October 2015 Bar Bulletin
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October 2015 Bar Bulletin

Irrigation and Drought in the Northwest and the Potential for Market-Based Reallocation of Water To Protect High-Value Crops

(Second of Two Parts)

By Douglas MacDougal


IEconomists contend that the most efficient means of adjusting disparities in economic impact, and allocating resources to more valued uses, is to allow for market transactions between willing buyers and willing sellers. As assumed in the Yakima study, someone may be willing to pay a farmer with a low-value crop not to irrigate, if deemed an acceptable investment.1

Depending on circumstances, anywhere there is sellable "excess water" and a willing buyer, there is a potential market transaction.2 The simplest cases involve mere fallowing of land and simple forbearance agreements, for in those cases there need not be any administratively approved transfer of water rights; it is entirely contractual.

An interesting example of district patrons fallowing for money is a three-year pilot project in Arizona, which contractually reallocated water to a "groundwater replenishment district" for use by others. The Yuma Mesa Irrigation and Drainage District (YMIDD) and the Central Arizona Groundwater Replenishment District (CAGRD) worked out an agreement in January 2014 whereby volunteer farmers are being paid not to grow crops and, thus, not to divert Colorado River water that otherwise would be used to irrigate the fallowed lands.3

The purpose of the program is to conserve water in the Colorado River system and allow Colorado River stakeholders a chance to "evaluate the benefits and impacts of creating conserved water through rotational fallowing."4 The saved water is maintained in Lake Mead, thus mitigating its dwindling levels and helping forestall shortages to water users in the Lower Colorado River basin.5 CAGRD pays $750 an acre to the fallowing farmer. No administrative transfers are involved.

In the Arizona case, Lake Mead is a "bank" for the purchased water. The buyer is an entity outside of the irrigation district in the business of acquiring water for storage and reuse. It seems possible, from transactions like the one in Arizona, that the idea could be reshaped into a customized, economic approach to curtailment in district drought planning.

But what about the case where there is no entity like CAGRD to act as a "storage partner"? What if the purchaser were the irrigation district itself? May a district buy back water from some of its patrons so that the district then diverts less water and the likelihood of patron curtailment is reduced? Or, in the case of a district with storage, may the bought-back water remain in storage, also reducing the risk of curtailment, or be specifically available to patrons willing to pay for the extra stored water?

An Oregon Experiment

IThese are intriguing questions. Oregon water law, like in many states, typically affords irrigation districts wide - though certainly not unlimited - authority over the water rights within their jurisdiction, such that districts are well positioned to employ creative market-based water allocation approaches.

The Irrigation District Law directs districts to "[e]stablish equitable bylaws, rules and regulations for the administration of the district and for the distribution and use of water among the landowners.""6 And while many districts have adopted rules that in times of shortage require water to be prorated on the basis of acreage, the statutory directive that distribution be "equitable"" does not compel a share-the-pain approach to curtailment in times of water shortage.7

Some districts and basins in Oregon have indeed considered transactional approaches to drought water reallocation.8 In one Oregon scenario, a district informed its patrons that it would pay farmers $300 per acre to forbear irrigating for the season, up to a certain acreage cap. The price of the "buyback" was fixed to induce the landowners with the lowest-value crops to sell to the district their right to use water.

If a hayfield typically yielded about this price per acre, or perhaps a little less, the district used that information to set its own offer price. The offer had conditions: assessments had to be current and the land had to be in production and regularly irrigated (the water rights associated with the land therefore not being subject to forfeiture for non-use). If agreeable, an interested farmer would sign up for a single season under a binding "forbearance contract," whereby he or she would surrender his or her right to use water on the land for the entire season. A farmer with a crop value that was higher than the offer price would have no incentive to forbear.

In the case mentioned, the plan was successful. There was a full buy-up of the set-aside funds in the spring of 2015, and more water was left in storage. This has reduced the risk of curtailment to other users during the irrigation season. As with the Arizona case, there was no administrative transfer required or involved for this fallowing project.9

Using a Reverse Auction
To Determine Price

IOne of the notable issues in this sort of intra-district arrangement is finding the right price to offer patron water users. One can do research on crops, costs, yields, and earnings to ascertain as accurately as possible what price a user ought to pay, and establish it administratively. This method has the virtues of simplicity, certainty, and low transaction costs. But it is not fundamentally market-based.10 As such one may never know whether one has underpaid or overpaid, relative to what a free-market transaction might have yielded. It nevertheless appeared to work here for its intended purpose.

A quasi-market method that has been used in the Yakima basin, the Deschutes basin, and in various places throughout the West, is the so-called "reverse auction."" Reverse auctions, or "procurement auctions"" as they are also called, are run by the buyer and not the seller. If a buyer has water it wishes to acquire, it solicits bids from potential sellers.

For example, in 2005 the Washington Department of Ecology conducted its first reverse auction for acquiring water in the Yakima River basin for the benefit of fish flows. Indeed, most reverse auctions, including those by the Department of Ecology, have been for the purpose of increasing fish flows in tributary waters.

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