On Markets and Water Security

Resource risk management is an important element of Water Security.  The changing hydrologic risk on the Colorado River provides a context to address how risk is currently allocated, how it may be reallocated, how we may reduce risk, and how we quantify risk and measure improvements in Water Security. 

The Colorado River Basin faces increased hydrologic risk as Colorado River flows return to their long-term averages that are substantially below the allocation of water rights.  Reduced supply reliability is on the horizon, especially for low-priority water users that, in the case of Arizona, are customers of the Central Arizona Project.  Recent market transactions in California offer different approaches to risk management.  The fallowing agreement between Palo Verde Irrigation District and the Metropolitan Water District reallocates water from senior to junior users when needed by Metropolitan.  The long-term agreement between the Imperial Irrigation District and the San Diego County Water Authority is based on long-term water conservation to allow more users of water available from Imperial’s senior water right.  Another risk management tool, water storage, faces challenges due to the changing hydrology of the Colorado River.  There will be more frequent demand for stored water and less frequent opportunities for storage.  

Quantifying and understanding risks can inform choices on how to enhance Water Security.  The current approach involves the “Wisdom of Experts” with computer resource models and hydrology history.  The non-transparent nature of analysis for the policy and broader community runs the risk of a lack of buy-in.  Another market solution will emerge for water resources—prediction markets that aggregate the diverse information, analysis and beliefs of the water community about the likelihood and magnitude of future outcomes (policy, hydrology, projects, agreements, litigation).

We can improve Water Security through prudent risk management.  Risk management is forward-looking, with a subjective nature.  Decision-making will improve by expanding dialogue with alternative views about risks and future outcomes with a way to balance them.  By improving understanding of future risks, prediction markets can help us secure a better water future.

This post is based on a presentation made at the conference “Water Security from the Ground Up,” Water Resources Research Center, University of Arizona, March 5, 2013.  On Markets and Water Security Presentation

For more on prediction markets, please visit the forthcoming series “Prediction Markets for the Water Industry”, starting March 11, 2013

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About Rodney T. Smith

Rodney T. Smith, Ph.D., President of Stratecon Inc.—an economics and strategic planning consulting firm—advises public and private sector water users on the acquisition, sale and leasing of water rights and water supplies in the western U.S. He is routinely involved in economic valuation of water rights, water investments, and negotiation of water acquisition and transportation agreements and has served as an expert witness in the economic valuation of groundwater resources, disputes over the economic interpretation of water contracts, economics of water conservation and water use practices, and the socio-economic impacts of land fallowing. For more information, see www.stratwater.com.