January 11, 2001

1

IEAB Independent Economic

Analysis Board

Daniel D. Huppert, Chair

Lon L. Peters, Vice-Chair

Joel R. Hamilton

Kenneth L. Casavant

Jack A. Richards

Roger Mann

Paul C. Sorensen

Hans Radtke

Economics of Water Acquisition Projects

Go to Appendix A

Go to Appendix B

Go to Appendix C

Developed by the Independent Economic Analysis Board

For the Northwest Power Planning Council

December 21, 2000

IEAB 2001-01
January 11, 2001

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Economics of Water Acquisition Projects

1. Introduction

As part of its oversight and approval role over Columbia River Basin (CRB) fish and wildlife

programs, the Northwest Power Planning Council (Council) receives proposals to augment

instream flows for the benefit of fish. Such proposals sometimes include plans to accomplish this

instream flow augmentation by the short- or long-term acquisition of water rights from existing

owners.

Because such instream flow acquisition has little precedent in the region, the Council has

requested the assistance of the Independent Economic Analysis Board (IEAB) to develop

recommendations and guidelines for how such water acquisitions might be accomplished, and

how these proposals should be evaluated. Specifically, the Council asked the IEAB to address the

following questions:

a. What determines the economic value of water uses?

b. How is water use currently allocated, and is this allocation based on economic value?

c. How should the cost-effectiveness of a proposed water project be evaluated?

d. How could market mechanisms or program structures be used to increase the cost

effectiveness of water projects?

A specific motivation for this report was the Council's recent experience with streamflow

enhancement in the Teanaway River. As explained to the IEAB by Karl Weist, a large section of

the Teanaway is dewatered every irrigation season. The intent of the Teanaway River Instream

Flow Restoration Project is to restore flows to the Teanaway by purchasing land with water rights

attached, by purchasing water rights outright and by doing a water conservation project. Due to

landowners’ strong reluctance to sell water rights and land for streamflow enhancement, the

project evolved into a water conservation effort. The Bureau of Reclamation, Bonneville and

others would purchase new irrigation systems for the three main water user groups on the

Teanaway, replacing the current system of push-up dams with a lower point of diversion on the

river and a high-pressure irrigation delivery system. By installing this higher-tech system, and

eliminating flood irrigation, it was hoped that considerable volumes of water would be saved.

For a variety of reasons, the cost of the project escalated to $5.3 million. According to Weist, the

project would generate no more than 3.74 cfs during the irrigation season (which is equivalent to

7.4 acre-feet per day). If the irrigation season lasts 6 months, this conservation project would be

expected to add 1,351.4 acre-feet to instream flow -- at a cost of $3,921 per acre-foot. This cost

seems high based upon casual comparison to prices experienced in Idaho and Oregon water

markets. So, we set out to gain some perspective on whether this cost is unreasonably high for a

stream enhancement project and whether water acquisition would be an appropriate, low-cost

alternative.

2. Context and broader framework
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Water acquisition should be viewed within a broader framework. First, the National Marine

Fisheries Service in its draft biological opinion (NMFS, 2000) lists instream flow augmentation as

one among a menu of alternative actions that should be considered to assist the survival and

promote the recovery of endangered and threatened anadromous fish stocks. In some

circumstances this potentially could be accomplished by transferring water rights from

agricultural use to instream flow.

Second, water acquisition should be viewed within the context of the Council’s subbasin planning

process and should be evaluated as an element of the Council’s ongoing efforts to assure the costeffectiveness of the fish and wildlife program. As the subbasin planning proceeds, we expect that

some subbasin plans will give high priority to instream flow improvements, based on an

assessment of the biological needs of the fish and a comparison of alternative programs to help

the fish. Once instream flow improvements are listed as a priority in a subbasin plan, then there

needs to be an evaluation of how such instream flow improvements might be accomplished –

involving choices among alternatives such as modifying reservoir or hydropower operating rules,

altering irrigation infrastructure, or acquiring water rights outright by purchase or lease. If a

decision is made to acquire water, still more choices must be made to select the most cost

effective way to acquire that water. Thus, once the subbasin planning process is in place, the

series of decisions that might lead to a decision to acquire water will offer a number of points

where economic input in the form of cost effectiveness analysis should be applied.

In the short term, however, the subbasin planning process is not yet in place, but NMFS is

advocating that flow augmentation be pursued, and the Council is currently being asked to

consider fish and wildlife project proposals that include provisions to augment instream flows

and/or acquire water for fish. Our comments address this situation – how should the Council

view and evaluate these proposals?

3. How water is now allocated

If programs are developed to acquire water for instream flow augmentation, these programs will

have to be designed in accordance with the rules that govern how water is allocated. Because

water law does not facilitate the emergence of water markets, water is often not allocated to the

highest value uses. The value of water to water rights holders depends upon the specific

circumstances of that use. Some water uses generate values of close to $100 per acre-foot per

year. Other uses generate values of barely a few dollars per acre-foot. Although some differences

over space and time in the values generated by water should be expected, given the cost of

transport and the uncertainties of water supplies, the historic allocation rules perpetuate a much

wider range of use values than would occur with more effective water markets.

The central tenet of water allocation in the Northwest states is the prior-appropriation doctrine,

interpreted slightly differently by each of the states. This contrasts with the riparian doctrine of

earlier eastern water law that allows landowners to make “reasonable use” of water from streams

adjacent to their land, but requires them to return such water to the stream undiminished in

quantity and quality. Under the prior-appropriation doctrine, a person earns the right to use a

quantity of water by diverting it to a beneficial use on a specific tract of land. For a beneficial use

in agriculture, the "water duty" for this right is the water needed to irrigate the average mix of

crops on the “appurtenant” land with the irrigation technology prevailing when the water right
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was granted. The priority of the right is the date the water was first diverted. If water supplies

are short, the most recent (“junior”) appropriators are the first to be cut off, partially or entirely.

The earliest (“senior”) appropriators receive their full entitlements until no water remains at the

source and all junior appropriators have been shut off. Irrigators desiring to expand their

diversionary rights beyond the quantity to which their appropriation entitles them must execute a

new appropriation having the most junior priority ("no expansion of use"). Even if water supplies

are not short, water not beneficially used is forfeited to junior appropriators or becomes available

for re-appropriation by another person ("use it or lose it"). Similar definitions of beneficial use

were developed for water diversion to other uses (municipal, industrial, etc.)

The prior-appropriation doctrine developed because the western states had plenty of land, few

people, and even more limited water supplies. Mining and irrigation development were expensive

propositions and were feasible only if abundant and secure water supplies could be assured when

and where needed. The prior-appropriation doctrine was a response to this need. If a miner or

farmer could first locate an unused water supply, and then build the required facilities and

beneficially use that water, the water would be his in perpetuity. No later, junior, appropriator

could do anything that would diminish the senior user's water supply. Such secure water supplies

were essential to attract the massive amounts of capital needed for western mining and irrigation

development. While other resources were also crucial to development, they didn’t pose the same

physical difficulties of transportation or the institutional problems of monitoring and enforcing

property right transfers as did water.

The security of water rights depends on the complicated "use-dependencies" among water users.

Actual consumption of water ("consumptive use") by irrigated crops is almost always less than

what is diverted from the stream ("diversion amount"). Unconsumed water returns to the stream

as surface runoff, via spring flow after deep percolation to an underlying aquifer ("return flows"),

or escapes by the same means to a second watercourse ("escape flows"). Return and escape flows

become water supplies that enter into the water rights of other irrigators, creating a complex web

of hydrologic linkages among users. These complicated user dependencies mean that water

transactions by parties somewhere in the basin can easily affect third parties elsewhere in the

basin. Many of the seeming rigidities of the prior-appropriation doctrine, and the barriers it

seemingly places in the way of markets, are actually provisions intended to minimize third-party

effects.

In most western states, waters rights are private property rights appurtenant to land. If you buy the

land you also buy the water. Separating the water from the land is legally tricky but sometimes

possible. This is because a water right specifies the quantity of water, nature of use, point of

diversion, point of use, and a priority date. Changing any of these parameters has the potential to

affect third parties through the complex workings of basin hydrology and water allocation rules.

States generally allow other users to protest, and frequently to block, changes in these parameters

if they expect the change to damage their rights.

This rigidity of the appropriation doctrine is especially significant because:

a. Irrigation was first in line for water. Today’s irrigators now hold most of the rights to

consumptively use water in the interior Columbia Basin. If water is to be reallocated to other

uses, most of this water will have to be shifted from irrigation use.
January 11, 2001

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b. Water supplies on many rivers have been fully or over-appropriated, meaning that the sum of

the rights to divert water exceed the typical annual flow. In dry years this means that many

western streams have little unappropriated water, and some streams at some times may be

virtually dry.

c. State laws have only recently recognized instream flows as beneficial uses. This means that

any new claims for water rights for the purpose of leaving the water in streams to augment

flows would be junior to other existing water rights on the stream, and of little use for

maintaining instream flows.

d. It is possible, but difficult to reallocate water among uses. This is true for reallocation from

low-valued to higher-valued irrigation uses, and especially true for reallocation from irrigation

to other uses.

The prior-appropriation doctrine evolved to foster reliability and security of water supplies, not

flexibility. Water is allocated according to some clear and simple rules – most notably the date

the water was first beneficially used – but the economic value of that use plays little role. The

prior-appropriation doctrine is likely to remain firmly entrenched in western water law for the

foreseeable future. Proposals to acquire water to augment instream flow will have to deal with

this institutional legacy.

4. Alternative ways to augment instream flows

Suppose it has been determined that fish in a stream segment would benefit if instream flows

were increased by selected amounts at given times. There may be a number of alternative ways to

meet these flow targets. The Council should select among these alternatives in a cost-effective

manner.

The choice is either to buy water, or to take some other action that yields augmentation water. It

may be possible to buy water in the amounts and at the time needed – probably from existing

irrigation use in the basin. The difficulties of this option were discussed above and will be

discussed in more detail below in Section 5.

It is important, however, to weigh the cost effectiveness of purchasing water for flow

augmentation against other possible flow augmentation alternatives such as changes in the

operation and physical infrastructure on a stream. These might include changes in the operation

of storage reservoirs or hydropower generation facilities, and physical or operational changes to

irrigation diversion or conveyance structures. Since irrigation is almost certainly the main

consumptive use of water in the basin, it also makes sense to consider whether changes in

farmers’ water delivery or application systems could meet instream flow augmentation objectives.

Although such alternative operation and infrastructure changes to meet streamflow targets would

have costs (and perhaps benefits) to basin stakeholders, it might be cost effective for the fish and

wildlife program to pay part of the cost of such projects if they could be shown to meet the flow

objectives. The IEAB is skeptical of this approach because it will take considerable care to make

sure that the hydrologic effects of such projects are correctly assessed. Because of the hydrologic

linkages between water supplies and return flows, increases in conveyance and application

efficiency usually don’t result in additional water that can be used for flows. However, such
January 11, 2001

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changes do need to be considered, although very carefully, because in selected cases they can be

used to meet flow amount and timing goals at critical stream locations, and perhaps in a costeffective manner.

Both Oregon and Washington have statutes dealing with “conserved” water. Some can be sold to

other consumptive uses and some must be left instream. Whether this really results in net

increases in water for the new uses and the stream, or just results in net damages to hydrologically

linked and widely dispersed third parties is an open question.

Idaho law is seemingly less hospitable to transfers based on water “conservation,” perhaps

because of the more obvious hydrologic linkages between irrigation and the Snake Plain Aquifer.

On the other hand, much of the water consigned to the Idaho water banks is surplus to irrigation

needs because of the increases in irrigation efficiency (much of it brought about by conversion to

sprinklers) over the last 40 years – suggesting that Idaho has in practice allowed “conserved”

water to be marketed.

5. Methods of acquiring water

Suppose the Council is considering whether the appropriate way for the fish and wildlife program

to augment instream flows for fish is to do so with acquired water. How might the program go

about acquiring this water? Agencies, politicians and current right holders seem to concur that if

water is needed it should be purchased from willing sellers, rather than rely on government

regulatory powers or taking provisions. Obviously, to purchase water from willing sellers, water

law must support such transactions.

Historically, discussion of water markets has followed several themes. Occasional years of

drought have stimulated interest in markets and led to the creation of institutions such as the

Idaho and California water banks (discussed in more detail below) to let surplus water or water

from low-valued uses flow to higher-valued irrigation or municipal uses.

Regularized water markets, not just in drought years, have been promoted to encourage efficiency

of water allocation among irrigation users and between agricultural and urban uses. While

various kinds of water markets do exist in the Pacific Northwest, and further market innovations

are regularly discussed, water markets have so far mostly failed to bring about a significant

magnitude of transactions because of the geographic, technical and appropriation doctrine

obstacles to such markets.

Most recently, water markets have been touted as a way to acquire water to achieve

environmental goals – such as the flow augmentation for fish that is the subject of this paper.

Water markets can take a number of forms. Some of these markets already exist in the Pacific

Northwest, and other forms that might augment instream flows are being proposed:

a. Western water has always been marketable in the sense that you can buy water rights if you

buy the land to which it is appurtenant. Likewise, it may be possible to buy only the water

rights and leave the landowner holding dry land. From the perspective of the proposals facing

the Council, the hard parts of any water right purchase include the difficulty of changing the

nature of the use from irrigation to instream flow, moving the location of use from the point
January 11, 2001

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where it was originally diverted for irrigation to where the streamflow is needed, and actually

delivering this water past other would-be users in between. Fortunately, some cases are easier

-- land fallow or purchase of water rights may provide more instream flows without a legal

change of use if there are no present or potential junior appropriators on the stream.

Oregon, Idaho and Washington all do allow water rights to be changed from irrigation to

instream flow use, subject to objection by potentially affected third parties. This means that

such a change in use is not treated as an abandonment of the right, where the water would be

subject to diversion by junior right holders, or new appropriation. In all three states, while

instream flow rights may be brokered by agencies or organizations, the water right is

eventually held in trust by the state.

b. Water transactions can also be short term (referred to variously as water sales or leases). The

water right holder retains ownership of the right, but annual flows of water under that right are

exchanged between buyer and seller. Water leases between farmers in drought years have

occurred since the beginning of irrigation in this region, but have often been informal,

unregulated, and unreported.

The Oregon and Washington water trusts have recently brokered a number of annual water

leases for the purpose of augmenting instream flows (Jaeger, 2000). These water trusts have

apparently been quite successful in changing the nature and location of use to instream flows.

Some states have placed such short-run transactions on a formal footing as water banks.

Idaho bank transactions move stored water that is excess to farmers’ needs to other watershort farmers, to utilities to generate hydropower, and to fish agencies for instream flow

augmentation. The California drought water bank was used in two critically dry years to

move water from willing seller farmers to municipal uses. The state legislation that creates a

water bank generally legitimizes the change in location and nature of use for bank

transactions.

c. Buying a water right gets you water every year unless a more senior user preempts the right.

Water banks or other annual markets are less reliable than purchased senior water rights

because the leased water may not be available in dry years when it is most needed for fish. To

bridge this gap, contingent water markets are now in place in Colorado, Arizona, and

California, but not in the Pacific Northwest. In a contingent water market, farmers agree, for

a price, to deliver water to the buyer whenever predefined trigger conditions (low flows, low

snowpack, etc.) are met. Farmers would keep their water in most years, but the water would

be available for flow augmentation in years when flow is most needed.

d. Other options for short-term acquisition of water when needed include water purchase and

leaseback, which also allows the seller to continue to use the water in non-critical periods for

the duration of the lease, and purchase of water priority where the buyer pays the seller to

accept a more junior priority date.

The various alternative forms of water markets, their advantages and complications, are described

more fully in the paper by Hamilton in Appendix B, as well as in the references listed in

Appendix A.
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6. Water has a range of economic values in alternative uses

If water for flow augmentation is to be acquired in some sort of market (i.e., voluntary exchange),

then the questions arise -- at what price and under what conditions?1 If sellers are to be willing to

part with some or all of their water, they must be offered a price that at least approximates the

value of the water in their own uses. Since most such water would have to be acquired from

irrigation, the question narrows down to asking how much irrigation water is worth. The answer

is not straightforward, and depends on factors such as the following, which affect both farmers’

willingness to offer water for sale, and the value of that water to other potential users. Values of

water in alternative uses and methods for estimating these values are discussed in considerable

detail in Young (1996). The range of water values is due to factors such as:

a. Variations due to land quality, region, crops grown, and irrigation system used.

Generally water is more valuable when applied to good land, in regions where yields are high,

and where high valued crops can be grown. On the other hand, farmers who have a high fixed

investment in expensive irrigation equipment may be less likely to lease their water (because they

generally have fewer variable costs that they can avoid if they choose not to irrigate). This

diversity of circumstances means that some farmers producing relatively low crop value per acrefoot might be willing to sell or lease water at relatively modest prices that would be wholly

unacceptable to others. Since there are a diversity of farms and water values, higher prices would

attract a greater supply of water. Within any subbasin, the amount of water voluntarily offered

would increase as water price increases.

b. Variations in the nature and quality of a water right.

There is a wide variation among irrigators in the nature and quality of their right to water. Senior

rights, since they are least likely to be cut off when water gets short, are most valuable -- both to

irrigators considering selling water, and to anyone wanting to buy or lease their water for flow

augmentation. A junior water right that is frequently cut off to meet the needs of more senior

rights would be much less valuable to both seller and buyer. Farmers with ample water to meet

their current irrigation needs may also hold additional water in storage as insurance against water

shortage in future years. In some cases, this surplus stored water could be marketed with little risk

of water shortage in subsequent years. Farmers without such rights to carryover water might need

much higher prices to cover income lost through actual reductions in consumptive use before they

could participate in a water market.

c. Variations in the condition of the farm economy, in the economic outlook for particular

commodities, and in the situation of each farm operator.

Water is more valuable in good times, and the prospect of selling can look attractive during times

of depressed commodity prices. If the farmer is aging or in ill health, selling water can be an

attractive way to retire.

 

1

 In addition, both buyer and seller must be assured of the terms and conditions of the transaction, including the

allocation of the risks of supply (timing, quantity, and quality) and the consequences to third parties, if any. Many, if

not most, of these transactions will and should be governed by contracts, which are an important determinant of the

economic consequences of the deal.
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d. Variations due to amount and frequency of water delivery in a contingent market.

The lost farm income, or "opportunity cost", of moving water out of irrigation use will normally

increase as the amount and frequency of delivery increases. For individual farmers, improving

water management and concentrating available water on high valued crops will help handle small

cutbacks in consumptive use. If more water is needed from the market, this must come at the

expense of reducing higher-valued uses, and enticing the participation of better farmers.

Occasional market deliveries, say one year in ten, may be tolerated without destroying the

infrastructure of a farm. As the delivery frequency increases, the increasing cost of keeping the

farm together as a functioning enterprise (e.g., assuring a reliable supply of occasional labor)

means that farmers would demand a higher price to cover these costs of market participation. At

some delivery frequency, perhaps one year in two, it would become more attractive to just sell

and retire the land. At that point it might be cheaper to obtain augmentation water from land

retirement than from frequent irrigation interruptions since retired land needs no irrigation system

or other infrastructure, and may qualify for lower property taxes and other overhead costs.

e. Flexibility of response to water shortage.

The degree of latitude that irrigators are given in responding to market-induced water shortage

will affect the price they will ask. If irrigators are free to concentrate what water they have on

high valued uses, then the cost to them will be lower than if they are required to idle specific

fields, adjust all crops in proportion, or idle the entire farm. If retirement of whole farms is

required, then there is obviously little scope for adjustment. On the other hand, some possible

responses to water shortage (such as adopting more efficient irrigation technology or substituting

groundwater for marketed surface water), while they might be done at little cost or might even be

profitable, might also have little or even negative effects on the amount of water that ultimately is

made available for flow augmentation.

f. Timing.

As a farmer calculates whether to lease water, he will consider the crop revenue he will loose

because he has less water, how much of his production costs he can avoid if he has less water, and

the revenue from leasing the water. Farmers might be willing to settle for a lower price early in

the season, before they have invested in seed, fertilizer and tillage operations. After the crop is in

the ground, it would take a higher price to induce the farmer to lease water. As the crops

approach maturity, almost all of the production costs are sunk, and the marginal value of the last

increments of water get even higher. For a contingent water market, it is important to notify

farmers early of impending interruption, before they incur unrecoverable costs for land

preparation and other input costs.

g. Nonfarm alternative uses of the water.

In some cases irrigation water rights may already be under pressure from possible or anticipated

alternative uses. The most obvious example is irrigated land in the path of residential

development. In cases where there are few alternative sources of water, competition between

agencies trying to purchase water for fish and developers trying to supply the needs of the

residential development can easily push the price of water to higher levels.
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h. Some water available for flow augmentation may be valued by its owners at close to

zero.

Examples might include small or hobby farmers, perhaps in marginal crop areas, who want to

retire, fallow a field, take a sabbatical from irrigating, or weather a health problem. They may be

willing to sell or lease such rights cheaply, or even give them away, especially if they view their

contribution to flow augmentation as an altruistic act. There may also be tax incentives for such

transactions. In some cases landowners may have already fallowed previously irrigated land. If

they do nothing, in a few years they will have abandoned their water right to junior right holders

or new appropriation. If they lease the water cheaply for instream flow, they can retain ownership

of the water right.

Given all this variability, how can one predict the market price of water sought in a particular

proposed transaction? There are a number of possible alternatives:

a. Evidence from water market transactions.

If water acquisition for streamflow augmentation becomes more routine, the process itself will

generate a track record of water prices under various situations. In fact, recent transactions

brokered by the Oregon and Washington water trusts have already started that record. The recent

draft report by Jaeger (2000) documented 10 water rights purchased in Oregon for an average

price of $9.16 per acre-foot per year. This compares to 23 single year-water acquisitions in

Oregon for $23.19 per acre-foot. Jaeger lists seven recent acquisitions in Washington (six water

right purchases, one single-year lease) averaging $57.51 per acre-foot per year.

b. Surrogate market values.

Because sales of water are not yet common, it may be useful to turn to other market information

that can serve as a surrogate for water value. Land and water are commonly sold together, so the

sale price of land includes the value of the appurtenant water. In fact, if one can find information

on sales of comparable land with and without water, the difference between the land prices, less

the value of improvements, can be used as an estimate of the value of the water itself. Jaeger

quotes such a recent study in eastern Oregon (Faux and Perry, 1999), which estimated the annual

value of water as $9 per acre-foot if applied to the poorest soil, $19 per acre-foot if applied to

median-quality soil, and $44 per acre-foot if applied to the best soil.

Land without water has little value in some areas of the interior Columbia Basin because use of

the land is limited to, perhaps, a little dryland grazing. In such cases, almost all of the value of

irrigated land consists of the value of irrigation improvements and the value of the water itself.

Another market that may yield useful water value information is the land rental market. The

difference between the rental price for comparable irrigated and non-irrigated land, less the

annualized value of the improvements, is an estimate of the annual value of the water. If the

dryland is only useful for extensive grazing, at a low rental value, then most of the rental price of

irrigated land consists of the value of the water and irrigation improvements. Hamilton and

Whittlesey (1996) reported 1996 land rents of $50 to $200 per acre in southeast Idaho, $100 to

$350 in southcentral Idaho, and $175 to $200 in southwest Idaho, depending also on whether the
January 11, 2001

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offered parcels were suitable for particular crops. They concluded that in 1996 some water had an

annual irrigation value below $40 per acre-foot of consumptive use in southeast, $60 in

southcentral and $95 in southwest Idaho.

c. Estimates based on economic modeling.

A number of studies have used economic modeling to estimate the value of water to Pacific

Northwest irrigation. Generally these are mathematical optimization models that simulate how

farmers can best “make do” with the water supply they have. When faced with supply shortfalls,

farmers may improve their water management, change their crop mix, shift water to their highestvalued crops, leave some land fallow, etc. The change in resulting farm income per acre-foot of

water shortfall yields an estimate of the value of the water. A number of the studies listed in

Appendix A summarize model results of this type. See especially Jaeger (2000); Frederick,

VanderBerg and Hanson (1996); and Hamilton and Whittlesey (1996).

d. Estimates based on engineering cost studies.

In some cases flow augmentation may be accomplished by changes to water infrastructure. For

example, redesign of water diversion and delivery structures may, in carefully selected cases,

actually release water to augment instream flows in a critical stream segment or at critical times.

An estimate of the cost of the acquired water is the cost of these system modifications. The

engineering cost estimates for irrigation system improvements proposed for the Teanaway River

and Salmon Creek are examples of this approach.

7. An Example of the reallocation of water - Streamflow Augmentation in the Deschutes

River Basin

In the Deschutes River Basin, the Oregon Water Trust and the Deschutes Basin Resources

Conservancy have cooperated in pursuing streamflow enhancement projects. These efforts

illustrate several of the points we have been making. They have been successful in acquiring

water from irrigators through both purchases and leases as indicated in the table below.

Table 1. Water Acquisitions in the Deschutes River Basin

Deschutes

Sub-basin

Current Use of

Water

Contract Type Total Acre

Feet (af)

Price or Lease

Amount/af

Squaw Creek 1-year donation 465.54 $ 0

Squaw Creek Pasture Purchase 878.14 $124.58/af

Buck Hollow

Creek

Hay 1-year lease 984 $32.03/af/year

Trout Creek 1-year donation 204 $ 0

Trout Creek Hay two 1-year leases 1405.5 $20.29/af/year

Tygh Creek 1-year donation 17.4 $ 0

Tygh Creek Pasture two 1-year leases 189 $10/af/year

Source: Data provided by Andrew Purkey, Director, Oregon Water Trust.
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As shown, the price per acre-foot for purchase of water rights was several-fold the one-year lease

rate. And the lease rate varies substantially across leases, illustrating the point that water is not

sold in well-organized market with near-uniform prices.

Second, the Deschutes Basin Resources Conservancy has successfully partnered with the North

Unit Irrigation District, the Bureau of Reclamation, and the Natural Resources Conservation

Service in a Water Conservation Grant Program that replaces an open irrigation ditch with buried

pipe. The pressurized pipe system provides water to approximately 445 acres. It is claimed that

the project will save about 600 acre feet of water annually (by eliminating seepage in lateral

canals). One half of the conserved water will be returned to instream flows. (Source: Deschutes

Basin Resources Conservancy website: www. dbrc.org on 11/27/2000).

Third, the difficulties associated with water rights law have frustrated some additional attempts at

water acquisition. According to Andrew Purkey, Director of the Oregon Water Trust, an attempt

to obtain additional instream flow in Trout Creek was unsuccessful. The eight or nine landowners

were assembled and agreed to share water contributions and the economic burden to improve

stream flow. But the problems of water rights priority precluded implementation of the

agreement.

8. Lessons from existing water markets and non-market transfers

The following are some lessons that the IEAB thinks can be drawn from the region’s still quite

limited experience with water markets and non-market water transfers.

a. Recognize that water acquisitions will have to conform to state water laws

The appropriation doctrine is deeply embedded in the water law of the Pacific Northwest states,

and this is unlikely to change anytime soon. This means that water acquisitions for fish and

wildlife purposes will have to conform to state laws – especially the laws on changes in place,

timing, and nature of use.

Most of these rules evolved to protect the water rights of other irrigators. Given the economic

importance and political power of Pacific Northwest irrigation interests, any viable water

acquisition program must respect these concerns. Where significant third-party effects are likely,

proposed transactions may have to include the affected parties, and may need to include

mitigation provisions. If agreement on mitigation of third party effects is not possible, this may

effectively block some proposed transactions.

Recognizing the dominant role of the states in water law and water allocation, it may still be

possible to make changes in state water laws that would make water markets function more

effectively while still protecting state prerogatives and the security of water rights. It is not now

clear which changes would be most useful, but as the process of water acquisition proceeds and

bottlenecks and ideas for change emerge, the Council should take the lead in promoting an open

discussion of the alternatives.

b. Anticipate a range of water values
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The cost of acquiring water will be highly case-specific. Most acquired water will come from

irrigated agriculture because farmers currently hold most of the water rights. The cost of this

water will depend on the crops being grown, the location, the irrigation technology being used,

the reliability of the water supply, whether water rights are being purchased or leased, timing of

the transfer within a year, conditions that must be met before the water is transferred, and the state

of the agricultural economy at the time of the transaction. Other possible alternative uses

(residential development, golf courses, industrial uses) can also affect the market price of water.

Because of this variability in water values, it is extremely important that a water acquisition

program have access to local contacts, information and expertise. Currently, most of the

experience with water acquisition resides in the state water trusts and other non-government

organizations that have been brokering such deals. These organizations are probably best situated

to find and execute the best deals on water to meet instream flow goals, and to avoid paying more

than necessary for water.

c. Recognize hydropower and other instream flow effects as benefits or costs

Water acquired for fish and wildlife purposes will often pass through a series of downstream

dams where it can generate hydropower. These effects may include changes in the amount,

timing and reliability of hydropower generation. The effects may occur on both federal and nonfederal power systems. These hydropower effects can be modeled using the power system

models available to the Council, but for small acquisitions simple rule-of-thumb estimates of

power system impacts may be adequate.

Such augmented flows may also affect recreation, resident fisheries and other endangered species,

and water quality in downstream rivers. These economic effects (perhaps both positive and

negative) should be recognized in considering proposed water acquisitions. Exactly what role

these projected effects should play in the analysis of flow enhancement proposals is less clear,

especially in the typical case where one agency would pay for the water, but these other instream

benefits would accrue to another entity or perhaps to the general public. Where clearly definable

hydropower economic benefits accrue to a private or public utility, it would seem to make sense

for the utility and the affected consumers to participate in funding the water acquisition.

d. Be aware of hydrologic issues and effects

In most cases (depending on basin hydrology and state laws) the amount of water that can

legitimately be marketed is the seller’s historic consumptive use. Consumptive use can usually be

estimated from information on historic cropping patterns, along with available information on

how much water crops typically consume. In cases where the proposal’s claimed augmentation

exceeds the estimated consumptive use, special care must be taken to assure that the proposed

water can actually be delivered at the time needed, and that possible third party effects are being

realistically considered.

Water markets can encourage irrigators to switch among alternative water sources. These

switches can be subtle – e.g., selling some storage rights, but relying more on groundwater in

drought years. Project documentation should address these issues, and the likely effects on

aquifers, third parties, and the fish and wildlife objective being pursued.
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Keeping these cautions in mind, there may be potential for transfers involving "conservation,"

stored water and groundwater substitution. Transfers of stored water can result in "real" water

savings from a basin perspective (i.e., more storage space to capture later runoff). Timing is the

major issue in some areas, and water quality impacts from return flows can be an important

consideration. An optimal water acquisition strategy for a region is likely to involve combinations

of permanent and temporary fallow, conservation, and storage management.

e. Sometimes “zero” is the right price to pay for water rights

One lesson from the Oregon Water Trust is that there are situations in which some landowners

will donate water to environmental purposes for a variety of reasons, such as altruism, potential

tax savings, and avoiding abandonment. As any water acquisition program is likely to face a

budget constraint, limited funds will clearly go farther if they are only spent on lands where there

is a need to actually make payments in order to gain the desired water rights.

f. Prices may be lower (and cost-effectiveness higher) in headwater areas

Because the value of water is determined by alternative uses, water prices may be expected to

decline the farther into headwater areas one goes. Often, the alternative economic uses of lands in

headwater areas are more limited than downstream reaches in broader valleys (e.g., grazing rather

than crops), which means that the price that must be paid for such rights in headwaters will be

lower, as well. If, in addition, the biological effectiveness of increased instream flows is higher in

headwater areas, the cost-effectiveness of water acquisition efforts may be substantially higher

than in downstream areas.

g. Some forms of acquisition appear preferable to others

To the IEAB, it appears that the permanent purchase of water rights is the most preferred

approach to acquiring water for enhanced instream flows. Next preferable would be dry-year

option arrangements, where the acquiring party would have the right to call on the water under

certain specified conditions. Third in the preference order would be leases, where the right to the

water is acquired for, say, one year at a time, as available but perhaps not timed well to mesh with

streamflow needs. Least preferable are “conservation” programs because of the track record of

expense relative to expected flow augmentation that we have seen so far for such projects. This

preference ranking takes into account existing knowledge of water acquisition programs,

uncertainty regarding hydrological conditions and third-party effects, and the limitations of

current state laws.

h. The lesson from the Teanaway River Instream Flow Restoration Project

 What does this introductory look at water acquisition concepts and projects suggest about the

stream flow enhancement project on the Teanaway River? In comparison to prices emerging in

negotiated exchanges by the Oregon Water Trust, that project is unreasonably costly per acre-foot

of water added to the stream. While prices have varied widely in Oregon (from zero to perhaps

$250 for permanent purchases), the cost per acre-foot in the Teanaway exceeds a reasonable

upper bound on water price. Because most of the irrigation water in the Teanaway is used for
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pasture, hay, and similar uses, there is no reason to expect water there to be substantially more

valuable than water obtained at much lower price by the Oregon Water Trust.

9. Recommendations for cost-effective acquisition of water for fish and wildlife purposes

The Council is faced with the need to make decisions about flow augmentation and water

acquisition projects. The following are IEAB recommendations on how to proceed.

a. Make use of existing expertise and existing markets in water acquisition

Since the early 1990s, several agencies and organizations have gained some experience in the

acquisition of Pacific Northwest water for instream use. These include the Oregon and

Washington water trusts, the Bureau of Reclamation, the Washington Department of Ecology, the

Nature Conservancy, and the Environmental Defense Fund. Generally the non-governmental

organizations play the role of broker, making the contacts, winning the trust of the participants,

and putting deals together. When a deal is complete, the organizations turn the acquired instream

water or water right over to be held in trust by the state. This body of acquired experience should

be utilized in any expanded water acquisition program. It may be possible to design water

acquisition programs in ways that let organizations such as the water trusts continue their broker

role, perhaps with funding and some policy direction from the fish and wildlife program, and

ultimately with direction from the Council subbasin planning process.

Note, however, that the issues related to water acquisition cut across state jurisdictions,

geographic regions, various water user groups, a range of potentially affected third parties, and

wider economic, cultural, and biological interests – a span of interests not now represented by any

of the water trusts or other brokering agencies. Of course, the Council does represent this broad

range of interests and may initially have to oversee the water acquisition programs to assure that

the full range of interests are heard. Eventually, if water acquisition programs become a more

routine part of the fish and wildlife program, the Council may want to delegate some of this

oversight, perhaps to a committee charged with assuring that water acquisitions are indeed cost

effective pieces of habitat restoration programs in both the basin-wide and subbasin planning

processes. This would involve allocating funds to competing water acquisition projects in

different basins or in different river reaches within a given basin.

b. Require careful justification and documentation of proposed acquisitions

Proposals to acquire water for instream flow augmentation should present documentation of (1)

the amount, timing, quality and reliability of water to be acquired, including documentation that

these water deliveries are realistic given the return flows, aquifer interactions and other

hydrologic linkages in the basin, (2) documentation that the amount, timing, and reliability of

water being acquired contributes to the biological goals expected from flow enhancement in this

stream segment, (3) any expected third-party effects and proposals to minimize or mitigate these

effects, and (4) estimates of the costs to acquire this water including an explanation of the basis of

these cost estimates.

The Oregon Water Trust’s requirements for water acquisition proposals are included as Appendix

C to this report, and may provide some guidance for what the Council should require of flow

augmentation proposals.
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Preparation of such documentation may require assessment work by professionals such as

hydrologists, irrigation engineers, economists and biologists. This information will be needed in

order to judge both the biological effectiveness and the cost effectiveness of the proposals.

c. Embed water acquisition in the broader planning framework

Water acquisition is one among many means to improve fish and wildlife conditions. Proposals to

acquire water should be compared to other alternatives. Habitat improvements, such as such as

stream fencing, riparian vegetation enhancement, etc., should be compared to stream flow

augmentation. Accomplishing this analysis requires substantial ecological assessment (such as in

the Ecosystem Diagnosis and Treatment model). More narrowly, alternative means of

augmenting streamflow (such as changes to structures and stream operation) should be

considered as alternatives to water acquisition. The alternative ways of acquiring water rights –

such as land retirement, improvements to diversion, conveyance and application infrastructure,

water banks, contingent water markets and development of alternative water sources – should all

be considered.

Some of these dimensions of cost-effectiveness should eventually be addressed as part of the

basin planning process. On the project level, assuring the cost effectiveness of water acquisition

compared to alternative ways of improving fish migration or habitat will have to be part of the

fish and wildlife project approval process.

d. Foster market competitiveness through transparency

Competitive markets require transparent procedures. If additional water is desired in a basin, this

should eventually be clearly stated in subbasin plans, along with the desired attributes of that

water (timing, location and reliability). Such a public process is necessary to make sure that

Council fish and wildlife projects don’t buy water at one price without making sure there aren’t

some other potential sellers who, if they would enter the market, would help to bring the price

down.

On the other hand, a degree of confidentiality may be requested or required before a seller will

sell or lease water rights.

Another aspect of market transparency is familiarity of all parties with the processes involved.

Since water acquisition for flow augmentation is a relatively new concept, it may be desirable to

think in terms of pilot projects in a few basins, where the acquisition procedures can be tested,

and the results (sale prices, consequences for flows and fish) can be assessed.

e. Weigh the advantages and disadvantages of leasing versus buying

Various forms of water acquisition and payment are possible, ranging from outright permanent

purchase to various forms of annual payments for leases or options. Uncertainty on both sides of

the market, as well as budget constraints, might suggest that leases are the way to start, rather than

locking parties into long-term arrangements or outright transfer of rights in perpetuity. Of course

this advice would have to be tempered by knowledge that leased water supplies are probably less
January 11, 2001

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reliable than water right purchases. Leased water may not be available in the years when flow

augmentation is most needed.

If the present value of the stream of annual payments exceeds the purchase price of the water

right, then purchase would be preferred to leases or options. Of course, this conclusion depends

on the certainty of the long-term need for the specific water rights and may be influenced by

inability to arrive at lease or option conditions satisfactory for both parties.

Opportunities to purchase water rights in a small basin, or to lease them, may only happen rarely.

Flexibility to respond quickly to such opportunities may be key to successful instream flow

augmentation.

f. Encourage development of contingent water markets

Water may not be needed for instream flow augmentation in all years. Contingent water markets

can provide water when needed, so long as the required delivery frequency is quite low and the

delivery trigger conditions are clearly specified. Contingent markets may minimize the effects on

farming communities and basin hydrology. Successful use of contingent water markets may

depend on improved water supply forecasts to use as delivery triggers.

g. Be willing to support infrastructure improvements

Seller market participation may depend on improved water management, measurement and

control infrastructure, as well as clarifying property rights and resolving any uncertainty about

third-party effects. The agencies interested in water acquisition need to be ready to encourage

and support such infrastructure improvements.

h. Land value is an upper bound to the value of water for irrigation

An upper bound on the amount that should be paid to acquire augmentation water is the market

value of the land appurtenant to the water. If the proposal involves irrigation infrastructure

improvements that cost more than the value of the land served, it would be more cost effective to

buy the land and water and retire the land. In some cases, these values may reflect potential

alternative uses of the water and land that push their values far above their purely agricultural

values. In such cases, if the particular water rights meet a critical environmental need that cannot

be met through any other means, and if the acquisition still passes the test of cost effectiveness,

high water acquisition costs may be justified.

i. Time the process to maximize avoided costs in irrigation

Irrigation farmers can alter their agricultural production decisions if the method of water

acquisition gives them enough notice that they will have less water. This gives them more

freedom to make changes in their operations to avoid production costs and reduce the amount that

would have to be paid for the water rights. For example, before the planting season land may be

fallowed, grazed, or planted with crops that have lower water requirements, or physical changes

may be possible in irrigation technology. After the crops are in the ground, fewer choices are

available. Any program to acquire water should maximize notice and timing flexibility.
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