Buying and Selling the Future: Diamond Valley’s Proposed Water Market Looks Beyond Prior Appropriation

Tension over declining water rights has been rising in Nevada’s Diamond Valley almost as fast as the water table has been falling. Some believe a new water-market approach will finally solve the valley’s troubled water supply. But will it work?

The Diamond Valley of central Nevada has been over-appropriated since the 1960s. In 2014, a rancher with the most senior rights holder in the valley initiated legal action to halt pumping for junior irrigators. Alfalfa farmers, who use about two hundred irrigator systems to produce 120,000 tons of hay every year, have responded with furor over the suit—and have even been blamed for illicit cattle killings at the ranch. In 2015, water right wrangling culminated in the state engineer declaring the basin a Critical Management Area, requiring water-rights holders to develop a groundwater management plan or face the mandatory curtailment of pumping.

In response, researchers from Duke University Nicholas School of Environment and Eureka County officials have developed a novel water market scheme in which traditional water rights will be divided up into shares for barter. Researchers said they imported many of their proposed ideas for Diamond Valley from Australia. The plan, which is currently under consideration by the state engineer, proposes moving Diamond Valley away from the traditional prior appropriation model (and its central tenet of seniority) in favor of a system based on tradable water “shares.” Researchers and supporters of this approach—including many local farmers—believe that a water market will ease tension among water users in the valley as well as help replenish an over-appropriated basin. While the plan faces numerous logistical and legal hurdles before implementation, many across the drought-ridden West are nevertheless watching how things progress in the Diamond Valley to see if this type of water market can offer new solutions for an age-old problem.

What is a water market?

Before analyzing the details of the Diamond Valley plan, it is first necessary to discuss the basics of water markets in the West. All prior appropriation states have at least some form of water market—that is that common law or statutory legal framework allows a water right to be sold from one person to another. Most of these transfers are permanent; however, some forms of water markets allow for a more temporary trading. The process for transferring water rights under this system can be expensive, bureaucratic, and risky. Water markets, like the one proposed for Diamond Valley, attempt to improve efficiency and flexibility through commodification, which refers to the “unbundling” of water rights into its component parts: water and property divided into separate interests. Water users can then buy and sell these unbundled water rights as a fungible commodity.

The commodification of water resources is not a new invention, and not all commodification schemes are water markets with a profit motive. Many water commodification systems are already in use in the American West, such as mutual ditch companies, which are non-profit corporations formed to furnish water to shareholders. A mutual ditch company stores and transports irrigation water for use by its shareholders in return for payment of assessments for operating costs.

Another type commodity scheme is a water bank, which is a tool for leasing water for a limited period on a voluntary basis between water rights holders and users. It provides temporary transfers of water entitlements based on how much and when a water user needs more water without a permanent change in water rights. Several states have experimented with the possibilities of a water bank. For example, Colorado implemented one on the Arkansas River in the mid-2000s, however no transactions have occurred.

Other states have experimented with commodification in large-scale water projects. Farmers in California’s Palo Verde Valley have entered into an agreement to lease a portion of their water with the Metropolitan Water District, the water agency that serves Los Angeles, San Diego, and much of the rest of urban Southern California. The model seeks to protect farmers even from their own financial temptation. In addition to an up-front payment of $3160 an acre, the agency pays them eight-hundred dollars an acre for fallowing portions of their farms each year, and has invested six million dollars into the community.

Another example of water marketing is the Colorado-Big Thompson (C-BT) project. The C-BT project provides supplemental water to municipalities and irrigated farms in Northern Colorado through tradable C-BT units. Each unit entitles the owner to a pro-rata portion of the project’s water supply. Transfers of C-BT units are not subject to water court review, and may be accomplished easier than a traditional transfer subject to review by the state water court system, where individual litigation and review may take years. As a result, real estate developers often purchase C-BT units to support new development projects in Northern Colorado.

How will Diamond Valley’s Water Market Work?

Nevada water law, like most western water regimes, is based on the prior appropriation system. In prior appropriation, seniority governs allocation and the oldest water rights are preserved at the expense of the more junior rights in times of shortage. In a stark departure from prior appropriation, the Diamond Valley plan is proposing that all water rights holders in the valley become shareholders in a total allocation of both ground and surface water. The plan calls for implementation of four changes: (1) “unbundling” of present water rights into shares and allocations for management of “long- and short-term interests” and third party impacts; (2) development and implementation of “sharing plans” to sustainable use; (3) appointment of a board comprised of experts, in partnership with the state engineer, to “prepare, plans, and oversee implementation of the new system”; and (4) establishment of registers and metering systems to “finance private investment and increase the speed and transparency of water rights and volumes trades.”

In their proposal for Diamond Valley, researchers explain:

“In an unbundled system, the component of a water right that defines the long-term interest is defined as a share. The water that is available for use within a time period (e.g., year or season) is then defined as a seasonal allocation. A share can be thought of as a perpetual entitlement to a portion of any water that is allocated for use. A seasonal allocation can be thought of as an acre foot of water available in a particular season. In an unbundled system, this acre foot can be used, traded, or, with adjustment for losses, saved for use in a subsequent season. The number of seasonal allocations a person receives is a function of the number of shares he or she holds in that particular water resource. When an allocation is made, it is recorded in a water account, but not recorded on a share certificate.”

To unbundle the existing water rights, the plan calls for a board—appointed by Eureka County officials—to determine the total amount of water available and then make allocations each water year in proportion to the number of shares held before the start of the that irrigation season.

In order to transition to the new system, the plan envisions that the board would initially assign shares on a basis of one share per acre-inch of the original right and then applying a formula—a so-called “seniority coefficient”—to account for seniority so that those giving up more senior water rights would get more shares in return. Valley shareholders can then buy and sell allocations with county water officials tracking usage through water meters. The plan also proposes that the board annually reduce allocations per share for two to three decades until the water table of the aquifer stabilizes.

Proponents of the water market argue that the ability to trade shares will reduce risk of abandonment or waste. Under prior appropriation’s beneficial use doctrine, farmers were forced to use their water or risk legal abandonment and forfeiture of their water right. However, under the market’s scheme, farmers will be able to get money for their surplus water by selling their allocations to others who need more. This would increase efficiency basin-wide as it would take away the need to use extra water for the sake of preventing abandonment.

What legal challenges will Diamond Valley need to overcome?

One significant legal issue in Diamond Valley will be how the water market can address the anti-speculation doctrine. This doctrine, codified under Nevada Revised Statute 533.040,

expressly prohibits a water right from being transferred to parties who do not beneficially use the water. The anti-speculation doctrine seeks to prevent “hoarding” of water by non-users, which could distort supply for farmers and artificially inflate prices. In a traditional prior appropriation system, beneficial use staves off speculation, but in a water market, many worry that ‘water barons’ might stockpile shares to drive up prices, making it unaffordable.

In response, academic proponents of water markets have argued that water rights are usufructuary, and that a water right different from ownership of the water itself. Water’s usufructuary nature makes it a semi-privatized—yet community-based—resource, and not an ordinary commodity. For instance, as compared to oil, wheat, or some other traditional commodity, private interests own the product and private entities buy and sell that product. However, water will still be the property of the public, but profit will now be available through trading that public product. By avoiding full privatization of the resources, water-market proponents argue that speculators will avoid water-right investment because of the risk of government or community regulation, thus preventing unwanted water monopolies.

Another problem has been the “buy and dry” of rural communities over the past few decades where agricultural-to-municipal water transfers have left local farming communities economically strained. In the buy-and-dry scenario, a rapidly growing municipality upstream buys senior water rights from rural farmers downstream, re-diverting it elsewhere. With no water left to farm the land, the fields—and the towns with less of a tax base to rely on—begin to dry up, further depressing the local community. One of the most striking examples of this phenomenon is Crowley County, Colorado. Similarly, in California’s Palos Verdes Valley, farmers have filed a lawsuit alleging that the Metropolitan Water District (“MWD”) is creating a water bank out of their fallowed fields and forcing the traditional farming culture out of the area. The farmers argue the MWD is using monetary pressure to reduce water use on their land, so that saved water can then be shipped to coastal, Southern California cities. In the case of Diamond Valley, what would prevent outside entities from buying up shares and exporting allocations out of the valley? Proponents have argued that, as compared to Crowley and Palos Verdes’ agreements with far off urban areas, shares in this system will be divvied up among all irrigators in the valley. To cope with this, the plan proposes charging “exit fees” for water users who want to permanently transfer water out of the system. Further, the yearly reduction to stable levels may make water right investment, coupled with the expense of transportation and infrastructure development, impracticable to a “high and dry” scenario because outside interests will not be able to rely on fallowing fields as a means of acquiring water.

A final issue will be how any trade or sale of shares (and the resulting change of use of that water) would protect any existing rights from injury—the no-injury standard will need to be addressed. Nevada requires that the state engineer review water right transfer applications to ensure the transfer will “not conflict with existing rights.” This rule creates enormous disincentives to transfer by driving up the transaction costs of any exchange, typically requiring a fact-specific, time-consuming, and expensive inquiry into return flows, irrigation ratio efficiencies, and consumptive use patterns to predict the impacts of a proposed transfer. However, in the case of Diamond Valley, injury issues would likely not surface under the proposed plan because the trading of shares/allocations around the valley would not affect any other shareholder because they have their own independent allocation of water, especially since most irrigators rely on pumping, not on surface flows. Of course, this assumes that proper enforcement exists and that all shareholders follow the rules.

Conclusion

In addition to the implementation challenges described above, plan proponents also have to get buy-in from the state and local irrigators. The final groundwater plan requires approval by half of the irrigators and the state engineer. And even if approved, the plan could also face challenges in court as well. Nevertheless, the Diamond Valley’s proposed water market represents either an exciting opportunity for innovation or another failed challenge to the hegemony of the prior appropriation doctrine in western states. While a water market includes the possibility of many solutions, its implementation stands as a direct challenge to many century-old standards of water law.

Ryan Hull

Image: View north along Nevada State Route 278 near Eureka Airport in Diamond Valley. Wikimedia user Famartin, Creative Commons.

 

 

Sources

Nev. Rev. Stat. Ann. § 533.040 (West).

Nev. Rev. Stat. Ann. § 533.370 (West.)

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Anne Knowles, Putting Stock in Trading Water at Forum, Nev. Appeal, (Aug. 20, 2015) http://www.nevadaappeal.com/news/local/putting-stock-in-trading-water-at-forum/.

Abrahm Lustgarten, A Free-Market Plan to Save the American West From Drought, The Atlantic, March 2016, https://www.theatlantic.com/magazine/archive/2016/03/a-plan-to-save-the-american-west-from-drought/426846/.

Erin McKenzie, Nevada City Tests Blueprint for Buying, Selling Water Rights, Duke U., Nicholas Inst., (August 19, 2016), https://nicholasinstitute.duke.edu/articles/nevada-city-tests-blueprint-buying-selling-water-rights.

Michael C. Young, Unbundling Water Rights: A Blueprint for Development of Robust Water Allocation Systems in the Western United States, Duke U., Nicholas Inst., (Sept., 2016), https://nicholasinstitute.duke.edu/sites/default/files/publications/ni_r_15-01.pdf

Water Info. Program, Ditches & Diversions (2017), https://www.waterinfo.org/colorado-water/ditches-diversions

John Fleck, Palo Verde Irrigation District Sues Metropolitan Water District Over Colorado River Water, Jfleck at Inkstain, (Sept. 21, 2017, 4:44PM), http://www.inkstain.net/fleck/2017/09/palo-verde-irrigation-district-sues-metropolitan-water-district-colorado-river-water/

Mark Squillace, The Water Marketing Solution, Colorado Law Scholarly Commons, (October 2, 2017, 9:35AM), http://scholar.law.colorado.edu/cgi/viewcontent.cgi?article=1753&context=articles

Sandra Zellmer, The Anti-Speculation Doctrine and Its Implications for Collaborative Water Management, 8 Nev. L. J. 994, 1011 (2008) http://scholars.law.unlv.edu/cgi/viewcontent.cgi?article=1127&context=nlj

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