Groundwater Management under SGMA—A Role for Markets Part 1

The June 30, 2017 deadline for medium and high-priority groundwater basins to create Groundwater Sustainability Agencies (“GSAs”) under California’s Sustainable Groundwater Management Act (“SGMA”) is behind us, and the newly-formed regulatory agencies must now figure out how they will meet their purpose of stopping overdraft and bringing groundwater to sustainable levels. SGMA implementation can easily build on the experiences of the west.

Markets Are Everywhere

While markets for water or water rights historically have been thin, negotiated transfers have helped ensure effective use of limited water supplies. The transfer from Imperial Irrigation District (“IID”) to San Diego County Water Authority (“SDCWA”) that is central to the Quantification Settlement Agreement (“QSA”) incentivizes conservation to meet municipal water supply needs. In a deal between IID and Metropolitan Water District of Southern California (“Metropolitan”), Metropolitan pays IID to make conservation improvements and receives the conserved water. Metropolitan also has an agreement with the Palo Verde Irrigation District under which Metropolitan pays for land to be fallowed and receives the saved water. Limits on how often a parcel can be fallowed help avoid the potential negative effects of fallowing. These transfers have been instrumental in meeting water demands for a region with a population of about 22 million—but the utility of water transfers is not limited to keeping California within its 4.4 MAF allocation from the Colorado River. Transfers have been used throughout the west for decades to meet water management objectives, and markets have emerged in some areas.

Look to Colorado’s Front Range and you will see transfers of Colorado–Big Thompson units being used to meet growth-driven increases in water demands. Local water providers in that region require developers to bring in sufficient water to meet projected demands of their development projects. A similar dynamic exists in central Arizona, where developers buy extinguishment credits (or other types of water rights that can be extinguished to create a credit), and in the Reno area in northern Nevada, where developers dedicate Truckee River surface water rights or local groundwater rights to the Truckee Meadows Water Authority to obtain a will-serve letter for their development projects.

In the Pacific Northwest, the Deschutes Resources Conservancy, the Freshwater Trust, and the Columbia Basin Water Transactions Program, acquire water, often through seasonal or split-season leases, to maintain streamflows for native fish species and other environmental purposes. In Texas, the Edwards Aquifer Authority meets springflow targets under a Habitat Conservation Plan by leasing pumping permits to prevent pumping from drawing down the flows.

Transfers of surface water also help meet the needs of individual water users. In the Lower Rio Grande Valley in Texas, irrigators engage in short-term leases to meet water needs. Similarly, Westlands Water District leases supplemental water, usually from settlement contractors or senior water rights holders, on behalf of growers in the district to make up for shortfalls in project water supplies.

Groundwater and Markets

Since SGMA specifically addresses groundwater, I separately highlight the markets that have emerged to trade groundwater. In Texas, the legislature passed the Edwards Aquifer Authority Act in 1993 limiting pumping from the Edwards Aquifer and establishing the Edwards Aquifer Authority to regulatory and enforcement duties. Permit holders lease or purchase pumping permits to meet their water needs. In Southern California, several groundwater basins have been adjudicated—meaning a court has specified pumping limits and established watermasters with regulatory and enforcement duties. With pumping capped by the adjudication, trading occurs to help water users meet their needs. In this series, I will provide a more comprehensive explanation of how markets work in these basins.

Current Interest in Markets

There is both implicit interest in the field and a blogosphere full of discussion on using markets to meet sustainability goals. Outside of environmental leader Gary Wockner’s call for the environmental community to abandon the use of markets to meet river protection objectives and instead push for change to an Ecuadorian “rights of nature” concept, bloggers tend toward the positive—covering the spectrum from whole-hearted advocates to cautionary optimists who suggest that markets are a solution, but not a panacea. Jay Lund, Professor, UC Davis Department of Civil and Environmental Engineering, argued in January that the environment needs water markets because water conditions are highly variable, and water markets provide the necessary flexibility to adjust to variable water supply conditions and water management needs. Jonathan Wood, an environmental attorney at the Pacific Legal Foundation and adjunct fellow at the Property and Environment Research Center, recently argued that markets bring parties with conflicting interests together to confront tradeoffs and arrive at solutions where a broad range of benefits and costs have been considered. Public utility and water rights appraiser, Wayne Lusvardi argues that California needs a speculative water market—where investors purchase and bank wet water when it’s available and sell it in dry years. He argues that this could help plug water supply shortfalls during drought and could help protect farmers from the high prices seen during peak dry years.

Studying Water Markets

Organizations have also produced reports on the utility of markets for meeting water demands.

In the 2012 report, Water Transfers in the West: Projects, Trends, and Leading Practices in Voluntary Water Trading, the Western Governors’ Association (“WGA”) and Western States Water Council (“WSWC”) evaluate water transfers as a tool to meet water demands. Under the premise that growth-driven increases in water demands will make transfers ever more important, WGA and WSWC set out to develop recommendations that will “make water transfers more efficient and equitable.” The report authors aim “to improve water transfer outcomes” by taking an analytical look at existing water transfer practices in order to identify the lessons—and they present six specific actions that states can take to meet that objective:

  • Provide data on water use and water rights, which improves transparency, allows market participants to act with better information, explains the nature and magnitude of impacts or injury, specifies necessary mitigation, and reduces transaction costs
  • Provide technical or financial support, especially to parties contemplating alternative transfer methods that prevent permanent dry-up of agricultural lands
  • Encourage conservation and efficiency by clarifying policies on conserved, saved, and salvaged water and providing incentives for reducing agricultural consumptive use
  • Offset potential negative impacts to rural communities by addressing local issues such as infrastructure needs, tax base, and revegetation
  • Develop or provide access to the infrastructure needed to transfer water
  • Coordinate with federal agencies to facilitate water transfers.

The Nature Conservancy also sees water transfers as a notable tool and in August 2016 released a report arguing that “water markets offer a powerful mechanism for alleviating water scarcity, restoring ecosystems and driving sustainable water management.” The report, Water Share: Using Markets and Impact Investment to Drive Sustainability, begins with the premise that water scarcity is a global problem and presents the case for why the traditional infrastructure-based approach to addressing the problem is no longer valid. In short, there is no more surplus water; the availability of renewable water supplies is declining; and the costs are becoming unbearable. On the other hand, “The establishment of high-functioning and well-governed water markets—in which a cap on total use is set; rights to use water are legally defined, monitored, and enforced; and in which rights can be exchanged among water users—can provide a powerful integration of public and private efforts to alleviate water scarcity.” Ultimately, the authors say markets bring together strong governmental leadership and private sector innovation to meet the critical objective of meeting water supply needs.

In a similar vein, the UC Berkeley School of Law, Center for Law, Energy & the Environment (“CLEE”) has released a report that provides guidance for using markets to meet sustainability objectives under SGMA. Authors of the report, Trading Sustainably: Critical Considerations for Local Groundwater Markets Under the Sustainable Groundwater Management Act, argue that markets can help efficiently meet sustainability goals and that SGMA may open doors for local transfers of groundwater allocations. They, however, caution that markets need to be designed and implemented carefully. The report then outlines several factors to ensure good management and reduce the risk of unintended consequences when developing groundwater markets under SGMA.

CLEE breaks its recommendations into three broad categories:

  • Foundational considerations—includes understanding the historical and current use patterns and determining how extractions will be measured
  • Market-specific considerations—includes defining market goals, understanding how the characteristics of groundwater allocations might affect the transferability of those allocations, evaluating the various impacts that transfers might have, establishing rules to address the impacts in a way that minimizes negative and maximizes positive impacts, and establishing a trading system that allows counterparties to find one another, establishes the regulatory process, defines how trades will be settled and recorded, and discloses when and how information will be available to the public.
  • General considerations—includes monitoring, enforcement and oversight, identifying the means and triggers for modifying or updating the program, transparency and public outreach, and identification of the necessary human, physical, technological, and fund resources.

While groundwater regulation and market transfers would be a new experience under SGMA, adjudicated basins have long been regulated and the trading of groundwater has been occurring successfully for decades. In two follow-on posts, I will examine how the Edwards Aquifer and three of Southern California’s adjudicated groundwater basins—the Mojave, Central, and Main San Gabriel Basins—line up with recommendations in the three reports highlighted above.