Special Report: Trading Scheme Between Farmers, Towns Part of Growing Trend in Allocation of Water

By Robert Thomason  

Two southeastern Colorado towns recently entered into deals with the Lower Arkansas Valley Water Conservancy District to secure rights to water made available by local farmers who agree to take a portion of their land out of production on a rotating basis.

With this plan, which follows years of organizing, preparation and negotiations, they are participating in a growing market of water rights trading that may provide an innovative option for allocating increasingly scarce supplies of water in the West.

But even with the signing of the leases, legal proceedings prevented delivery of water in 2012 and 2013. Although new methods of trading in water are becoming more commonplace, a complex and long-standing system of Western water law still dominates the allocation of water.

The city of Fountain and nearby Security-Widefield were the first municipalities to sign lease agreements from the Lower Arkansas Valley Super Ditch Co., which is operated by the water district, as part of a pilot project. Farmers supplying water through the “super ditch” system would agree to take various parts of their land out of production and lease the water; the system is called a rotational fallowing lease, or lease fallowing.

The super ditch, actually a network of smaller ditches, reservoirs and agreements between water suppliers and users, was a creation of the Lower Arkansas Valley Water Conservancy District, itself formed as a response to water transfer challenges. The impetus was the loss of farmland. Municipalities and other users had been buying water rights, and about one-fourth of irrigated agriculture had been taken out of production since the 1950s.

Despite the initial delay in finalizing the trades, the company is signing new rotational fallowing agreements with other cities and working to iron out the legalities of water transactions.

Some water users have challenged the trading agreements in Colorado's water court, warning that the new system could upend the balance of water distribution and that they could suffer water shortages. But Lower Arkansas Valley says its plan is manageable and is proceeding nonetheless.

“We believe that rotational fallowing will be the future of water in Colorado,” said Jay Winner, executive director of the Lower Arkansas Valley Water District, which operates the Super Ditch company.

The “future” has been in the making for years, experts say, and has the potential to disperse water more economically without treading on valuable property rights or the deeply rooted political sensitivities of Western water. The new trends of trading, even with political considerations and court contests, operate in stark contrast to the highly contentious, and sometimes violent, “water wars” that the West experienced in the 19th and 20th centuries.

Different Forms in Different Markets

Water rights trading takes different forms in different markets. Sometimes a water right is sold permanently, but this is not as common as leasing, those who track water trading say, because landowners are wary of severing water rights from their properties. In other cases, municipalities buy land to get the water associated with it; in others, buyers and sellers participate in auctions. In addition, water banks have been established where in times of plenty, water is pumped into storage, and during scarcity it is released to eager buyers.

But in the rotational fallowing agreement under development by the parties, farmers will take some acreage out of production for a period of time and lease water rights to municipalities. Farmers optimally would receive a higher price by leasing water to the municipalities than if they had put the water to use irrigating a low-value crop. Later, that acreage would be planted again, thus maintaining agricultural continuity on the farm and in the region. If the city still needs water, it could lease it from a different farmer, or the same farmer could fallow a different part of his property.

In Fountain and Security-Widefield, communities just south of Colorado Springs, the terms of the leases have started on a small scale. The cities drew 250 acre-feet per year in 2012. (An acre-foot is 325,851 gallons, or enough to supply a typical family of four for a year.) But they have the right to increase the amount of water that they lease in the future.

The water will come from farmers who have agreed to fallow certain amounts of land and lease the rights to the water that otherwise would have been used for irrigation to the municipalities. The farmers do not surrender their valuable water rights, but earn hundreds of dollars per acre-foot for what they lease.

In 2002, the water district was formed and began studying new forms of water rationing, including water rights trading and, specifically, leasing. Rotational fallowing leasing grew in practice in California during the drought of the early 1990s. With the new lease between Fountain, Colo., and Lower Arkansas Valley farmers, the practice and trend has extended throughout the west. In this case it has almost expanded to the 100th meridian of the United States, the traditional boundary between the relatively water-rich East and the arid West.

Concern About Impacts of Change

But the new trend in water trading rights must contend with a complex legal system in Western states. In this system water is appropriated on the basis of a seniority of claims, with those users who have held their water rights the longest being first in line to receive water in times of drought. It is also appropriated based on type of use and other factors.

But some are skeptical about the impact of the trading schemes, and members of a different water network have joined forces with a regional power company to challenge the way the program is being administered. One is District 67, a consortium of other ditch operators and water users.

“The District 67 water users do not oppose the Super Ditch lease fallowing concept,” the district's leadership said in an open letter in September, “but do oppose the way Super Ditch and Lower Arkansas Water Conservancy District have gone about trying to change upstream water rights without proving any change of water use or exchange of water will not injure downstream water rights and ensure historic return flows are maintained in time, location and quantity.”

Winner said he believes a new Colorado state law will help resolve the disagreements. The law calls for establishing a common engineering standard for assessing the effects of water transfers. In November, the Colorado Water Conservation Board will decide on adopting the standard.

Water Markets Regionalized

That is how Colorado is approaching a change in trade in water transfers. Other jurisdictions are developing their own approaches.

“Water markets are very regionalized,” said Clay Landy, managing director of WestWater Research, which tracks water trading in the western U.S. The fallowing program is part of other relatively new practices, such as water banking and the introduction of institutional capital into water markets, which are slowly changing the way the West allocates water among various providers and sellers.

The Eastern and Western states treat water differently, and that translates into different market characteristics. In the East's riparian system of water management, made possible because of the relatively abundant and somewhat predictable annual rainfalls, a landowner can use a reasonable amount of water that flows through or is contained on his or her property so long as the downstream flow is not harmed.

The West relies on the system of “prior appropriation,” often summarized as “first in time, first in right,” where a landowner's right to use water could be subordinate to someone else whose right dates farther back in time.

The difference is vital to the water markets and drives much of its character. A senior water rights holder could sell or lease his or her water at a higher rate than the junior water rights holder.

Program Helps Farmers Preserve Rights

For farmers with senior rights, the fallowing program helps them preserve their rights yet receive a better price for it. By leasing the rights to a municipality for a specified period of time they do not relinquish any seniority in the system.

Some municipalities have sold off land that they had previously acquired for water rights and entered into leasing arrangements, Landy said, citing Phoenix and Mesa, Ariz., as examples. While the reasons may vary from locale to locale, he said, many municipalities are finding that leasing water for temporary periods may be economically better than investing large sums of capital in the storage tanks, pumps, pipes and other infrastructure needed to supply municipal water from a “water ranch.”

WestWater Research has found that increased prices in California and northern Colorado were offset by price decreases in southern Colorado, the Truckee Basin in Nevada and the middle Rio Grande basin in New Mexico. Altogether, it found that the price index of water rights was very stable recently, even though it had risen significantly and then fell to some degree in the previous decade.

On the farmer's side of the transaction, the nature of the crop and the market can determine whether to lease water rights and what price to negotiate. For example, a farmer growing alfalfa to sell to other cattle farmers might benefit from leasing to municipalities. It would be easier for the farmer to rotate out of that alfalfa than some other crop, said Gary Libecap, a professor of environmental science in Santa Barbara and the author of books and studies on water markets. On the other hand, an orchard grower with a large inventory of trees would need to keep those trees irrigated, even in down markets.

Changes in Attitude, Mechanisms Help

Ellen Hanak, senior researcher at the Public Policy Institute of California, said that changes in attitudes, legal mechanisms and the continued development of physical infrastructure have helped develop water trading.

“In the past there wasn't a lot of trading and that has developed,” she said. “People have to get used to how it works.”

Traditionally water rights holders were very reluctant to sell or lease water rights, she said, but in the 1980s and 1990s the state of California began encouraging the practice to avoid rationing water.

Also, California over the decades has developed an extensive system of ditches, pipes, aqueducts and reservoirs to move water throughout the state. The fact that this infrastructure makes water transfers in California physically possible facilitates trade, Hanak said.

Similar to Electricity Grid

Further, the system can act, at times, similar to the electricity grid. Water purchased from a distant source may not be the actual, physical water that arrives at the buyer's location. Instead water can move to one reservoir and replace water that had been used to fulfill the transaction, she said.

Another structure that has helped develop water rights trading is water banking, Hanak said. This takes two forms. In the first, people can promise their water rights to a central clearinghouse which holds the promises of the water rights on paper.

But the second form is an actual physical pool or reservoir, typically an aquifer. In wet years, such as 2011, water is pumped into the water bank and warehouse. In a drought year, such as 2012, this warehouse water is pumped out and used. The same pooling up and release of water, she said, occurs within the wet and dry seasons of a single year as well.

Also, the price of an agricultural commodity influences water lease and transfer prices. When the price of rice has been high, farmers tend to hold on to their water rights rather than lease or sell them, Hanak said.

But Hanak amplified the point made by Landy of WestWater that water markets are very regional.

For instance, in the southern part of the Central Valley in California, the farms on the east side have relatively good water supply and senior rights. On the west side, the farmers tend to hold more junior rights. California also has a wet delta region near Sacramento where the San Joaquin and Sacramento rivers come together, in addition to other parts of the state like the Central Valley with good flows of water and then the low desert of the Imperial Valley.

“What the water market does is sense prices,” she said. If the farmer could make $200 per acre-foot leasing the water and but only $50 an acre-foot by farming they would be likely to trade the water, she said.

While this price sensing of the market has evolved along with changes in population and economics, as the situation in Colorado's Lower Arkansas Valley shows, prior appropriation doctrine remains the context in which water rights trading develops.

 

To contact the reporter on this story: Robert Thomason in Washington at Robert Thomason

To contact the editor responsible for this story: John Sullivan at jsullivan@bna.com