Water fights: Can the free market tame the West’s vital and volatile currency?

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Steve Marcus

A protest sign in Baker, Nev., opposes the Southern Nevada Water Authority’s proposed 300-mile pipeline from Las Vegas to the Great Basin area, where groundwater would be transported to the state’s population center.

Mon, Jun 19, 2017 (2 a.m.)

There was no electricity when Vickie Buchanan’s family came to Diamond Valley in 1958. Nor were there many crops. But there was water, and as early settlers, Vickie’s parents were given priority access under a rule fundamental to Western water law: “first in time, first in right.”

A steady flow of farmers followed, planting alfalfa and timothy hay grass in the high-desert soil of the central Nevada valley. As fields started producing, demand for water skyrocketed, and the state awarded more and more water rights. These rights became the farmers’ property, and they could be passed down in perpetuity.

Imagine 35,000 football fields filled 1-foot deep. That’s about equal to 35,000 acre-feet of water, or 9.8 billion gallons — enough to cover the annual consumption of over 70,000 households. This number is important in Diamond Valley, because it represents the amount of groundwater that can be sustainably withdrawn from the aquifer each year. If substantially more than 35,000 acre-feet is withdrawn, the water table will drop and the basin could one day run dry.

How Nevada uses water

In 2010, the U.S. Geological Survey found Nevada water was devoted to: irrigation, 59.9%; public supply, 22.2%; mining, 13.2%; aquaculture, 1.9%; thermoelectric, 1.2%; domestic wells, 1.1%; 0.2% industrial wells, 0.2% livestock.

In 1964, six years after the Buchanans settled in Diamond Valley, the state had already allocated nearly triple the 35,000 acre-feet that would later be deemed sustainable. (As a result, farmers have legally pumped past the limit for decades, as was within their rights. The amount of water rights exceeded what the basin could handle.) It was a bureaucratic misstep, and one that encouraged growth. A community bloomed around the farms in Eureka County, and agriculture helped diversify the region’s economy, largely driven by booms and busts in mining.

But all debts must be paid.

“There has been an entire community built on overappropriation,” the county’s natural resources manager, Jake Tibbitts, told Nevada legislators in February.

“And that’s kind of scary.”

The predicament is not unique. Throughout the West, from the state level to the local level, water is overallocated. That includes the Colorado River, which serves about 40 million people in seven states and parts of Mexico. Prolonged droughts and a changing climate amplify these issues of overuse, straining water supplies.

And disagreements over priority breed conflict.

“It pitted neighbor against neighbor,” Buchanan said, recalling “water wars” — finger pointing in the 1970s over who was using what.

Water policy in the West is a balancing act: between the needs of many groups and industries, between urban and rural, between short-term costs and long-term needs, between short-term needs and long-term costs. Should the Southern Nevada Water Authority (SNWA) build a $3.2 billion, 300-mile pipeline to pump water from the North? Should California accept voluntary cuts in its allotment of the Colorado River? Which Diamond Valley farmers should dial back usage? And at what cost?

As cities grow, demand for water is expected to rise, and many experts agree that they cities will likely get more — beg, borrow or steal. But questions remain about how they will get it, where they will get it, and who will pay the social and economic costs of reallocating the resource.

Collaboration is necessary, yet no one approaches these issues without an agenda.

In recent years, one solution has brought together the unlikeliest of collaborators, a group that includes academics, free-market institutes, farmers, rural communities, cities and environmental advocates.

These groups want to bring the free market to water.

Buchanan is pushing for it too. Since the 1960s, groundwater levels beneath Diamond Valley farms have declined about 100 feet, according to documents from the state engineer Jason King. In 2015, he required residents to draft a conservation plan. Otherwise, many farmers would face a harsher sentence: mandatory curtailment of their water rights. Because Buchanan’s family came to the valley before the boom, she said she would not lose her water rights. It’s the long game that worries her.

If the basin runs out of water, farms will disappear and Eureka County’s largely agricultural economy will falter. Households relying on the basin for water also would suffer. That’s why Buchanan believes everyone should have to sacrifice. The alternative would be mandatory curtailment, a more drastic action she thinks would put many farmers out of business and revive old tensions.

“If curtailment comes in,” Buchanan said, “it’s just going to start a new water war.”

 

THE RIGHT TO WESTERN WATER

The current water level and in 2009, as seen from the Hoover Dam overlook.

The current water level and in 2009, as seen from the Hoover Dam overlook.

The law views water as real property, so farmers, factories and cities can purchase and sell the rights to it. There is no formal exchange for water trading like there is for energy. But that does not mean there is no market for water. There already are markets in most states that consist of one-off deals between two parties, deals governed by state regulations.

Transfers are limited by such regulations, as well as infrastructure, state boundaries and third-party challenges. Proponents of organized markets for water transfers want to liberalize the system to enable more trades. “We don’t actually have — and pardon the pun — very liquid markets, because there are so many different people and entities that have a potential say in each individual transaction,” said Martin Doyle, director of Duke University’s water policy program.

Recent academic studies suggest that many Western water systems will face further strain in the coming decades due to a changing climate. More of the Colorado River will evaporate in reservoirs like Lake Mead. A shrinking snowpack will reduce supplies while populations are expected to increase. That will aggravate problems like overallocation and the fact that agriculture, which contributes a small share of GDP, accounts for as much as 80 percent of water usage in several Western states.

Markets could help redistribute water based on its value, supporters argue. If cities and developers need more water, they can pay high prices for it. If farmers can find ways to use less water, they should be able to sell or lease the excess.

Nevada water rights 101

Colorado River water users, on paper, are entitled to more than Lake Mead can give. This is known as the “structural deficit,” meaning that even without drought, Lake Mead’s levels are poised to drop. A conference of Colorado River water users once referred to this as “More Slices Than Pie.”

Of Nevada’s 256 water basins, 84 are overappropriated, so the rights to groundwater exceed what the basins can sustainably provide.

So how do water rights work in the state? The water is essentially owned by the public. But once a water right is issued to a farmer, a company or a city, it’s treated like real property. The state engineer is in charge of appropriating the resource, based on three main principles:

1) Beneficial use: Water must be applied to ‘beneficial’ activities. In Nevada, these include mining, recreation, drinking water and irrigation, which takes the most water in Western states.

2) Use it or lose it: If water users don’t take advantage of their annual allocation, they run the risk of losing their rights. This, in large part, was created to avoid speculation — water users hoarding rights for future economic benefit. But it also has been criticized for discouraging conservation and efficient applications of water.

3) “First in time, first in right:” In times of drought or scarcity, priority goes to those who have used the water longest — the senior rights holders. This is slightly more nuanced in practice, however, because in some cases water users have, over the years, acquired both senior and junior rights.

Under Western water law, farmers and ranchers must put their allocations to beneficial use or risk losing their water rights, valuable assets that are, on occasion, worth more than land. These laws were meant to discourage speculation, to dissuade an investor from buying up water rights and doing nothing with them. But the laws often lead to waste and leave little room for flexibility (Buchanan recalled seeing farmers “pump in the dead of winter just to prove they used the water”).

Water markets could encourage conservation, supporters say, by allowing farmers to divert a portion of their share of water.

“It’s not all or nothing,” said Reed Watson, executive director of the Property and Environment Research Center, a free-market think tank in Bozeman, Mont.

But markets raise the tricky question: How do you value water in a way that is fair?

This is the question Clay Landry tries to answer for clients every day. With WestWater Research, Landry estimates the going price for a unit of water to help clients in transfer negotiations. Most Western states don’t require water users to disclose the price of a sale, so Landry and his team often compile this data manually, interviewing the parties to a trade for a thorough appraisal.

“Don’t think about it at the state level,” he said. “The Reno housing market is different from the Las Vegas housing market, and even in those markets have submarkets.”

In Northern Nevada, for instance, WestWater tends to see high-frequency but small-volume trades tied to homebuilding; whereas in Southern Nevada, the research firm tends to see low-frequency, high-volume water trading tied to SNWA, which often purchases water to store in Lake Mead. These trades give a local snapshot. Until there are more flexible markets, many experts believe water will remain undervalued.

“It’s easily the most undervalued natural resource we have, aside from maybe air quality,” Doyle said.

A world in which water is viewed as a commodity worries some users in rural communities. They fear cities will swoop in to grab water — a practice known as “buy and dry.” They fear they will lose their property rights or that developers will price them out of the market. Although a water sale could make one farming family rich, transferring water to urban areas — a trend in larger transactions — could hurt local economies that are already facing threats like mechanization and decreased demand for farm services.

Douglas Kenney, who directs a water program at the University of Colorado Boulder, predicts that in a drier West, the market will play a more active role.

But he warns: “It’s a complicated future.”

 

A NEVADA CASE STUDY

Click to enlarge photo

A Nevada alfalfa field gets watered on Friday, June 6, 2009.

After the state engineer declared Diamond Valley a critical management area in 2015, Buchanan joined a group that began working on a market-based system to balance roughly 110 legal interests with water rights. The plan is based on the idea that everyone should have to sacrifice something to save the aquifer.

In the absence of action, the aquifer could dry up within three decades.

Under the proposed groundwater management plan, Diamond Valley’s basin would be managed collectively. Users would receive shares of the water based on their rights, each share equal to one allocation. The allocation would be set by a board and decreased each year until cumulative water pumping reached a sustainable level. If successful, the water table would stabilize within 35 years.

Diamond Valley's market plan

The predicament: Water rights allow for about 76,000 acre-feet to be pumped from the Diamond Valley basin each year, and it must be reduced to 30,000-35,000 acre-feet.

The proposed fix: Water rights would convert to shares based on priority (senior or junior). Each year, shares would decrease until the basin reached a sustainable level. Water usage would be measured with smart meters. The system would be governed by the Diamond Valley Water Authority, a new group that would include the State Engineer Chairs Board and a full-time water manager.

The goal: Condense the allocations so they don't exceed the 35,000 acre-foot cap on how much water can be taken from the basin.

The key is that shares could be bought and sold (since they are all on the same basin, farmers could trade water easily). This, Buchanan argues, would give farmers flexibility. One farmer could, for instance, pump more groundwater by purchasing shares from another farmer looking to decrease operations without losing the water's property value. The value of water would be determined by a willingness to pay. And such a market could encourage farmers to conserve more water because they could sell any water they didn’t use.

Buchanan thinks such a market would move the area away from “use it or lose it.”

“That’s what we have to get away from,” she said.

Not that they expect any of this to be easy. It would be a move away from existing Nevada water law, and even proponents expect it to be challenged in court.

The Diamond Valley groundwater bank would be relatively small, but economists have created markets in the region and internationally to accommodate larger-scale transfers. Many markets hope to emulate Australia’s Murray-Darling basin, which required significant investment and coordination from the country’s government.

“Everything is embedded in the design of it, as opposed to the implementation,” said Doyle, who runs the Duke water institute.

A successful program also requires that all groups have a seat at the table.

In the U.S., the Colorado-Big Thompson Project, which diverts water from the Colorado River to homes and agriculture on the east side of the state, is often pointed to as a successful market. It broke down barriers through policy reforms, said Reagan Waskom, who directs the Colorado Water Institute. And it can be lucrative. Share prices can soar above $35,000 per acre-foot.

That gives an advantage to the highest bidder, often a city or a developer.

And as the market moves its hand, there can be collateral damage to communities. “We’re growing houses where you used to grow crops,” Waskom said, asking what might be the right way to balance urban needs with the impact to rural communities.

 

RISKS OF A FREE MARKET

Click to enlarge photo

A road sign announces Walker Lake near the receding lake's south end in 2003.

Proponents say their goal is to avoid “buy and dry” and the kinds of deals that fleece sellers of valuable property. They argue this is possible through leasing and learning from the past.

What caused overallocation?

According to the Nevada Department of Conservation and Natural Resources, there are multiple reasons for overallocation: 1) When water was first appropriated, experts did not fully understand the hydrology. They often underestimated the maximum amount a basin could provide. 2) Some basins were intentionally overappropriated with the belief that new water supplies would offset the amount that had been overpromised to users. 3) Farming projects in some basins, such as Diamond Valley, were more successful than anticipated, and therefore drew more water. 4) Domestic wells are exempt from water rights. These wells, which pump groundwater for cooking and household use, draw from basins without being accounted for.

The poster child for the social consequences of “buy and dry” is Crowley County, said Kenney, who studies water policy at CU Boulder.

In the late ’60s, farmers in Crowley County began selling their water to Denver subdivisions and nearby cities, including Aurora. In the next three decades, irrigated land in the county would contract to only a few thousand acres. This hurt farmers and had the unintended effect of hurting businesses that supported farming. And it created conflict between farmers who sold their land and those who didn’t. “Markets function very well at a macro level,” Kenney said. “At the micro level, when you look at these distributive impacts, that’s where people get really worried. And for good reason.”

Solutions already in motion

Last year, Lake Mead’s surface levels dropped to a low not seen since it was filled in 1935. It put pressure on the states that pull municipal and agricultural water from the lake — Nevada, Arizona and California — to finish negotiating a Drought Contingency Plan. Under the agreement, they would voluntarily reduce intake during times of scarcity to prevent more severe mandatory cuts. And before the inauguration of President Donald Trump, the administration of former President Barack Obama and state water managers drafted an accord with Mexico that would make it easier to share water during shortages. Work on both agreements continues.

Increasingly, market-based solutions are taking social costs into account. Recent legislation in Colorado enabled temporary transfers designed to promote sustainable growth. A 2016 WestWater Research paper showed water leases, not sales, made up 80 percent of the transactions in the South Platte basin near Boulder.

Rotational fallowing also is seen as a preventive measure. The municipal utility that provides water to LA and San Diego is paying some Palo Verde Valley farmers to fallow their fields, so farmers can continue making money while San Diego temporarily uses their water.

Environmentalists are split on the issue of markets. Influential groups like the Nature Conservancy support the idea, saying it gives the environment a seat at the table. The Nature Conservancy proposed groundwater management plan has pushed water markets as a way to address not only the West but also the global water crisis. Advocacy groups and governments already participate in water markets to restore key landscapes.

One Utah program offers farmers financial incentives to increase water efficiency. The savings are then used in river restorations. In Nevada, the National Fish and Wildlife Foundation has purchased water rights and ranch land to restore Walker Lake. About 19 square miles of that land will be turned over to Nevada and used to create a new state park, the Associated Press reported last week.

“Our goal is to engage in the development of that market so the environment isn’t priced out,” said Season Martin, director of water projects and sustainable finance for the Nature Conservancy.

Gary Wockner, co-founder of preservation group Save the Colorado River, is skeptical. “The more that we commodify nature … the more we are undermining the reality that nature or a river has the right to exist,” he said.

He is in favor of a bolder approach that would give legal rights to nature. It would effectively allow a river to be a plaintiff in court. Some states already have what are known as public trust doctrines. They allow plaintiffs to sue the government if it fails to care for the land, but Wockner said some of these statutes are weak.

 

FOSTERING A DIALOGUE

Another protest sign in Baker, Nev.

Another protest sign in Baker, Nev.

About 200 miles northwest of Diamond Valley, Winnemucca Farms represents the speculative side of water markets. The decades-old farm is part of a portfolio owned by Water Asset Management, a New York investment firm that makes bets on water resources, utilities and infrastructure. “There’s a lot of interest in the idea of investing in water but very little courage,” said Landry of WestWater Research.

In addition to investments in other Western states, the firm manages about 20,000 acres in Nevada. Markets could help the state grow without hurting rural communities, said Disque Deane Jr., Water Asset Management’s co-founder and chief investment officer. He said this requires dialogue with such communities before drafting a proposal.

“At the end of the day, the actors in urban communities and the rural communities want their state and communities to prosper,” Deane said, rejecting a "one-size-fits-all” solution. “Throughout the West, you are starting to see different programs in different communities for different reasons.”

Deane said reallocating water will require an investment in infrastructure.

SNWA is looking to fill the infrastructure gap with its $3.2 billion pipeline, but the plan is controversial and remains tied up in the legal process.

The 300-mile pipeline would connect Las Vegas with areas near the Great Basin, where the SNWA owns 23,000 acres of land and more than 100,000 acre-feet of water rights. Under its proposal, SNWA would pump water to Southern Nevada if resources grew scarce — Las Vegas gets 90 percent of its drinking water from Lake Mead, and the lake’s elevations have been dipping for years.

From practical to far-out

Drain Lake Powell: Proponents believe that draining Lake Powell would save Colorado River water lost to evaporation. They seek to decommission the Glen Canyon Dam, which holds back Lake Powell, and combine its water with Lake Mead. The Nevada Assembly passed a resolution this year asking the U.S. government to explore the issue, but the measure died in the Senate. Opponents worry that it could jeopardize Colorado River allocations for states to the north.

Pipeline from the Mississippi River to the West: Some water experts, including former Southern Nevada Water Authority General Manager Pat Mulroy, have called for a pipeline that would deliver excess floodwater from the Mississippi River to communities in the West. The federal government studied the 600-mile pipeline concept in 2012 but took no action. Some worry about the cost and political issues involved with building an interstate pipeline.

Desalination projects: Southern Nevada Water Authority officials have explored the possibility of freeing up Colorado River water through desalination. The way it would work is that SNWA could, for instance, invest in an ocean desalination plant in Mexico or California. In return, the Nevada water agency would take a portion of those entities’ allocations from Lake Mead.

Tow in an iceberg: A company in Dubai wants to solve its water problem by bringing in an iceberg from Antarctica. In May, the firm told business magazine Fast Company that an iceberg could store up to 20 billion gallons of drinking water. For decades, entrepreneurs have explored the idea of iceberg towing to supplement water supply, but no one has pulled it off yet.

In the towns near Great Basin National Park, signs of frustration are visible. There are water buckets, maybe 10-feet tall, imploring people not to “let Las Vegas destroy Nevada.” Leaflets in gas stations protest what some perceive as a “water grab.”

The Great Basin Water Network challenged SNWA’s permits for water rights, tying up the process in court. They argue that granting the water authority rights could do irrevocable damage to the water table and the ecology of the region. The state engineer will hear the issue again this year.

Great Basin Water Network spokesman Howard Watts says, “Look no further than Owens Valley,” referring to the dusty lake LA drained in the early 1900s.

SNWA spokesman Bronson Mack rejects the comparison. He said laws and regulations are in place to protect rights holders with priority, adding that the water authority is committed to using the groundwater sustainably. “You have to keep in mind that Owens Valley occurred at a time when we didn’t have the same types of environmental protection laws in place,” Mack said.

In April, Water Asset Management’s Deane urged legislators on the Senate Natural Resources Committee to build statewide pipelines to enable active markets in Nevada. When compared with California and Arizona, Nevada has few pipelines to ship water. Deane said this hurts its ability to create markets and compete for economic development.

“Whiskey is for drinking, and water is for fighting over,” says the adage often attributed to Mark Twain during his travels in Nevada and California. Water experts hope, however, that the adage is as mistaken as the attribution. Collaboration is essential. At every level of the system, someone is going to have to give.

“The important thing is to have the dialogue,” Deane said.

Diamond Valley is counting on it.

“People go to church together every week. They went to school together. They were raised together,” Tibbitts, the county water manager, said. “They are willing to sacrifice and give some up to help save their neighbors." Of course, he added that "there are some water-rights holders who do not support this process at all.”

Diamond Valley’s plan is far from being approved, and the process demonstrates the difficulty of reaching a consensus. The state engineer must sign off. Then it has to receive signatures from a majority of rights holders, who aren’t all in favor.

Water remains a source of tension. Since 2015, one ranch — with rights that predate Nevada water law — has pushed for curtailment in the area. Two cows were recently shot on that ranch, and its owner suggested in an op-ed published in the Elko Daily Free Press that frustrated Diamond Valley farmers might be to blame. The owner, who says over-pumping has decreased the ranch’s surface water, announced a $10,000 reward.

Buchanan noted that when her father circulated a petition to bring power to the valley in the 1970s, it passed by one signature.

“Change is scary,” she said.

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