A Fix for California Water Policy


Critics of California’s current water policy advocate more infrastructure spending on things like dams, canals, and desalination plants.  Many would also curtail water releases for the benefit of fish and other wildlife.

Certainly, infrastructure spending would be better than wasting money on the governor’s high-speed-train fantasy.  However, California cannot spend enough money on water infrastructure to prevent water shortages.  And, solving California’s water shortage does not require an end to “dumping water” to save fish.

California has a history of droughts lasting as long as 200 years.  You can dam every canyon in California and line the coast with desalination plants, and you won’t solve the water shortage in a 200-year drought, or even a ten-year drought.  Under the current allocation and pricing system, California will simply consume every new drop of water produced. We will have a water shortage all the same.

Consider Westborough and Hillsborough, in the South San Francisco area. Hillsborough consumes more than four times the water per person as Westborough, just six miles away. Increasing the supply of water in California will simply allow Westborough to be more like its neighbor. The problem is how to constrain demand in places like Hillsborough.

California policy makers prefer to use authoritarian conservation policies and police-state enforcement tactics to allocate water and control demand.  These polices do not end water shortages.  They perpetuate the shortage, and they add to the burdens imposed by energy and growth policies which are already driving businesses and people out of the state.

Eliminating California’s water shortages in the presence of recurring droughts will require that the state resort to something truly radical --- a free market in water.  This will require that ownership of water be clearly defined, that resale be allowed, and that we adopt a market-clearing price.

We know what this looks like. Water markets equipped Australia to endure the 1995-2009 Millennium Drought. This was the worst Australian drought since European settlement.  Total water stored declined to just 27 percent of capacity. Yet water trading allowed Australian cities to avoid the most severe water restrictions. It protected agricultural businesses, and it ensured that the country’s endangered habitats and species received adequate water.

Remarkably, in an end-of-drought survey, over 90 percent of Australian farmers reported that water markets were important to their businesses’ survival. There are many lessons for California here.  A key one is that the tension between water users is completely the creation of policy. There is no need for the tensions between the agricultural industry and California’s cities, between growers and endangered fish, between Hillsborough and Westborough, between neighbors. Water markets can balance competing uses in a way that benefits all.

To work, markets need something to trade. The basis for trade in a functioning water market is exclusive access to a share of water from a specific body. Australian water laws provide this. California’s water laws do not.

In California, water rights are often tied to land ownership. The right to surface- or ground-water is conferred by owning the land and often can only be transferred by selling the land. If a land owner wants to use the water, he needs only to put a straw in the ground or the stream. The landowner is entitled to “reasonable and beneficial” use of the water, but that right only extends to the borders of the property.  He can use all the water he can pump, but he has to use it on his land. There are legal barriers preventing the sale of water.

This creates a “use it or lose it” system of water allocation, with lots of absurdities.  We have growers using sprinklers to irrigate low-value crops like alfalfa in our deserts, while neighbors shame each other for watering their lawns and cities establish water police to enforce arbitrary rationing goals.  We have huge aquifer overdrafts, with massive damage to the environment and to highways and canals.

California water users are drawing from a common pool. Since they cannot do anything with their water except use it or lose it, an individual’s incentive is to use as much water as possible, before it’s gone and his neighbor gets it. During a drought, it’s literally a race to the bottom of the well. A functioning water market would provide each user with a specific allocation. Then, as the supply of water diminishes during a drought, remaining allocations would become more valuable, increasing the economic return to conservation.

Prices in a functioning water market would behave just like those in any number of other healthy markets. Consider gasoline or coffee beans. Over the past year, the price of gasoline in California declined by 30 percent, reflecting new supplies and slower demand growth in some markets. In 2014, coffee bean prices increased by 72 percent, in fewer than four months, reflecting a severe drought in Brazil. Australia’s water behaves the same. During the Millennium Drought, water’s price increased by 20 times, from a low of $25 AUD per acre foot to $500 AUD. Naturally, when the rains returned, the price fell.

California water prices are much more stable over time, but they vary a lot by geography. California municipalities see prices that vary by about 12 times. For example, Ventura pays pumping charges of just $120 per acre foot, while San Diego is purchasing desalinated water for $2,200 per acre foot. Price discrepancies like this defy economic laws. There is certainly nothing resembling a scarcity price for water.

When you pay your personal water bill, the price that you pay does not signal that we are facing a critical water shortage. Water prices have increased incrementally, but not nearly enough to convey our dire situation. The gas lines of the 70s reminds us of what a world without scarcity pricing looks like.  Remember how quickly shortages disappeared when price controls were abandoned?

California does not need another speech by the Governor.  It doesn’t need another legislative proposition promising additional water supply 20 years or more later (think Proposition 1). It doesn’t need more dams or canals.  Remarkably, it doesn’t even need more rain, although more rain would be nice.

What California needs is a process to define who owns the water and how much is available.  A comprehensive rewrite of California’s water laws is the best way to achieve this, but this is probably politically impossible, especially since that rewrite would require Sacramento to cede control of water allocation to the markets.  Alternatively, California has a court-mediated alternative in place.  The process, adjudication, is far from perfect, but it can work.

Twenty-three of California’s more than 400 groundwater basins have already undergone adjudication. While not models of efficient water use, adjudicated basins are a big improvement over non-adjudicated basins. Unfortunately, the current legal infrastructure requires a minimum of 10 years for the adjudication process to work.  This is obviously too slow to help with our immediate problem. Sacramento legislators have promised to implement policies to expedite adjudication, but we are still waiting for them to deliver. This should be California’s single highest legislative priority.

Absent meaningful reform, litigation will take on an increasingly important role. Significant Proposition 218 cases have already been decided in San Juan Capistrano and Ventura. The Ventura case is especially noteworthy. The City sued the local water purveyor over pumping charges which are greater than those of local farmers. Suing to lower the City’s already low water prices during a severe shortage shows impressive audacity. Fortunately, an appeals court ruled that the current rate system is legal. Ventura’s pumping charges are not going down anytime soon.

The San Juan Capistrano decision seems less helpful. There, an appeals court ruled that the City’s tiered rate system, which increases the cost of water as the number of units increases, is illegal under Proposition 218. We ask the question again, what will constrain the demand for water in places like Hillsborough? Or San Juan Capistrano? We are not qualified to object to the legal decision on its merits. But the cost of water for all users in San Juan Capistrano very likely ought to be higher than it is today. A free market in water would tell us just how much higher.

Finally, allowing a market price for water would contribute to increased supply during droughts.  Businesses and business people are amazingly efficient at taking advantage of profit opportunities.  Who knows where water would come from if the price were higher? Water districts would have economic incentives to explore supply alternatives such as rain catchment, waste water reuse and desalination. Residents would have incentives to explore household alternatives such as grey water irrigation systems. Maybe Mexico would put in desalination plants and sell it to us? Maybe some business would use tankers to import water?  We don’t know how markets would provide the water, but they would.  We see this with oil, coffee, and every other commodity.  It’s time for California to move to a market price for water.  It’s time to end the current nonsense.

Matthew Fienup teaches graduate econometrics and works for the Center for Economic Research and Forecasting at California Lutheran University, where he specializes in applied econometric analysis and the economics of land use. He is currently working on his PhD at the Bren School of Environmental Science and Management at the University of California Santa Barbara. He holds a Masters Degree in Economics from UCSB. Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found atclucerf.org.

Photo by TCAtexas (Own work) [CC BY-SA 3.0], via Wikimedia Commons