Water Markets May Help California Better Manage Its Water

Sally Pipes
President and CEO of the Pacific Research Institute

California’s famous moniker – the Golden State – is becoming all too accurate as the state enters the fifth year of drought and the summer heat begins to dry out its rolling hillsides. A lackluster El Niño failed to deliver a promised deluge of rain and ultimately brought only an average amount of precipitation – far from what was needed to make up for several years of record low rains and snow packs.

California’s natural drought cycles are made worse by ineffective water management policies – policies that drown water managers in top-down, command and control regulations. The byzantine set of rules and pricing requirements mandated on water at all stages of distribution across the state create absurd market inefficiencies. These regulations prevent markets from doing what they do well – allocating scarce resources.

Last week, the Pacific Research Institute’s Center for California Reform, assembled some of the nation’s most knowledgeable voices on water policy. Experts from the Water Foundation, the Public Policy Institute of California, the Association of California Water Agencies, the Environmental Defense Fund, Assemblymember Kristin Olsen (R-Modesto) and Wade Crowfoot, Deputy Cabinet Secretary and Senior Advisor to Governor Jerry Brown gathered in the State Capitol to discuss the benefits of a California water market and to highlight legislative and regulatory challenges and solutions needed to do so.

Conference highlights include:

  • In an era of hyper-partisanship, policymakers from both sides of the political spectrum, and experts from multiple scientific disciplines agree that water markets may be the “next innovation” that will change the way water is distributed across the state. Aside from the actual legislative challenge of creating a functional statewide market, institutional barriers within local, state and federal water agencies must be understood, addressed and broken down if a market is to succeed.
  • Water, while a commodity, is different than other commodities. It is a life-giving resource that allows nature and people to thrive together. A statewide, nimble water market can serve all the state’s different communities – farmers, the environment, disadvantaged urban and rural communities, cities and businesses – rather than pitting them against each other.
  • While water is traded in limited circumstances at the local level – 38% of all water trades occur between parties in the same county and another 41% occur within the same region – we do not realize the potential of markets statewide due to restrictions on transfers across the Sacramento Delta and institutional barriers between state and federal agencies.
  • Transparency and functionality are essential for an effective water market. Shockingly, in tech-friendly California, the state lacks comprehensive statewide water data, a starting point for a functional water market. Assemblymember Dodd has introduced SB 1755, The Open and Transparent Water Act, which requires the Department of Water Resources to create, operate and maintain an integrated water data platform.
  • California’s leaders are discussing water markets and want to create a statewide market. Governor Brown’s Water Action Plan discusses the need for “a streamlined water transfer process.” A number of forum participants highlighted their recommendations and policy proposals to streamline and improve water transfer (see documents from ACWA and EDF as two examples).

The current drought is not California’s first. It certainly will not be its last. There’s no panacea to California’s ever-fluctuating cycles of wet years and dry years. But, some common sense steps can be taken to alleviate this vexing challenge that impacts families, businesses, farmers and the environment. One important first step is the creation of a statewide water market.

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Sally C. Pipes is President, CEO and the Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute, headquartered in San Francisco. www.pacificresearch.org. Download PRI’s e-Book with background materials on water markets.

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