The Californian water on the boil

Guest blogger: we have invited Charles Regnacq to write a post on the drought in California and to our great pleasure he has accepted. Charles Regnacq is a Ph-D student at U. Pau (CATT). Last year he was a visiting scholar at U.C., Riverside (Water Science and Policy Center). He currently works on water markets in California and on transaction costs of the institutional transition toward a sustainable use of water.

On April the 1st, the Californian department of water resources announced that the snowpack in the Sierra Nevada (an important source of water for the State in the next months) is at its lowest level ever measured: only 5% of the normal at this date [1]. 

This fact among others confirms that the singular drought period of the past three years in California is not over but instead is reinforcing. As exceptional event calls for exceptional response, the governor Jerry Brown declared the same day and for the first time in the Californian history a statewide mandatory cutback of water for the 2015 year [2]. The order asks for a reduction of 25% of urban water use, a better monitoring of water allocation and urges to limit the use of water in agriculture.

It is now very likely that the State will go through another tough year with farmers in the front line. For the sole 2014 year, 5% of irrigated land had to be fallowed leading to a loss for the agricultural sector of more than 2 billion of dollars and around 17 000 jobs [3].

While this drought is breaking records one by one and thus become an exceptional event in the Californian history, the difficulties to reallocate water during shortage periods in this state is not something new. For almost 150 years, the institutions governing this resource has been shaped as conflicts occurs and new laws are passed to cope with contemporary issues. But innovation in institutional infrastructure is often curbed by the previous reform due to the inherent transaction cost and potential conflict associated with such a transformation [4].

1. “Whiskey is for drinking, water is for fighting”. (An old say in the American West)

Since the gold rush in the mid-19th century until today, an extensive use of water resource allows California to be one of the wealthiest State in USA. However, the path toward such a growth has been punctuated with multiple conflicts over water allocation.

In an early stage, the “laissez-faire” regulation has been replaced with more formal rules through the creation of water districts and irrigation districts. These local entities was dedicated to manage water among users and helped in solving conflicts in a specific area. But the increase of agricultural production within the central valley in the beginning of the 20th century and the growing urbanization in the southern California rapidly exceed the limited local resources and call for a broader management of water.

In order to solve the geographical mismatch between water supply and demand, institutional and hydrological investments has been made to allow the transfer of water from north to south of California. The last century has thus seen the development of an important network of canals and reservoirs in order to cope with the geographical imbalance of water [5]. 

The government and federal authorities agreed to build the Central Valley Project (CVP) intended to deliver water for irrigation to the central valley followed some decades later by the State Water Project (SWP). Districts sufficiently large were also able to build their own project: the Hetchy Hetchy canal to deserve the city of San Francisco (San Francisco Public Utility District), the Colorado River aqueduct and Los Angeles aqueduct delivering water to the south coast (mainly the Metropolitan Water District of Southern California and San Diego Water Authority).
With the increase of water transfers including exportations outside of the hydrological basin, tensions between regions became more pronounced. An iconic case has been the transfer of water from the Owens valley (in the Sierra Nevada) to the growing metropolis of Los Angeles. In this story, farmers from the Owens valley felt aggrieved from the agreement with multiple environmental degradation [6] and led to the so-called “Californian Water War” [7]. Despite this conflict happened almost 100 years ago, the specter of this conflict is still present in every minds [8] and played an important role in the reluctance of local authorities to encourage water exportations. However, the major impediment of water transfers appeared after an important reform for water in California had passed: the introduction of market based instruments.

Following two reports by the governor [9] and the legislature [10] in 1978, agent entitled with a water right of use are now allowed to sell or lease its endowment. But simultaneously to the rise of the water markets, resistances to water exports increased as well among local authorities. Several concerns relating to the effects of these transfers on the region of origin has been put forward. Environmental degradation, water depletion, economic impacts on related businesses raise as much worries among rural communities and curbs water transfers. In virtue of their police power, several counties and cities implemented a groundwater ordinance which drastically restrict the possibilities of water export [11]. While it is important to protect the local resource to avoid the classical tragedy of the commons, the Hanak’s papers ([8] and [11]) revealed that groundwater ordinances are too much often viewed as a solution rather than a transitional state.

2. The balkanization of the information and groundwater issue

The movement of decentralization in the beginning of the 20th century toward local water management has been a helpful reform to address the contemporary issues. Indeed it is well known since Ostrom [12] that conflict and problem of the commons are better solved in small structures. It simplified water allocation within the district’s boundaries and improved water usage among members.

However, the delegation of power to local authority also led to complicate the transfer of water outside of the district’s boundaries through the groundwater ordinances or more informal pressures [13]. The source of the problem in many places aroused from the lack of a proper groundwater management. Indeed, in California and until a very recent date (august 2014), groundwater resources were not controlled by any state regulation as the surface water were and decision toward this particular resource has been let to the discretion of local authority (Wright Act of 1887) This often induced the region to experience the well-known problem of resource in “open access”.

This point is particularly concerning in a context of water trade which increase the pressure on the groundwater resource with a significant risk of negative impact on local economy and a potential risk of environmental crisis for the ecosystem in the region of origin [14]. This lack of State regulation promotes resistance to reform and deter any attempt to improve groundwater management mainly because of a lack of financial and political capital [15]. Indeed a good cooperation between districts is needed to study underground water and is often costly. Some small districts do not always possess the necessary resources to engage in such path. Furthermore, the reluctance toward an improvement of groundwater management can be also attributed to an insufficient net gains (or simply a net loss) of such transformation from potential water sellers [16]. Indeed, numerous activities are using groundwater as a buffer in period of drought and if this backyard resource become more regulated, pumping groundwater in time of surface water shortage could become impossible. Thus, the disorganization of the decision’s chain induces some local policy makers to prefer an inefficient status-quo by restricting the water transfers rather than an active water management which would allow large benefit for California.

3. California has its back against the wall

Today California is facing one of the driest drought of its history and the lack of water reform from the past decades (primarily in groundwater management) increase the scarcity and the risk of dramatic water shortage in many places. However this drought also gives the possibility for the State to regain control of groundwater. Recent improvements in the legislature goes into this way: in the last summer, a package of three major bills have been passed (AB 1739 (Dickinson); SB 1168 (Pavley); and SB1319 (Pavley)) in order to regulate pumping. These bills increase the incentive to control the overdraft of several basin at a local level but also authorize the State to intervene into the process if the local management fails [17].

 The recent mandatory of the governor to cutback water also implies to centralize water information at the state level in order for this letter to be able to take the best possible decision.
In conclusion, in spite of the critical situation which faces California today, the actual drought can be a springboard toward a more resilient water economy for the future. 


Charles Regnacq


Reference

(1) http://ca.gov/drought/topstory/top-story-29.html
(2) http://cdec.water.ca.gov/cdecapp/snowapp/sweq.action
(3) J. Mount, E. Hanak, J. Lund, R. Frank, G. Gartrel, B. Gray, P. Moyle, and B. Thompson. April 2015. “California’s Water: Managing Drought”; PPIC report: http://www.ppic.org/content/pubs/report/R_415MDR.pdf
(4) G. D. Libecap. 2011. “Institutional Path Dependence in Climate Adaptation: Coman's "Some Unsettled Problems of Irrigation”. American Economic Review
(5) E. Hanak, J. Lund, A. Dinar, B. Gray, R. Howitt, J. Mount, P.Moyle, and B. Thompson. February 2011. “Managing California’s Water: From Conflict to Reconciliation, Executive Summary”; PPIC report: http://www.ppic.org/content/pubs/report/R_211EHR.pdf
(6) G. D.  Libecap, 2008. “Chinatown Revisited: Owens Valley and Los Angeles—Bargaining Costs and Fairness Perceptions of the First Major Water Rights Exchange”; Journal of Law, Economics, and Organization
(7) M. Reisner. 1986. “cadillac desert”, Viking Press
(8) E. Hanak. July 2003. “Who Should Be Allowed to Sell Water in California? Third-Party Issues and the Water Market”; PPIC report: http://www.ppic.org/main/publication.asp?i=337
(9) Governor’s Commission to Review California’s Water Rights Law (1978)
(10) C. Phelps, N. Y.  Moore, and M. Hammer Graubard. 1978.  “Efficient Water Use in California: Water Rights, Water Districts, and Water Transfers”, RAND, R-2386-CSA/RF, Santa Monica, California.
(11) E. Hanak. 2005. “Stopping the Drain: Third-party Responses to California's Water Market”, Contemporary Economic Policy, Volume 23, Issue 1, pages 59–77, January 2005
(12) E. Ostrom. 1990. “Governing the Commons: The Evolution of Institutions for Collective Action”, Cambridge University Press, New York
(13) N. Ghimire and R. C. Griffin, 2014. “The Water Transfer Effects of Alternative Irrigation Institutions”; Am. J. Agr. Econ. (2014) 96(4): 970-990
(14) M. S.Taylor, 2009. "Innis Lecture: Environmental crises: past, present, and future," Canadian Journal of Economics, Canadian Economics Association, vol. 42(4), pages 1240-1275, November.
(15) K. Jandoc, R. Howitt, J. Roumasset and C. Wada, 2014. "Institutions for Managing Ground and Surface Water and the Theory of the Second-Best," Working Papers 201415, University of Hawaii at Manoa, Department of Economics.
(16) K. C. Knapp, M. Weinberg, R. Howitt and J. F. Posnikoff, April 2003. “Water transfers, agriculture, and groundwater management: a dynamic economic analysis”, Journal of Environmental Management, Volume 67, Issue 4, Pages 291-301
(17) P. W. Culp, R. Glennon, G. Libecap, October 2014. “Shopping for Water: How the Market Can Mitigate Water Shortages in the American West”, The Hamilton project: http://waterinthewest.stanford.edu/sites/default/files/market_mitigate_water_shortage_in_west_paper_glennon_final.pdf