Indian Water Rights: A Series on the Appropriate Cost Benefit Analysis Framework for Economic Feasibility Assessment

I.                   Introduction

The near lack of progress in resolving the millions of acre-feet of outstanding Federal reserved water rights claims of many Native American Tribes is a significant contributor to the perilous uncertainty that plaques the water supply-demand landscape in many regions of the western United States.  This uncertainty poses a formidable constraint to the proactive and comprehensive water resource plan decision-making so particularly needed in these times of prolonged drought and widespread concern over the potential adverse hydrologic impacts of climate change.  It is no surprise, therefore, that stakeholders at the local, state and federal levels are ever searching for technical and political solutions to facilitate the settlement of native water rights claims as a means to jumpstart long stalled water resource development and management action.  A prime example of this very situation can be found within the Milk River basin of Montana where the sizable unresolved water rights claims of the Blackfeet Nation has brought efforts to address that region’s shifting water resource needs to a virtual standstill despite the substantial commitment of the Federal and state governments to settlement efforts for what is now going on twenty years.

A central technical consideration in the quantification of Native American water rights claims is economics; specifically cost-benefit analysis (or CBA).  As such, the lack of an established methodological framework for performing CBA in the context of native water rights claims has proven to be an important bottleneck in efforts to settle those rights. The purpose of this blog, therefore, is to discuss the appropriate CBA framework to apply in evaluating water resource development on Indian Reservations as it relates to the quantification of Native American Federal reserved water rights and why the standard federal guidelines for water resource project evaluation should not be used for this purpose.  Specific topics to be addressed in future installments of this series include the appropriate objective function for the economic analysis of water resource development on Indian reservations as it relates to water rights quantification, the discount rate to use for converting future benefits and costs to common present value terms in economic analysis related to Native American Federal reserved water rights quantification, and how to assess water resource project development-related land, water and labor input costs in economic analysis related to Native American Federal reserved water rights quantification.

II.  Historical Background

In Winters v. United States (1908), the court ruled that Native Americans hold reserved rights to water for use on their reservations and that these rights are reserved for tribes; they are not forfeited by a lack of past use as is the case for appropriators holding water rights under state jurisdiction.  For decades after Winters, however, the water rights claims of many tribes remained unresolved in large part due to the lack of an established standard for their quantification.  In fact, it wasn’t until 1973, in Arizona v. California, that a specific technical standard for the quantification of Native American Indian reserved water rights was first adopted by the courts.  This formula is referred to as the Practically Irrigable Acreage standard (PIA).  Under PIA, the quantity of water to which a tribe is deemed legally entitled is equated to the quantity of water that it is economically feasible for the tribe to use for the development of irrigated agricultural on its reservation’s irrigable lands, water supply permitting.  The determination of feasibility is based on a comparison of the estimated economic benefits that would be generated by the prospective agricultural development to the estimated associated economic costs to implement the development; i.e., a cost-benefit analysis (CBA). However, the court did not provide specific methodological details for how to assess costs and benefits under PIA-related CBA.

Since the Arizona v. California decision, several cases involving Native American reserved water rights claims have been litigated.  While these cases cemented PIA as the legal standard for the quantification of Native American water rights, they did not produce a standard economic analysis framework for performing PIA.   Consequently, a recurring debate has and continues to be the appropriate CBA framework to use in the PIA economic evaluation – the P in PIA.  This debate has often focused on whether or not to adopt for that purpose the analysis framework used by the Federal government for its water resource project development economic assessments as set forth in the, Economic and Environmental Principals and Guidelines for Water and Land Related Implementation Studies (PGs).   The issue has recently come to a head as the Federal government has initiated efforts to revise the PGs. There are three main arguments, however, against applying the PGs to economic analyses related to Native American water rights: A) they were designed for a different purpose (have different objectives) and, therefore, are not applicable, B) they fail to account for the particular economic, physical and socio-cultural features of Indian reservations that greatly influence the potential benefits and costs of water resource development on those reservations, and C) they are methodologically flawed and should be revised even for the purposes they were intended.

III.             Cost Benefit Analysis

Cost benefit analysis (CBA) is widely used by government agencies and organizations to evaluate the potential economic return to proposed public investment project and public policy alternatives, and, correspondingly, as a key decision tool for the allocation of limited capital and other resources among those alternatives.  In CBA, the estimated future benefits that would be realized from implementation of a proposed project or policy are compared to the associated estimated future costs to implement that project or policy.  The purpose of this comparison is to either: A) determine if a project or policy is economically justified in its own right; i.e., its anticipated benefits exceed its anticipated costs, and/or B) rank a project or policy relative to alternative solutions with the same or similar objectives to identify the economically superior course of action (in terms of relative net benefits or benefit-to-cost ratios).  While the objective of CBA is fundamentally to compare benefits and costs, the underlying analysis methods and considerations for quantifying those benefits and costs are by no means set in stone.  They can, in fact, vary greatly within the boundaries of accepted economic principles depending on the context of the analysis being performed, the normative objectives at play, and the situation-specific, institutional, socio-cultural and physical constraints under which the subject project or policy proposal may be executed. One excellent means for demonstrating how circumstances, objectives and constraints can greatly influence the appropriate CBA analysis framework to adopt is to examine the use of CBA in water resource project development evaluation in the context of normal Federal planning as compared to the context of quantifying Native American Indian Federal reserved water rights.

IV.              U.S. Water Resource-Related CBA

The principal agencies of the Federal Government that have historically been responsible for water resource development within the United States include: the Army Corps of Engineers, the U.S. Bureau of Reclamation, the Natural Resources Conservation Service and the Tennessee Valley Authority.   As a matter of law, these four agencies must adhere to the analysis procedures for CBA prescribed within the, Economic and Environmental Principals and Guidelines for Water and Land Resources Implementation Studies (PGs), for all their water resource-related planning and decision-making activities. (Though they have generally served as the de facto baseline CBA framework for all water resource-related investment planning by the Federal Government.)

The PGs were developed by the U.S. Water Resources Council and first published in the Federal Register in March of 1983.  They represented a significant revision to the, Principals and Standards for Planning Water and Related Land Resources, enacted in 1973, which, as with the PGs, were formulated to provide a uniform economic and environmental assessment framework for the optimization of Federal water resource investment decision-making.

The PGs are divided into three major sections (Chapters).  Chapter 1 – Standards, includes, among other components, a thorough characterization of the objectives and guiding principles of Federal water and related land resource planning. Chapter 2 – National Economic Development (NED) Benefit Evaluation Procedures, provides an analytical framework and specific procedures for the economic assessment of water resource plan alternatives under consideration.  And, Chapter 3 – Environmental Quality (EQ) Evaluation Procedures, provides an analytical framework for factoring environmental protection into the water resource planning process.  According to Chapter 1, Section II – The Federal Objective (a): “The Federal objective of water and related land resources planning is to contribute to national economic development consistent with protecting the Nation’s environment, pursuant to national environmental statutes, applicable executive orders, and other Federal Planning requirements.”  This language clearly established national economic development as the overriding objective of Federal water resource planning with environmental protection as a very important, though secondary, consideration.

Congress’ 2007 Water Resources Act mandated that the PGs be updated.  The “revised” PGs are to be titled, Principals and Standards for Water and Related Resources Implementation Studies (PSs). And, per the directive of President Obama, will apply to all water resource-related planning at the Federal level, not just the activities of the four agencies stipulated in the PGs. This expansion of scope has stirred substantial debate regarding the potential pitfalls of applying a single and relatively inflexible CBA methodological framework to all aspects of water resource investment and policy evaluation at the Federal level.  Interestingly, the very impetus for legislative action to revise the PGs was borne of a growing concern within and outside government that the PGs fail to adequately address the expanding array of Federal water resource-related priorities.  Over time these priorities have steadily shifted away from their narrow focus on navigation, flood control, hydropower generation and water supply development to include a much greater emphasis on sustainability and sound water resource management through conservation, riparian restoration/protection, water quality enhancement and water reallocation/transfer.

In December 2009, the President’s Council on Environmental Quality (CEQ) released draft language intended to replace Chapter 1 of the PGs (CEQ Draft) to the public for comment and to the National Academy of Sciences (NAS) for formal review.  In December 2010, NAS issued a report summarizing the conclusions of its review.  The NAS report is highly critical of the CEQ Draft, concluding it to be at times both excessively ambiguous and contradictory.   For the most part I concur with NAS’s findings; though am perhaps somewhat less critical considering: A) the challenge of evaluating the principals portion of the document absent the more detailed guidelines that are also to be revised over the coming years; and B) the extremely difficult task of balancing necessary generalities with specifics in developing a black-box CBA model designed to cover an extremely broad spectrum of planning settings and circumstances.

According to Section 3 of the CEQ Draft, National Objectives of Water Resource Planning:

Federal water resources planning and development should both improve the economic well-being of the Nation for present and future generations and protect and restore the environment.  America’s water resources – streams, rivers, wetlands, estuaries, lakes and coasts – are at the heart of our economy, our environment and our history.  These water resources support billions of dollars in commerce, provide drinking water for millions of Americans and supply needed habitat for fish and wildlife and other benefits.  The National Objective for water resources planning is to develop water resources projects based on sound science that maximize net national economic, environmental, and social benefits.

Comparing this language to the statement of objectives in the PGs (noted previously) indicates that while national economic development continues to be a primary objective of Federal water resource planning, environmental and social considerations will now be given equal footing with economics, an extremely important philosophical shift from the PGs.  This noted, the CEQ Draft doesn’t provide any insight as to the possible associated changes to the economic procedures set forth in the PGs other than the intent to place greater consideration on non-market values in the quantification of benefits.  It is, therefore, at this juncture a matter of wait and see.

V.                 Indian Water Rights and the PGs

An important example of a context in which application of the CBA objectives and procedures prescribed by the PGs are at best problematic is in the quantification of Native American water rights.  Though technically limited to the four Federal agencies noted previously, the use of the PGs in evaluating the economics of Native American water rights claims has, over time, been advocated by some in government, particularly the Office of Management and Budget.  The argument for using the PGs in the context of Indian water rights is based on the facts that, A) the Federal Government serves as trustee to tribes and, B) tribes’ water rights claims are typically negotiated/litigated in the context of a potential Federal contribution (investment) of funds for on-reservation development of the subject water.   Until now, proponents of Native American rights, including attorneys and appointees with the U.S. Departments of Justice and Interior, Indian Tribes, and tribal advocacy groups, among others, have been generally successful in resisting the adoption of the PGs for CBA in Native American water rights matters.  However, this resistance is already being put to the test following Mr. Obama’s directive for all Federal water resource planning to fall under the PSs.  This is unfortunate, as the PGs do not, and by all indications, the PSs will not, provide an appropriate CBA framework for Native American water rights-related economic analysis.  This is true whether the objective is to quantify a tribe’s Federal reserved water rights under the Practicably Irrigable Acreage (PIA) standard or to evaluate the potential monetary contribution by the U.S. towards the settlement of those rights.  Strict adherence to the PGs or similar CBA framework fails to account for the appropriate objectives associated with the determination and settlement of Native American water rights and the specific, and particularly unique, circumstances of resource development on Indian reservations.  And concurrently, for the PSs to do so would require too great a departure from the objectives and economic perspectives relevant to the core water resource development planning activities of the Federal Government.