permitted to carry over the remainder to the
next year. This carryover water is the first to be considered
pumped in the following year’s total production. Rights
holders, however, are restricted in their use of carryover
water in one important way. Any unused FPA that is not
pumped in the carryover year is deemed expired. This rule
limits the ability for producers to make longer-term plans
for how to use their groundwater and reduces the incentive
to conserve water.
The judgment provides rights holders with the ability
to buy, sell, and lease BAP rights and FPA rights, including
carryover. Transfers of rights are limited to the consumptive
57
Mojave (2012)
use of water to avoid third-party damages. Further, transfers
between subareas are limited to leases only and must be
approved by the watermaster. Another limitation is that no
water can be exported out of the basin.
Producers who are obligated to replace water in excess of
their Free Production Allowance can purchase or lease rights
within the same subarea to meet that obligation. In 2011,
the replacement assessment rate charged by the water­
master was $395.
There are currently about 470 water producers in the
Mojave Basin Area with 259,000 Base Annual Production
rights. Figure 1 shows a map of the Mojave Water Agency
and the adjudicated boundaries. Urban water use demand
is high in the Alto Subarea. Though Alto represents over
40 percent of base annual production rights, for 2013–2014,
the free production allowance is recommended to be set at
60% of BAP for municipal and urban users.
Table 1 describes water consumption in the basin from
2008-2012. Groundwater pumping makes up the majority of
water use. Water from the State Water Project to the Mojave
Figure 1
Mojave Water Agency Ajudicated
Boundary
Source: Mojave Water Agency, http://www.mojavewater.org/files/
mWAAdjudicatedBoundaries2.pdf
Markets and Private Property Rights to Groundwater
12
Table 1
Table 2
Mojave Basin water use
Mojave Basin replacement water
(acre-feet)
Obligations and purchases
Water
year
Reclaimed
wastewater
Verified
State water groundwater
imports
production
Total water
use
Water
year
Replacement
water
obligations
Replacement
water
assessments
Replacement
water
purchases
Unused
FPA
2008
4,776
11,060
156,724
172,560
2008
32,549
$10,969,013
27,720
116,424
2009
4,582
19,166
146,131
169,879
2009
27,798
$10,730,028
21,516
114,629
2010
5,304
16,286
126,705
148,295
2010
20,825
$ 8,227,875
16,580
116,577
2011
5,802
35,700
128,084
169,586
2011
14,355
$ 5,670,225
10,591
113,989
2012
4,181
32,066
137,037
173,284
2012
19,558
$ 7,920,990
6,231
110,663
Sources: Annual Report of the Mojave Basin Area Watermaster 2008–2012.
http://www.mojavewater.org/downloads.html
Sources: Annual Report of the Mojave Basin Area Watermaster 2008–2012.
http://www.mojavewater.org/downloads.html
Figure 2
Permanent and temporary water transactions, 1995–2012
Markets and Private Property Rights to Groundwater
13
Figure 3
Permanent (BAP) transaction prices
Figure 4
Temporary (FPA) transaction prices
Markets and Private Property Rights to Groundwater
14
Water Agency is also a large share of consumptive use,
though the annual supply is far from reliable.
Table 2 describes the accounting for replacement water
obligations for the entire adjudicated basing from 20082012. Since pumpers are obliged to account for groundwater
pumping above and beyond their free production allow­
ances by either paying the replacement water assessment
rate per acre-foot or by acquiring through purchase or lease
another producer’s unused FPA. For example, in water year
2012 water producers had obligations for 19,558 acre feet in
the Mojave Basin. Nearly that entire obligation was within
the Alto Subarea. The watermaster made an accumulative
replacement water assessment of $7,920,990 at a rate of
$405 per acre-foot. Because of market transactions, however,
only 6,231 acre-feet of replacement water was purchased
by the watermaster.58 The remainder of the replacement
water obligations was met through transactions with other
producers for unused FPA within the same Subarea.
Water transactions have been occurring in the Basin
since rights were adjudicated. Temporary and permanent
transactions over time are shown in Figure 2. Temporary
transfers of free production allowance, carryover, or carry­
over in lieu of replacement water make up the majority
of transactions. Permanent transactions of base annual
production rights occur at a much smaller but consistent
level through time.
Temporary and permanent transactions prices are
represented in Figure 3 and Figure 4. In recent years, the
average BAP transaction price has been around $2,000 per
acre-foot. Looking at individual transactions, however,
reveals that some are selling for well over $4,000 per acrefoot. These transactions are in the more urban Alto Subarea.
Temporary FPA transaction prices have been trending up
since 2005. The average price was nearly $250 per acre-foot
in 2012. As with BAP transfers, there are a number of FPA
transactions trading well above the average selling price.
Again, these come from the Alto Subarea, where urban
demand for water is high and where the FPA is set at just
60% of base annual production in order to meet the safe
yield for the Subarea.
Figure 4 also graphs the rates set by the watermaster for
replacement water assessments. For water producers who
pump groundwater amounts above their free production
allocation, the replacement water rate is the price they
would have to pay if they were unable to trade with other
rights holders. Figure 4 shows, however, that producers in
need of additional water are able to transact with other
producers for water, and the trades are at lower prices than
the replacement water rate.
Figures 5 and 6 describe the total magnitude of water
rights transactions. For example, in 2012 over 25,000 acrefeet of FPA were transferred at a total value of over $7 million.
This represents nearly 14% of the Basin’s FPA in 2012. For
BAP rights, there were nearly 600 acre-feet trans­ferred in
monetary transactions, which represent a fraction of a
percent of total rights.
The administrative costs of the watermaster to monitor,
enforce, and facilitate water rights transactions in the basin
in water year 2012 were just under $400,000. Groundwater
users were assessed fees of $3.55 per acre-foot to cover these
costs. Additionally, there is a biological assessment rate of
$0.79 per acre-foot in 2012.59 This biological assessment
goes toward a Biological Resources Trust Fund, which was
established in the judgment to go toward projects to protect
endangered species and riparian habitat in the basin.
Adjudicating the Mojave Groundwater Basin Area and
reaching management objectives to develop a physical
solution to the overdraft problem have resulted in benefits
and costs. Along with the annual administrative costs to
groundwater producers there was the cost of adjudicating
the basin. One estimate is that the adjudication cost
$30 million.60 One way to consider the price of adjudication
is to divide this cost estimate by the 2012 FPA of 184,215
acre-feet. With this approach, the price of adjudicating the
Mojave is $163 per acre-foot. While groundwater users are
paying for what they once produced for only the cost of
pumping, there’s no question that the adjudication has
increased sustainable pumping. Recall that it took only
50 years to pump half of the aquifer’s 5 million acre-foot
storage capacity.
Though the Mojave judgment did not establish property
rights to the groundwater stock, rights were established that
are ramping down to the basin’s production safe yield. The
number of transactions taking place annually in the basin,
both in terms of annual leases and permanent sales demon­
strates the value of the water market to redirect water to
higher valued uses.
Conclusion
The time has come for institutional reform in
groundwater management that recognizes the scarcity value
of groundwater. Everyone agrees that groundwater in many
places is both scarce and valuable; however, in economic
terms, the scarcity value of groundwater is not reflected in
59
MWA (2011)
60
58
MWA (2012)
Figueroa, Teri, “Water agreement endangered: Move by Baldy Mesa Water
District could lead to costly legal battles,” Desert Dispatch (Barstow, CA)
June 23, 2001.
Markets and Private Property Rights to Groundwater
15
Figure 5
Temporary transfer volume and sales volume
Figure 6
Permanent transfer volume and sales value
Markets and Private Property Rights to Groundwater
16
how we manage and use the resource. Those who propose
central control of managing groundwater often argue that
the costs of adjudicating are too high. The benefits, however,
of creating the institutions that both manage the sustainable
use of groundwater and establish tradable rights to move
water from historically low-valued uses to higher ones are
now justifying these costs and makes both the buyers and
sellers of water rights better off.
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