WATER USE CONFLICTS IN THE WEST:

IMPLICATIONS OF REFORMING THE BUREAU

OF RECLAMATION’S WATER SUPPLY POLICIES

AUGUST 1997

The Congress of the United States

Congressional Budget Office

C

Preface

onflict among water users is part of the history of the American West. The conflicts

have changed over the years but have not gone away. Environmentalists, who want

water to be left in the rivers to preserve threatened species, are now competing with

urban and agricultural users for the West's limited water resources. Native American water

rights, long ignored, are also receiving more attention. 

The federal government is a key player in western water. Through its Bureau of Reclamation, the government developed water supplies that literally made the desert bloom. Developing new sources of water&deciding where the next big water project should be built&has long

been the focus of the Bureau of Reclamation. But good options for the large-scale projects are

extremely limited, and the federal government now focuses more on the fair and efficient

allocation and use of existing supplies. Policy changes that could lead to better use of water

are being put in place in parts of California served by the Central Valley Project, the largest

water supply project in the United States. Policy changes introduced in California could serve

as models for changes throughout the West.

In response to a request from the Ranking Minority Member of the House Committee on

Resources, this study analyzes the policy tools slated for use in California, estimates the costs

of those reforms to agriculture in the state, and discusses the implications of using those policy

tools in the rest of the West.

Marca Weinberg, formerly of the Congressional Budget Office's (CBO's) Natural Resources and Commerce Division, wrote the study under the supervision of Jan Paul Acton and

Roger Hitchner. Gary Brown, Coleman Bazelon, and Teri Gullo of CBO; Doug Elmendorf

and Aaron Zeisler, formerly of CBO; and Gregory Amacher, Richard Wahl, Daniel

Hellerstein, Benjamin Simon, Dennis Wichelns, Noel Gollehon, and Amy Matthews-Amos

provided valuable comments and assistance. Michael R. Moore helped develop the agricultural model and also provided general comments.

Sherry Snyder edited the manuscript, and Chris Spoor proofread it. Angela McCollough

typed the many drafts. Kathryn Quattrone and Jill Sands prepared the study for publication.

June E. O'Neill

Director

August 1997

Contents

SUMMARY ix

ONE INTRODUCTION 1

Background 1

The Changing Federal Role 2

Assessing Reform Efforts with a Case Study 2

TWO WATER USE IN THE WESTERN UNITED STATES 5

Types of Water Use 5

Conflicts Over Water Use in the West 8

The Role of the Bureau of Reclamation in

Developing Water Supplies 11

THREE ISSUES IN REFORMING FEDERAL WATER POLICY 15

Tools for Reforming Federal Water Policy 15

Implications of Policy Combinations: Interactions

and Redundancies 23

Matching Reform Objectives with Policy Tools 24

FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND

REFORM IN CALIFORNIA'S CENTRAL VALLEY 27

The Central Valley Project and Its Stakeholders 27

The Central Valley Project Improvement Act 33

The Regulatory Environment for 

Implementing the CVPIA 38

FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL

VALLEY PROJECT IMPROVEMENT ACT 41

Empirical Framework 42

Results of the Empirical Analysis 44

Environmental Benefits and Issues in

Estimating Their Values 52
vi WATER USE CONFLICTS IN THE WEST August 1997

SIX LESSONS FOR THE WEST 55

Regional Differences in Variables That Influence 

 Farmers' Response to Reform 56

The Role of Key Variables as Predictors of Farmers'

Response to Water Supply Policies 57

A Role for Flexibility 65

APPENDIXES

A The Central Valley Project Improvement Act 69

B The Economics of Tools for Reforming

Federal Water Policy 75
CONTENTS vii

TABLES

1. Diversion of Surface Water for Various Uses in

Western and Eastern United States, 1990 6

2. Potential Effectiveness of Selected Policy Tools for

Alternative Conflicts and Reform Objectives 24

3. Selected Crops Produced with Water from the Central

Valley Project as a Percentage of Total U.S. Production, 1987 28

4. Effect of the Central Valley Project Improvement Act

on Agricultural Water Use and Revenues 44

5. Effect of the Central Valley Project Improvement Act

on Urban Water Use 45

6. Ranking of Crops in the Bureau of Reclamation's

Five Regions, by Acreage and Revenues, 1990 61

7. Regions' Dependence on Water Deliveries by the

Bureau of Reclamation, 1989-1990 62

A-1. Applicable Charges to Finance the Restoration Fund,

by Type of Water Use 72
viii WATER USE CONFLICTS IN THE WEST August 1997

FIGURES

1. Water Projects and Agricultural Regions of

California's Central Valley 30

2. Cost of Environmental Water Allocations Under

Average Water Supply Conditions, as Measured

by Reductions in Agricultural Revenues 47

3. Total Amount of Water Delivered by the Central

Valley Project, 1949-1995 50

4. The Bureau of Reclamation's Five Regions in the

Western United States 56

5. Average Gross Revenues from Crops Irrigated with

Water from the Bureau of Reclamation's Projects

in 1990, by State 58

6. Agricultural Land Values for Irrigated and Dryland

Uses in 1988, by State 59

7. Average Amount of Water Delivered to Districts in

1989 and 1990, by Region 64

B-1. The Effects of a Water Market on a Farmer's Decisions

About Water Use 76

B-2. The Effects of Tiered Water Prices and a Water Market

on a Farmer's Decisions About Water Use 78

B-3. Water Prices and Quantities with a Water Market and

an Allocation for Fish and Wildlife 80

B-4. Water Prices and Quantities with CVPIA Provisions 82

BOXES

1. Water Districts 12

2. Terms Relating to Water Prices 21

3. Using Changes in Gross Revenues as a Measure of the

Impact of Water Policy Reform on Agriculture 43
T

Summary

he Bureau of Reclamation, an agency within the

Department of the Interior, has spent billions of

dollars over the past 90 years to develop water

supplies for farmers in the western United States.

Those federal water projects have "made the desert

bloom," but the bureau's policies on supplying water—including subsidized prices, long-term contracts,

and restrictions on the sale of water by farmers—have

resulted in a rigid allocation of major water resources to

agriculture. That allocation often comes at the expense

of urban, environmental, and Native American water

users, and at a large cost to taxpayers. 

Reform of federal water policies that have their

roots in the early part of the century could improve the

Bureau of Reclamation's ability to meet the demands of

today. Properly done, reform could improve economic

efficiency in allocating water among commercial water

uses, provide more water for public purposes such as

the environment or Native American tribes, and could

address equity concerns regarding the portion of project

costs that the federal government must pay.

In California, where conflicts between agriculture,

cities, and environmental interests over scarce water

resources are severe, reform has been brought about by

the 1992 Central Valley Project Improvement Act

(CVPIA). In designing and passing the CVPIA, the

Congress created a potential model for reforming federal water policy. The act contains numerous provisions that encourage farmers who receive water from

the Bureau of Reclamation's Central Valley Project

(CVP) to use less, that facilitate the movement of conserved water to higher-valued uses, and that protect and

enhance fish and wildlife populations in California's

Central Valley. However, those reforms come at a cost

to agriculture. Passage of the act creates an opportunity

to analyze the magnitudes of costs and benefits that

reform imposes on the agricultural and urban sectors in

California and to explore the implications of policy reform for the Bureau of Reclamation's projects throughout the West. 

Competition for Limited

Water Resources in the West

Conflicts over current and future allocations of surface

water resources exist throughout the western United

States. Those conflicts typically involve historical patterns of use by irrigated agriculture on the one hand and

increasing (or increasingly recognized) needs for urban

and environmental uses on the other hand. Many

western cities—including Los Angeles, Denver, and

Las Vegas—are experiencing rapid population growth

that will increase pressure on water supplies that are

both uncertain and limited. Fish and wildlife species

that depend on river ecosystems for their survival are

declining in every major river basin in the West. A total of 184 species listed as threatened or endangered or

proposed for listing under the Endangered Species Act

may be affected by the Bureau of Reclamation's operations. In addition, the water rights of many Native

American tribes have yet to be quantified and allocated.

Historically, increased demand for water has been

met by developing additional supplies. However, rising

economic costs and environmental sensitivities are

likely to preclude future construction of major water

supply projects. Instead, reallocating water from existing uses—primarily agriculture—may be the best
x WATER USE CONFLICTS IN THE WEST August 1997

"new" supply of water for addressing urban, environmental, and Native American needs.

The Role of the Bureau of

Reclamation in Resolving 

Water Conflicts

Participation by the Bureau of Reclamation will be necessary to alleviate water conflicts in many areas of the

West for two reasons. The first is the bureau's pervasive presence: reclamation projects are located in all 17

western states and in essentially every major river basin. Because of the sheer volume of water that the bureau controls, the feasibility of addressing many conflicts depends on its participation. 

Second, the bureau's water supply policies, which

have their roots in the Reclamation Act of 1902 and its

1939 amendments, include below-cost prices and restrictions that inhibit the ability of market forces to

move water to its highest-valued uses. Those provisions isolate recipients from the true economic value of

water. An inefficient allocation results from making

water available to farmers at lower rates than would

prevail in a market setting. On average, farmers use

more water and for lower-valued uses than they would

if they faced higher prices. Likewise, urban users receive less water and pay a higher price. The discrepancy between low values associated with agricultural

uses and high values associated with urban uses implies

an economically inefficient allocation of water supplies.

Thus, allowing farmers to transfer water to other uses

and giving them the incentive to do so, or simply mandating a reallocation of water supplies, could improve

net social welfare.

Options for Reforming the

Bureau of Reclamation's 

Policies

Many objectives exist for reforming the Bureau of Reclamation's water supply policies, and many policy tools

exist for achieving those objectives. Reforms can address economically inefficient water allocations, environmental problems associated with water development, tribal claims to water rights, reimbursement to

the federal Treasury, or any combination of those objectives. Broadly defined, the available policy tools

include facilitating water markets, directly increasing

water prices, directly reallocating water, and requiring

that water conservation measures be carried out. Water

markets, water price reform, and conservation programs

are tools that create incentives for farmers to reduce the

quantity of water used in agriculture. Allowing farmers

to sell water forces them to consider its value in other

uses when making decisions about using water. Increases in water prices also create an incentive to use

less water. Finally, encouraging farmers to adopt irrigation practices that use less water can be accomplished

by creating goals for using water more efficiently or by

developing a list of recommended practices from which

farmers must choose. In contrast to incentive-based

tools, directly reallocating water involves legislatively

or administratively allocating a specific quantity of water to a specific use. With that measure, however, previous users may or may not be compensated for the water

that is reallocated.

Water Markets

Water markets are an effective policy tool for improving the allocation of water among competing economic

uses. Such markets are the one tool that would leave all

participants better off (though some nonparticipants

could be made worse off). Sellers would be better off

because they would make more money from selling

their water than they would from using it, and buyers

would be better off because they would get water for a

lower price than they would have to pay for the nextbest source. The voluntary water transfers that result

could alleviate conflicts between urban and agricultural

water users and move water to higher-valued uses

within the agricultural sector. They would generally be

less effective as a tool for addressing environmental

concerns.

Water Price Reform

Water price reform can be an effective tool for encouraging water conservation and increasing the return to

the federal Treasury from investments in water projects.

Water price reform is a broad category that includes
SUMMARY xi

increasing water prices, changing the structure of prices

(for example, from a uniform price to one that rises as

consumption increases), and imposing surcharges that

target specific users or earmark funds for specific purposes. Price reform is the only option discussed in this

study that would directly address concerns about charging farmers below-cost prices for water. 

Many uncertainties, however, could limit the potential benefits of price reforms. First, current reclamation

law and water delivery contracts between the Bureau of

Reclamation and water users could restrict increases in

water prices. 

Second, water price reform would be effective in

modifying farmers' behavior only if those reforms were

passed on to farmers by the water districts holding the

bureau's contracts. (Water districts are quasi-governmental entities composed of landowners within district

boundaries.) The bureau's influence on the prices that

farmers pay is indirect; reform would change the rates

the water districts pay to the Bureau of Reclamation.

Unless water districts recovered the cost of the higher

rates by increasing the prices they charged farmers for

water use rather than through land-based charges (for

example, charges per acre or per household), the incentive to conserve water that might otherwise be expected

from water price reform would not exist. Furthermore,

if farmers were unable to obtain as much water as they

wanted at the original price, they might not respond to

changes in water prices at all.

Third, the disposition of conserved water is uncertain. Water conservation is generally a stepping stone

to achieving a broader objective of policy reform and

not an objective on its own. If the conserved water is

not put to a higher-valued use, the conservation effort

may represent a net loss to society. The final disposition of conserved water would depend on a mix of state

water laws, federal policies, and rules set by water districts. The water could be left in the river, in which

case the environment could benefit, or it could be diverted by other farmers, who may or may not put it to a

higher-valued use. Environmental objectives also could

be met if the price increase was an environmental surcharge with the receipts earmarked for spending on environmental purposes. 

Allocating Water to Public Purposes

Of all policy tools, directly allocating water to public

purposes such as the environment and Native Americans is the most likely to protect those uses. It would

not, however, address inefficiencies resulting from restrictions on the transfer of water among farmers or

from agriculture to urban uses. 

Water Conservation Programs

Conservation programs may be appropriate for meeting

the objectives of increasing water allocated to environmental purposes, if the conserved water remains in the

river. However, as with water price reforms, the effectiveness of such programs will depend on the ultimate

disposition of the conserved water.

Conservation programs generally are effective in

reducing problems with water quality. For example,

programs that encourage or require the use of more efficient irrigation systems could reduce the runoff of salts

and chemicals into rivers, lakes, and groundwater aquifers. However, programs that rely on incentives, such

as cost sharing for irrigation system improvements,

could increase the cost to the Treasury of operating the

Bureau of Reclamation's projects.

Combinations of Policy Tools Can 

Reduce or Enhance the Effectiveness 

of Individual Policies

Policy tools can be implemented independently or in

combinations. If one policy results in a bigger change

in costs than another, the latter could become redundant. For example, combining water markets with price

increases would render the price increase ineffective in

motivating changes in water use if the new price was

lower than the market price. However, since no one

policy tool effectively addresses all possible reform

objectives, combinations of policies may be necessary

to meet multiple objectives. For example, combining a
xii WATER USE CONFLICTS IN THE WEST August 1997

water reallocation with a water market would achieve

two objectives: increasing the water available for public purposes and increasing the efficiency of water allocations for commercial uses. It would also lessen potential economic inefficiencies associated with reducing

the water supply of some users in order to provide water for public uses.

Conflicts and a Solution 

in California

The Bureau of Reclamation's Central Valley Project, in

California, provides an important example of the types

of conflicts over water use that may arise and the possible effectiveness of federal reclamation legislation in

helping to construct a solution. The CVP is the largest

water supply project in the country, serving 2.6 million

acres of farmland in the Central Valley. Between 1979

and 1991, the Bureau of Reclamation delivered an average of 5.3 million acre-feet of water to water districts

serving farmers in the valley. CVP farmers produce

crops worth roughly $3 billion per year. The CVP has

helped transform the Central Valley into one of the

most productive agricultural regions in the world, delivering roughly 95 percent of its water to agriculture.

Since the CVP's inception in the 1930s, the federal government has invested a total of $3.6 billion in the project, of which water users have repaid roughly $500

million.

Conflicts in the Central Valley

Conflicts over water allocation have arisen between

agricultural, urban, and environmental uses in California. The successes of the CVP have occurred, to an

extent, at the expense of the Sacramento and San

Joaquin Rivers and the delta ecosystem, from which the

water is diverted. One indicator of poor conditions in

the ecosystem is a decline in resident fish populations.

The delta region (including San Francisco Bay) supports a total of 37 species of fish, birds, mammals, reptiles, amphibians, invertebrates, and plants that are

listed or are candidates for listing under the Endangered

Species Act. Another 83 species are declining because

of the loss of their habitat in the ecosystem. Significant

quantities of CVP water may be necessary to preserve

those species.

The severe drought that lasted from 1987 to 1992

exacerbated the conflict between competing agricultural

and urban demands. The drought demonstrated the

vulnerability of California's urban and agricultural water supply systems to natural fluctuations in hydrologic

conditions. Urban areas are anxious to secure supplemental water supplies, both to moderate the effects of

drought and to accommodate future growth. 

The Central Valley Project 

Improvement Act 

The Central Valley Project Improvement Act, signed

into law in October 1992 by President Bush, sets a new

standard for operating one of the Bureau of Reclamation's projects. That legislation gives the bureau both a

mandate to address environmental problems associated

with project development and the ability to address economic inefficiencies in allocating water. The act incorporates each of the policy tools defined above—voluntary water transfers, price increases, direct reallocation

of water, and water conservation programs. Specifically, key CVPIA provisions:

o Allow voluntary water transfers. Farmers can sell

water to any user for any (beneficial) use, at any

price. All sales must have the Secretary of the Interior's approval. Farmers must pay the bureau a

higher rate for all water sold to non-CVP users and

a surcharge of $25 per acre-foot for all water sold

to non-CVP urban users.

o Create tiered, or increasing block-rate, water prices.

The bureau will charge water districts low (subsidized) contract rates for the first 80 percent of their

water allotment, the average of contract and socalled full-cost rates for the next 10 percent, and

full-cost rates for the last 10 percent. Full-cost

rates reflect the Treasury's costs of water projects

but are not a market price for water.

o Create a fish and wildlife restoration fund. The

fund is to total $50 million per year to be spent on

projects to enhance habitat. The financing will
SUMMARY xiii

come from the tiered water prices, the surcharge

and rate increases for transferred water, and a set of

environmental surcharges to be paid by water

users, with any remaining balance charged to power

users. The environmental surcharges include a

charge of up to $6 per acre-foot on all agricultural

water users and $12 per acre-foot on all urban water users (in 1992 dollars). Recipients of water

from the Friant division—an isolated portion of the

CVP with distinct problems—pay an additional

surcharge of $4 per acre-foot until October 1997,

then will pay $5 per acre-foot from 1997 to 1999

and $7 per acre-foot after 1999.

o Allocate CVP water for fish and wildlife. The bureau will dedicate 800,000 acre-feet of CVP water

to in-stream fish and wildlife uses in normal years

—roughly 20 percent of average deliveries to contractors or 12 percent of average available water

supplies. That amount declines to 600,000 acrefeet in drought years. The bureau also must allocate or acquire another 400,000 to 550,000 acrefeet for enhancing habitat in the Central Valley's

wildlife reserves and in the Trinity River.

The act also requires the bureau to develop criteria for

evaluating the adequacy of districts' plans for water

conservation. However, the requirements of the provision are vague, and implementation of the districts'

plans does not appear to be mandatory.

Effects of CVPIA Provisions

The Congressional Budget Office (CBO) examined the

implications of various combinations of CVPIA provisions both conceptually and empirically. Economic

principles underlying each provision suggest that each

has the potential to be effective in encouraging water

conservation and allocating water to urban or environmental uses, but that effectiveness will depend on both

the exact levels of price changes relative to the benefits

of water use and the combination of provisions enacted.

The impact of the CVPIA will include benefits to

the environment, benefits to urban consumers, and

costs to agriculture. CBO does not quantify benefits to

the environment from the CVPIA, but some studies

indicate those benefits could be large. Estimates range

up to $21 million per year for increased commercial and

recreational fishing from a minimal level of protection

and $10 million to $25 million per year in recreational

fishing alone for achieving the CVPIA's goal of doubling salmon populations. One study estimates that

benefits associated with the provision that allocates

approximately 250,000 acre-feet of water to wildlife

refuges would be $79 million per year. 

The empirical analysis estimates costs to farmers in

terms of changes in agricultural revenues and benefits

to urban consumers in terms of changes in consumers'

welfare caused by various CVPIA provisions. CBO

estimates those benefits to be $11 million, $7 million of

which would be paid to farmers through the water market.

In an average water year, the CVPIA would reduce

farmers' gross revenues by an estimated $100 million—less than 5 percent of average gross revenues.

That amount is the change in the value of agricultural

output caused by the CVPIA. If changes in input costs

were proportional to changes in gross revenues, then

farmers' net revenues (revenues net of the costs of variable inputs) would decline by roughly $44 million. The

decline in regional economic income as a result of the

CVPIA, including income losses for suppliers of agricultural inputs would be roughly $69 million.

Estimates of the economic impact of CVPIA provisions are sensitive to assumptions about water supply

conditions (quantity available and price), the regulatory

setting, and the capacity of infrastructure for conveying

and storing water. A severe drought could significantly

increase both the costs and the benefits of the act. Urban consumers would benefit more from the CVPIA in

a drought year because the ability to transfer water is

more valuable to them when a drought reduces their

existing water supplies. However, the incremental cost

of environmental water allocations increases as the

quantity of water removed from the agricultural sector

increases. Consequently, the cost to agriculture of the

CVPIA would increase with drought conditions. In wet

years, however, the cost of the CVPIA could be minimal. Finally, restrictions that the Endangered Species

and Clean Water Acts place on water use could magnify

both the costs and benefits of the CVPIA.
xiv WATER USE CONFLICTS IN THE WEST August 1997

Implications for Reform of

Federal Water Policies

Throughout the West

In other areas of the West, the effectiveness and appropriateness of policies for reforming the Bureau of Reclamation's water supply policies will depend on the nature of competing demands for water and the objectives

of the reform action. The profitability and flexibility of

the agricultural sector have implications for the cost of

shifting water to other uses. Those factors vary among

regions and projects.

The results of the CVPIA analysis indicate that the

competing demands for water can be balanced with a

complicated package of reform options at a relatively

small cost to the agricultural sector as a whole in most

years. But even in that case, some individual farmers

could be significantly affected, and the average cost

would be much higher in drought years. The predicted

effectiveness of the CVPIA derives in part from the

high degree of flexibility CVP farmers have in adjusting cropping patterns and irrigation practices in response to water policy reforms. Farmers in other regions would probably respond differently to CVPIAtypes of reforms.

An array of policy tools may be necessary to generate the maximum benefit from reforming the Bureau of

Reclamation's policies while moderating the impact on

the agricultural sector. Reforming those policies could

improve the economic efficiency of water use and moderate or resolve conflicts throughout the West. However, the effectiveness of individual policy tools will

vary from region to region and project to project, and

even among water districts in a given region. A menu

of options that includes a number of policy tools from

which the bureau could select would provide the flexibility to adapt the policies to the specific problems and

conditions at the regional or project level. The primary

provisions of the CVPIA—water markets, water price

reforms, an environmental water allocation, and conservation incentives—though not necessarily appropriate

in all cases, span the range of effective options for

achieving likely reform objectives and reducing conflicts over water use.
W

Chapter One

Introduction

ater has played a vital role in the development of the western United States. In many

areas, agriculture exists only where irrigation water is plentiful and inexpensive; much farmland

would be unproductive without access to water. Cities

in the West are among the fastest growing in the nation

and need additional water for residents and industries.

Fish and wildlife need water, too, and such environmental uses have become strong competitors for increasingly scarce water over the past several decades. Native American tribes are also asserting their water

rights. The rivers and aquifers, however, cannot supply

enough water to satisfy unchecked demands in all

sectors. 

Conflicts among water users are not new, but they

are intensifying as cities grow, environmental needs

become more acute (and their advocates gain power),

and the courts begin to give stronger support to the

claims of Native Americans. Because those demands

for water grow at different rates, the historical, relatively rigid allocations of water and the institutions that

govern them have become increasingly inefficient and

harder to justify. Why, for example, should municipal

and industrial users have to pay water prices that are

many times what farmers pay? Why should farmers be

prohibited from selling water to cities? Why should

water be allocated on the basis of seniority rather than

on the basis of need or willingness to pay?

Background

Historically, as water became more scarce in the West,

new supplies were developed. Dams and canals were

built to move water from where it was abundant to

where it was needed, or to store it for use during dry

seasons. The federal government financed much of that

work, and the Department of the Interior's Bureau of

Reclamation played a key role. As its name suggests,

the goal of that agency was to reclaim arid lands for

productive uses by farmers. The big water projects

were built to supply water to agriculture, and they succeeded. 

But the era of big government water projects is all

but over. Now, if more water is to go to some use such

as developing urban areas, protecting endangered species, or satisfying the claims of Native Americans, it

must come from some other use. The prime candidate

is agriculture. 

Agriculture is the obvious source of water for other

uses for two reasons. First, it is the biggest use of water, accounting for over three-quarters of total use in the

West. Second, agriculture can release water for other

uses at a relatively low cost. The second point is key:

the total value of water in agriculture is high, but the

marginal value is low. Some farmers could use less

water by making minor changes in their irrigation practices, changing the mix of crops they grow on their

land, or investing in water-saving irrigation equipment.

None of those changes are without cost, but most observers agree that agriculture could free up some of the

water it now uses—and at a substantially lower cost

than the bill that municipal or industrial users, for example, would pay to develop new supplies of water.

Reforming water policy in a way that makes more

efficient use of current water resources is difficult. Institutional reforms are needed and are under way in

some parts of the West. But even if reforms produce
2 WATER USE CONFLICTS IN THE WEST August 1997

net social gains, there will be winners and losers.

Farmers could lose if their access to water was reduced.

Should they be compensated? Who should pay? Property rights must be considered, though they are not always well defined. Effects on third parties (those not

directly affected by the transfer of water from one use

to another) must be considered. Rural communities

could be hurt if reforms reduced the amount of water

available for irrigation.

The Changing Federal Role

Federal involvement has been key to nearly all largescale development of water resources in the United

States, and the Bureau of Reclamation remains the largest purveyor of water in the West. The role of the bureau, which was originally to develop water supplies to

facilitate and encourage settlement of the arid West, is

changing. Economic and environmental realities that

will limit the construction of future projects have

caused the bureau to change from an agency that develops water supplies to one that manages them. According to the bureau, its new mission is "to manage, develop, and protect water and related resources in an environmentally and economically sound manner in the

interest of the American public." In addition to irriga- 1

tion, the bureau's responsibilities now include water

conservation, hydroelectric power generation, municipal

and industrial water supplies, flood control, outdoor

recreation, enhancement of fish and wildlife habitats,

and research. 

The Reclamation Projects Authorization and Adjustment Act of 1992 has been an important step in

changing the bureau's mission. The competing forces

affecting water policy are evident in the act, as they are

in the bureau's mission statement. The act contains

several titles that explicitly consider environmental

problems associated with water development. Those

titles include sweeping requirements to mitigate the

effects on fish, wildlife, and recreational users arising

from development of the Central Utah Project (title 3)

and from the production of hydropower immediately

upstream from the Grand Canyon National Park

(title 8); a comprehensive Western Water Policy Review (title 30); and the Central Valley Project Improvement Act (title 34), which is discussed in Chapter 4.

The act also authorizes construction projects in several

western states, including completion of the Central

Utah Project, which may be the bureau's last major

interbasin transfer project. 

Assessing Reform Efforts

with a Case Study

The issues that arise in attempts to reform federal water

policy are clearly seen in the Central Valley Project Improvement Act of 1992 (CVPIA). Conflicts concerning

water are severe in California, and water supplied

through the Central Valley Project is often at the center

of those conflicts. The project is the largest in the nation. Consisting of 20 dams and more than 500 miles

of canals, it is vitally important to California. Nearly

60 percent of the surface water used in the state originates in the Central Valley, and the Bureau of Reclamation controls almost half of that water through the Central Valley Project.

The CVPIA aimed to reduce inefficiencies caused

by the bureau's policies on water supply and to resolve

environmental problems associated with developing

and operating large water projects. The law changed

the allocation of water and the rules for pricing it in

California. Purposes of the CVPIA include protecting,

restoring, and enhancing fish, wildlife, and associated

habitats in the Central Valley and Trinity River basins

and increasing water-related benefits through expanded

use of voluntary water transfers and improved water

conservation. The latter purpose reflects a recognition

that existing water policy in general, and the operations

of the Central Valley Project in particular, have resulted

in an inefficient allocation of water among uses and

users in California.

The reforms in the Central Valley Project Improvement Act have been both hailed as pathbreaking and

subjected to harsh criticism. Some options for reforming the CVPIA have been introduced in the Congress.

This study looks at the provisions of the act in detail. It

assesses how the individual provisions and combinations of those provisions are likely to affect the effi1. Daniel P. Beard, Blueprint for Reform: The Commissioner's Plan for

Reinventing Reclamation (Bureau of Reclamation, November 1,

1993).
CHAPTER ONE INTRODUCTION 3

ciency of water use and the welfare of agricultural producers and urban water users. The study contains detailed estimates of the costs the agricultural sector will

incur and the benefits the urban sector will receive.

In addition to addressing specific questions about

the effects of water reform in California, this study

looks more generally at water conflicts in the entire

West. It also explains how the reforms begun in California might—or might not—apply in other areas.

F

Chapter Two

Water Use in the Western United States

irst and foremost, western rivers provide water

to agriculture to grow crops. They also help

cities meet municipal and industrial needs for

water and generate electricity. Other benefits that rivers provide—such as habitat for fish and wildlife, recreation, and cultural values for Native Americans—were

historically ignored in the water equation but increasingly are considered legitimate and valuable uses. Demand for water by existing agricultural and urban users

outstrips available supplies in many cases, however, so

demand for water for public purposes or for increased

urban supplies necessarily conflicts with existing patterns of water use. Those patterns, and the policies and

institutions that guide them, are inextricably linked;

that is, allocations have arisen in response to the policies and institutions that provide or encourage those

allocations. 

Perhaps the most important institution in the use

and allocation of western water is the federal Bureau of

Reclamation. Today it is at the center of many conflicts

throughout the West. Understanding the distortions

inherent in reclamation law is integral to understanding

how current patterns of use came to be and how best to

guide the bureau in alleviating various conflicts. Agricultural water use, in particular, can be understood only

in the context of the policies of the Bureau of Reclamation.

Alleviating water conflicts in many areas of the

West will require the bureau's involvement for two reasons. The first is its pervasive presence: the bureau's

projects are located in all 17 western states and in virtually every major river basin. The sheer volume of water

controlled in those projects means that the feasibility of

addressing many conflicts depends on the bureau's participation. Second, the bureau's water supply policies,

which have their roots in the 1902 Reclamation Act and

its 1939 amendments, include below-cost water prices

and a preference for agricultural use of water that are

embedded in long-term contracts with water districts.

Those policies began to evolve almost 100 years ago,

when the West was sparsely populated and the government wanted to encourage irrigation and development.

Those conditions no longer apply, but one legacy of

that era is that, on average, farmers use more water and

for lower-valued uses than they would if market forces

were allowed to guide the use of water. 

Types of Water Use

The diversion or withdrawal of water from river systems and the consumption of water are two related but

distinct concepts for describing water use. A third type

is in-stream use, which neither diverts nor consumes

water. 

Diversions and withdrawals are synonymous terms

referring to the physical removal of water from its natural course. Water that is diverted from rivers meets

several different fates. Some portion of diverted water

is consumed by crops, people, or industrial processes,

or it evaporates. Water that is consumptively used is

lost to future beneficial uses. Water that is not consumptively used may flow back to rivers via overland

channels (canals, ditches, or surface runoff) or seep into

the ground, ultimately reentering river systems through
6 WATER USE CONFLICTS IN THE WEST August 1997

Table 1.

Diversion of Surface Water for Various Uses in

Western and Eastern United States, 1990

(In percent)

Use West East 

Irrigation 76 24

Thermoelectric Power 13 60

Municipal 8 9

Industrial 2 7

Livestock 1 0

Total 100 100

SOURCE: Congressional Budget Office using data from Wayne B.

Solley, Robert R. Pierce, and Howard A. Perlman, Estimated Use of Water in the United States in 1990, U.S.

Geological Survey Circular 1081 (1993).

lateral flows of groundwater or through municipal outlets for storm water and wastewater treatment plants.

The length of time before diverted water is available for

other uses can vary from region to region and even

within a relatively small section of a single watershed. 

The ratio of water diverted to water consumed varies by use. For example, diversions for thermoelectric

cooling affect the water supply differently than those

for urban uses. Thermoelectric power plants typically

divert water only for cooling purposes, and 97 percent

of that water returns to the source, albeit at altered temperatures. Thus, the production of thermoelectric

power diverts large quantities of water but consumes

very little. In contrast, municipal and industrial uses

withdraw smaller quantities of water than thermoelectric uses but consume significantly more.

Water is diverted from rivers and streams for a

number of purposes. The primary use of surface water

in the western United States is for irrigated agriculture

(see Table 1). Diversions for thermoelectric power 1

plants, such as those using fossil fuels or nuclear energy

to generate electricity, are a distant second, followed by

municipal and industrial uses. Table 1 displays water

diversions in the eastern United States as a point of

comparison. The significant difference in the percentage of water diverted for agriculture—76 percent in the

West and only 24 percent in the East—is the most important characteristic distinguishing water use in those

parts of the country.

In-stream water uses, which are nonconsumptive,

are an important third category because dedicating water to those uses may reduce the quantity of water available for diversion or consumption. Examples of instream water uses include the production of hydroelectric power, fish and wildlife habitat, recreation, and

navigation. 

Agricultural Uses

In the West as a whole, 76 percent of all withdrawals of

surface water are for agricultural purposes. That fig- 2

ure is much higher in many individual western states

and river basins. For example, approximately 95 percent of the water diverted from the Rio Grande and the

upper basin of the Colorado River is used for irrigating

crops or for livestock. In only five of the 17 western

states does agriculture account for less than 80 percent

of the diversion of surface water. All five—Kansas,

Nebraska, North Dakota, Oklahoma, and Texas—are

Great Plains states with access to large quantities of

groundwater. Total agricultural water use in the West

has remained relatively constant over the 1955-1990

period, declining slightly between 1985 and 1990.3

Power Production

Thermoelectric power plants use water to cool the reactors and condensers where electricity is generated using

fossil-fuel or nuclear energy sources. In the eastern

states, thermoelectric power accounts for more than

half of all water diversions and is by far the largest single diverter. In the West, however, thermoelectric diversions account for only 13 percent of total withdrawals and are less than one-fifth the amount of water diverted for agriculture there. Although the production of

1. The western United States includes all 17 contiguous states west of the

100th meridian, the approximate line dividing humid regions to the

east from those receiving less than 20 inches of rainfall per year. The

17 states are Arizona, California, Colorado, Idaho, Kansas, Montana,

Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon,

South Dakota, Texas, Utah, Washington, and Wyoming. 

2. Wayne B. Solley, Robert R. Pierce, and Howard A. Perlman, Estimated Use of Water in the United States in 1990, U.S. Geological

Survey Circular 1081 (1993). 

3. Ibid., p. 65.
CHAPTER TWO WATER USE IN THE WESTERN UNITED STATES 7

thermoelectric power accounts for relatively large withdrawals nationwide, it consumes minimal amounts of

water; less than 3 percent of water withdrawals for that

purpose are consumptively used.

In contrast, producing hydroelectric power generally requires neither the consumption nor the withdrawal of water. Hydroelectric power is created when

turbo generators are activated by falling water. Power

plants are generally included in the base of large dams

to harness the energy created when water is released

from the associated reservoir.

Although water need not be diverted or consumed

to produce hydroelectric power, achieving the greatest

possible financial value from power production for a

given quantity of water requires adjusting releases to

match daily and seasonal fluctuations in demand. In

many cases, the timing of water releases for hydropower production conflicts with environmental and agricultural needs for water. In the Pacific Northwest, for

example, peak demand for power occurs in the relatively cold fall and winter months, but the greatest

needs of endangered salmon in the region occur in the

spring and summer when young salmon migrate to the

ocean.

Urban Uses

The use of water for municipal and industrial purposes

accounts for a small portion of total water use in the

West—only 10 percent in 1990 (see Table 1). Although total quantities remain small, urban water use is

growing. Population growth and regional development

increase demand for a reliable supply of high-quality

water. Municipal water use doubled between 1955 and

1990, increasing 5 percent from 1985 to 1990 alone. 4

Environmental and Recreational Uses

Direct measures of environmental water use are difficult or impossible to obtain. The amount of water

needed to sustain a fish population, for example, is

harder to quantify than the amount needed to irrigate a

field of cotton or the amount a family of four consumes.

Fish may require a minimum amount of water for

spawning and migration, or they may require water that

is within a certain temperature range. Although those

requirements vary by species and river basin, one rule

of thumb holds that 30 percent of average annual flows

is the minimum amount needed to protect fish populations. Rivers in the southern portions of California 5

and Arizona, the headwaters of the Platte and Arkansas

Rivers, rivers in the San Joaquin Valley, the Rio

Grande, and rivers in closed basins in Nevada, Utah,

and California have failed to meet that standard in most

years.6

Recreational uses of water include activities that

benefit from reservoirs (such as boating, waterskiing,

swimming, and fishing) as well as those more suited to

free-running rivers and streams (such as whitewater

rafting and fishing). Many recreational activities depend on the health of fish and wildlife populations—fishing, bird-watching, and duck hunting are

several examples. Thus, the need for water for purely

environmental purposes, such as the preservation of a

fish species, may be difficult to distinguish from the

need for water for recreation.

Although environmental and recreational uses of

water are considered nonconsumptive, they may conflict with other uses. In river systems modified by extensive water development, adjusting water regimes to

benefit fish, wildlife, and recreation may require reducing the amount of water used for other purposes. For

example, adjusting the timing or location of water releases from dams to improve conditions for fish or

whitewater boating may reduce the value or quantity of

hydroelectric power produced with that water. Similarly, the amount of in-stream flows required to protect

fish habitat may restrict the diversion of water for irrigation. 

4. Ibid.

5. Donald Tennant, Instream Flow Regimes for Fish, Wildlife, Recreation, and Related Environmental Resources (Billings, Mont.: U.S.

Fish and Wildlife Service, 1975).

6. Keith Bayha, Instream Flow Methodologies for Regional and National Assessments, Instream Flow Information Paper No. 7,

FWS/OBS-78/61 (Department of the Interior, U.S. Fish and Wildlife

Service, Cooperative Instream Flow Service Group, December 1978),

p. 43. Although that study is 19 years old, it remains the most current,

comprehensive work on the subject. Total use of surface water has

remained relatively constant in the intervening years. Thus, the assessment is probably still valid.
8 WATER USE CONFLICTS IN THE WEST August 1997

Native American Water Uses

Claims to water rights by Native Americans are another

source of conflict in allocating water. Though not technically a distinct use, since tribal water is generally used

for agricultural, municipal, or environmental purposes,

resolving outstanding claims could reduce the amount

of water available for other users and uses. The U.S.

Supreme Court ruled in 1908 that in establishing a reservation for Native Americans, the Congress implicitly

reserved rights to a quantity of water sufficient to meet

the needs of the reservation. The right to the water is 7

based on the date the reservation was created and thus

predates existing uses in most cases. The tribes, however, typically have not exercised those rights, and in

many cases subsequent users have appropriated the

water to which the tribe was entitled. 

More recently, many tribes have asserted their water rights but for the most part have had only modest

success in wresting water from long-established users.

Many disputes remain unresolved, and most tribal water rights are unquantified. Other disputes have been

settled on the presumption that new water projects,

such as the Animas-La Plata Project on the Colorado/New Mexico border and the Central Utah Project,

would satisfy water requirements. (The Congress initially authorized both projects in the 1960s, but neither

has been completed.) Litigation and negotiation between 1963—the first time tribal rights were quantified

in court—and 1992 resolved 16 separate claims for a

total of 4.7 million acre-feet of water. (An acre-foot is

the volume of water that would cover one acre to a

depth of one foot.) Half of those settlements occurred

between 1990 and 1992. In a landmark case in 1989, 8

the U.S. Supreme Court affirmed a decision by the

Wyoming Supreme Court allocating to the Wind Rivers

Tribe 0.5 million acre-feet of water used by local,

nontribal users. Litigation is continuing over the manner in which the tribe can take and use that water.

How Native Americans' claims to water rights will

affect the supply of water is anybody's guess. According to one estimate, which was based on the amount of

water needed to irrigate eligible cropland on the reservations, outstanding tribal claims in 14 western states

totaled 45.9 million acre-feet in 1984. That estimate 9

represents 45 percent of the total use of surface water in

those states. Actual settlements since 1984 total 3.7

million acre-feet, less than 10 percent of the estimated

outstanding claims. It is not clear, however, whether

the divergence between potential claims and actual settlements arises because relatively few cases have been

settled or because the amounts of water awarded are

small relative to the estimate of claims. In any case,

resolution of outstanding claims could result in a substantial departure from current patterns of water use in

many river basins. 

Conflicts Over Water Use

in the West

Conflicts between agricultural, urban, environmental,

and tribal uses of water exist throughout the West, although the nature of the conflicts and their potential

solutions differ from location to location. One common

factor is the presence of at least one fish species with

federal endangered or threatened species status in all

major river basins in the West. Attempts to protect

those species could force adjustments in current or future patterns of water use. Urban water needs are acute

in some areas but not in others. The specific nature and

relative importance of those and other factors vary by

region. Examples drawn from California's Central Valley, the Pacific Northwest, the Colorado River basin,

and the Great Plains states illustrate that variety. 7. United States v. Winters, 207 U.S. 564, 28 S. Ct. 207, 52 L. Ed. 304

(1908). For a discussion of federal reserved water rights and the socalled Winters Doctrine, see David H. Getches, Water Law in a Nutshell, 2nd ed. (St. Paul, Minn.: West Publishing Co., 1990), Chapter

8; or Joseph L. Sax, Robert H. Abrams, and Barton H. Thompson, Jr.,

Legal Control of Water Resources: Cases and Materials, 2nd ed.,

American Casebook Series (St. Paul, Minn.: West Publishing Co.,

1991), Chapter 9.

8. Benjamin Simon and Harvey Doerksen, "Conflicting Federal Roles in

Indian Water Claims Negotiations," Chapter 2 in Thomas R.

McGuire, William B. Lord, and Mary G. Wallace, eds., Indian Water

in the New West (Tucson: University of Arizona Press, 1993).

9. Western States Water Council, Indian Water Rights in the West

(study prepared for the Western Governors' Association, Denver,

Colo., May 1984).
CHAPTER TWO WATER USE IN THE WESTERN UNITED STATES 9

California's Central Valley

The Central Valley is characterized by large-scale water

projects that move water long distances in artificial

canals. The largest of the projects is the Bureau of

Reclamation's Central Valley Project. The point of

diversion for those canals is a delta ecosystem that is

home to 37 species that are either listed or are candidates for being listed as threatened or endangered under

the Endangered Species Act (ESA). In addition, 10

although the Central Valley Project has the infrastructure to move at least a limited amount of water from

relatively low-valued agricultural uses to higher-valued

urban uses, such diversions of water have been inhibited by federal policies. Drought and environmental

restrictions on water diversions have reduced available

supplies of surface water in recent years—a period in

which agricultural demand has remained constant and

population growth has increased urban demand. Concurrently, the general state of decline in the delta ecosystem has prompted calls for more water for environmental purposes. The Central Valley is discussed in

detail in Chapter 4.

The Pacific Northwest

Water conflicts in the Pacific Northwest arise primarily

over how to manage the flow of the Columbia and

Snake Rivers—to produce hydropower or to protect

three salmon species with federal status as threatened

or endangered. Most parties concede that efforts to 11

protect and enhance populations of the ESA-listed

salmon will require some modification of water allocations in the region. Those changes could affect regional

power users, agriculture, and navigation. In contrast to

California and the Colorado River basin, urban water

supplies in the Pacific Northwest are generally sufficient and are not considered a source of conflict.

Federal water projects are important links in efforts

to protect salmon. The Army Corps of Engineers operates the primary reservoirs targeted for lower water levels to help reduce the amount of time it takes young

salmon to migrate to the ocean. Bureau of Reclamation

projects have been asked to provide water to help the

salmon population recover, even though the projects are

not directly implicated in problems facing the endangered salmon. The Northwest Power Planning Coun- 12

cil—a federal entity responsible for balancing the needs

of fish and wildlife in the Columbia River basin with

hydropower and other traditional uses of the river—has

recommended that the government acquire water from

irrigators near the upper Snake River in order to improve conditions in the lower Snake River for the ESAlisted fish. 

One prominent proposal calls for a minimum of

0.427 million acre-feet to augment the flow, with the

possible addition of another 1.0 million. Unobligated 13

storage space in reservoirs may provide some of that

quantity, but as much as 1.127 million acre-feet might

need to be obtained from farmers to meet those objectives. Another proposal contains flow objectives for

the Columbia and Snake Rivers, rather than the volume

objectives for augmenting the flow contained in the earlier proposal. Nevertheless, in years in which the nat- 14

ural flow is low, obtaining water from farmers in the

upper Snake River basin may be necessary to meet the

flow objectives. One study predicts that as much as 9.6

million acre-feet could be required in an extreme

drought and that water purchases could average be10. Information provided by the U.S. Fish and Wildlife Service, Sacramento, Calif., July 1996. That number includes seven species that the

service has officially proposed listing as threatened or endangered.

11. Snake River sockeye were listed as endangered on November 20,

1991. Two additional runs—the Snake River spring/summer and fall

chinook—were originally listed as threatened but are being reclassified

as endangered (emergency rule issued August 18, 1994, and proposed

rule issued December 28, 1994).

12. The bureau's Grand Coulee Dam on the Columbia River, which is

impassable by migrating fish, eliminated all salmon runs that spawned

in the stretches of the river above the dam. (The Army Corps of Engineers' Chief Joseph Dam, which is downstream from Grand Coulee

and also is impassable by salmon, was constructed 16 years after

Grand Coulee was completed.) Because those salmon runs are now

extinct, they are not protected by the ESA. The salmon runs currently

of most concern travel up the Columbia to its confluence with the

Snake River, spawning in tributaries of the latter. The bureau's largest

project in Washington—the Columbia Basin Project—is served by the

Grand Coulee Dam. Likewise, Hells Canyon Dam on the Snake River

in Idaho blocks passage of salmon to the upper Snake River where the

bureau's Idaho projects are located.

13. Department of Commerce, National Oceanic and Atmospheric Administration, National Marine Fisheries Service, Proposed Recovery Plan

for Snake River Salmon (March 1995).

14. Bonneville Power Administration, Army Corps of Engineers, and Bureau of Reclamation, Columbia River System Operation Review:

Final Environmental Impact Statement (Portland, Ore., November

1995).
10 WATER USE CONFLICTS IN THE WEST August 1997

tween 1.1 million and 3.15 million acre-feet per year.15

Most of that water would have to come from farmers

who receive their water from the Bureau of Reclamation. Furthermore, the bureau is the lead agency attempting to purchase that water. 

Conflicts also arise between agricultural and hydropower uses of water in drought years. When water is

scarce, the value of water used to produce hydropower

may be greater than the value that can be generated

from agricultural uses. 

Local conflicts exist as well. In the Yakima River

basin, resolution of claims to water rights made by the

Yakima Indian Nation and concerns about the declining

stock of native salmon may require adjustments in the

amount of water delivered to agriculture, including water managed by the Bureau of Reclamation. 

The Colorado River Basin 

Conflicts exist in the Colorado River basin between the

upper and lower basins and between agricultural, environmental, urban, hydropower, and Native American

uses of water. Conflicts between upper- and lowerbasin states have been particularly contentious. Those

conflicts are international as well; water use in the

United States reduces flows and increases the salinity

of the Colorado River when it crosses the Mexican border. 

The Colorado River is not only fully allocated; it is

overallocated. An interstate compact has allocated 17.5

million acre-feet of water among the riparian states, but

estimates of actual average annual flows range from

13.5 million to 15.0 million acre-feet. Shortages have

not arisen in most years because most states have not

yet developed the infrastructure needed to capture their

allocation. 

Two new Bureau of Reclamation projects could

reverse that situation. The recently constructed Central

Arizona Project enables Arizona to take its entitlement,

and completing the Central Utah Project would do the

same for Utah. Based on current expectations of population growth and project development, the states in the

basin will be able to take their full entitlement by 2040.

The question of how to allocate the shortage between

actual flows and the 17.5 million acre-feet in allocations that would occur at that time has not yet been addressed. In addition, demands for water arise from

other sources: Native Americans' claims to the rights to

an estimated 31 million acre-feet in Arizona alone ; 16

environmental requirements for addressing fish and

wildlife habitat (28 fish species with habitat in the Colorado River and its tributaries are listed as threatened

or endangered under the federal ESA); and the need to

address problems related to salinity levels. 

The Great Plains Region

Of all the western regions, conflicts over water use are

most localized in the Great Plains states. The Bureau

of Reclamation's largest project in the region—the

Colorado-Big Thompson Project—diverts water from

the Colorado River through the Rocky Mountains into

the Platte River basin. That out-of-basin diversion may

contribute to environmental problems in the Colorado

River basin, but the additional water may benefit threatened and endangered species, such as the whooping

crane, that have important habitat in the Platte River.

Extensive development along the north and south forks

of the Platte River, however, could conflict with efforts

to protect threatened and endangered species in the

area. Similarly, endangered sturgeon in the Missouri

River could become the focus of conflicts in that basin.

Other issues include claims by Native Americans,

overallocated river basins, and declining groundwater

tables. A significant number of claims by Native

Americans may remain unresolved; for example, claims

for 5.1 million acre-feet of water in Montana and 1.3

million acre-feet in South Dakota were unresolved as of

May 1992. Rivers are overallocated, and water rights 17

15. Daniel D. Huppert and David L. Fluharty, "Economics of Snake River

Recovery: A Report to the National Marine Fisheries Service" (draft,

School of Marine Affairs, College of Ocean and Fishery Sciences,

University of Washington, Seattle, March 1996). This report discusses

the economic impact of purchasing water to meet both the flow objectives and the 1.427 million acre-feet volume objective for flow augmentation.

16. Sax, Abrams, and Thompson, Legal Control of Water Resources, p.

873.

17. Calculated by the Congressional Budget Office based on information

in Sax, Abrams, and Thompson, Legal Control of Water Resources;

Western States Water Council, Indian Water Rights in the West; and

Simon and Doerksen, "Conflicting Federal Roles in Indian Water

Claims Negotiations," pp. 27-34.
CHAPTER TWO WATER USE IN THE WESTERN UNITED STATES 11

that exist on paper exceed average flows in some basins. Conflicts in the Arkansas River basin are particularly contentious and may affect operations of the Bureau of Reclamation's Arkansas-Fryingpan Project.

Finally, groundwater tables that are falling because of

excessive pumping for irrigation or municipal uses have

increased demands for access to surface water or decreased supplies of surface water (where groundwater

aquifers are closely linked to river systems). Those

problems are particularly acute in the Texas high

plains.

The Role of the Bureau of

Reclamation in Developing

Water Supplies

The Bureau of Reclamation is firmly positioned near

the center of controversies over water allocations

throughout the West and therefore must be a component of effective, long-term solutions. Since passage of

the Reclamation Act of 1902, the federal government,

through the Bureau of Reclamation (and its predecessor, the Reclamation Service), has provided water to

encourage settlement of the arid West. In 1996, the

Bureau of Reclamation's budget was about $800 million.

The bureau now controls significant shares of river

flows throughout the West. The agency diverts between 40 percent and 85 percent of the annual flow of

major western river systems such as the Colorado, Rio

Grande, Snake, Sacramento, and San Joaquin. To 18

fulfill its mission, the bureau allocated nearly all of that

water to agricultural uses and built a number of subsidies into the payment scheme to ensure that the water

would be affordable to farmers. The large quantities of

water involved and the nearly single-purpose allocation

imply that attempts to adjust patterns of water use in

any of those river basins will require the bureau's participation.

Use of Water Developed by 

the Bureau of Reclamation

Agriculture uses most of the water developed by the

Bureau of Reclamation, receiving 85 percent in 1992,

the last year for which data were published. Munici- 19

pal and industrial uses received 10 percent, with the

Los Angeles area receiving about 45 percent of that

quantity. However, municipal and industrial water uses

are increasing; between 1970 and 1990, the bureau's

delivery of water to those uses more than doubled.

Pressure to supply greater quantities of water to urban

areas will only increase over time. 

Water managed by the bureau is also used to produce electricity. Many of its projects include powergenerating facilities. Though not a consumptive use of

water, the capability to produce power has implications

for the financing of water projects and for the prices

farmers pay for water. Power produced from the bureau's projects is used first to provide the electricity

needed to pump water into and along distribution canals. Any excess power is then marketed by two federal power marketing agencies housed in the Department of Energy—the Bonneville Power Administration

(in the Pacific Northwest) and the Western Area Power

Association. 

Importance of the Bureau's Water 

to Western Agriculture 

The Bureau of Reclamation is the largest supplier of

irrigation water in the United States. Over 150,000

farms in the 17 western states receive water from the

bureau annually. Its water irrigates roughly 10 million

acres—about half of all cropland irrigated by surface

water in the West. Although that acreage represents

only 5 percent of western cropland, it accounted for 25

percent of all revenue generated from crop production

in western states in 1992. The high per-acre revenues 20

arise from the high yields for staple commodities and

the production of high-value specialty crops. For ex18. Michael R. Moore and Donald H. Negri, "A Multicrop Production

Model of Irrigated Agriculture, Applied to Water Allocation Policy of

the Bureau of Reclamation," Journal of Agricultural and Resource

Economics, vol. 17, no. 1 (July 1992), pp. 29-43.

19. Bureau of Reclamation, 1992 Summary Statistics: Water, Land, and

Related Data (1992).

20. Congressional Budget Office estimate based on data in Bureau of Reclamation, 1992 Summary Statistics: Water, Land, and Related Data;

and Bureau of the Census, 1992 Census of Agriculture (1993).
12 WATER USE CONFLICTS IN THE WEST August 1997

Box 1.

Water Districts

Hundreds of local water districts, composed of and directed by district landholders, are chartered under state

law to distribute water to their members. Those quasigovernmental entities can appropriate water, construct

reservoirs and distribution systems, and enter into contracts with federal or state water suppliers. Most of the

Bureau of Reclamation's water is supplied through local

water districts.

Districts come in all types and sizes. They may be

chartered as water districts, irrigation districts, or mutual water companies, among other types. The duties,

rights, and organization are essentially the same for all

types. One primary difference involves the criterion for

member votes; for example, irrigation districts generally

operate under a one landholder/one vote rule, whereas

water districts usually allocate votes based on the value

of landholdings (for example, one vote per $1 of assessed land value). In California, irrigation and water

districts are the most common types. Their sizes vary

considerably, from very small districts serving only one

farm to one California district that encompasses more

than half a million acres. In some states, the most common type of water supply organization is a mutual water

(or ditch) company. Mutuals are nonprofit cooperative

organizations that generally sell stocks or shares to

members. Water and costs are distributed among shareholders in proportion to the size of their share. In this

study, the term "water districts" is used generically to

describe all types.

Water districts determine retail water prices. Districts can recover their costs by charging per-unit prices

for water use, or they can assess charges that are independent of the quantity used, such as a fixed charge per

acre or per household. In California, for example, approximately one-third of all irrigation water is distributed on a per-acre fee assessment rather than being

priced on a per-unit usage basis. Those pricing procedures reflect the district's need to generate only enough

revenue to meet operating expenses and debt without

making a profit; under California law, all water districts

are not-for-profit entities. Even districts that price water

on a usage (per acre-foot) basis may cover some of their

costs with land-based assessments. Where charges for

water use exist, farm-level (retail) water prices may be

much higher than the rates that districts pay to suppliers

such as the Bureau of Reclamation.

ample, that acreage produces 60 percent of the vegetables and 25 percent of the fruits and nuts grown in the

United States. 

The Bureau's Policies for 

Pricing Irrigation Water 

The Bureau of Reclamation supplies water to agricultural water districts with which it has long-term contracts. The water districts are composed of individual

farmers (see Box 1). The contracts specify subsidized

prices and fixed water allotments. Reclamation law

requires that contracts for water delivery be made between the Bureau of Reclamation and a water district

organized under state law. That institutional requirement has important implications for the potential effectiveness of policy reforms (discussed below and in the

section on price reform in Chapter 3).

Allocation of Costs. The Bureau of Reclamation determines water prices based on a complicated formula

for allocating the costs of building and financing a water project among the various groups of users. In so

doing, the bureau must determine both the percentage

of the costs attributable to each use and then, given the

allocation of the total costs, the actual amount it will

charge each user group. Both calculations tend to be

highly favorable to agriculture. 

For multipurpose projects—those whose purposes

may include flood control, recreation, hydropower production, and municipal and industrial uses in addition to

agriculture—the Reclamation Projects Act of 1939 directs the Secretary of the Interior to allocate costs to

each of the uses based on the proportion of the benefits

each use receives from the project. However, it is rarely

clear exactly what portion of a project's costs or benefits is attributable to a given use, and the ultimate cal-
CHAPTER TWO WATER USE IN THE WESTERN UNITED STATES 13

culation is somewhat subjective. For example, suppose

a single dam stores water for irrigation, provides flood

control, and generates hydropower. The cost of the turbines for generating electricity are charged to electricity

users, and the costs of canals that bring irrigation water

to farms are charged to agriculture, but how should the

cost of the dam itself be apportioned? Thus, even if

agriculture receives 90 percent of the water developed

by that project, its share of the costs may be much

smaller. Project costs associated with public purposes

are not allocated to any user group; the government

pays the costs. Such uses include flood control, recreation, fish and wildlife, and Native American uses.

The formula for allocating the costs of financing

construction also benefits agriculture. The government

pays the interest charges on the portion of costs allocated to irrigation, but electricity users and urban water

users must pay interest charges on their portion of the

cost of constructing the project. In addition, all users

benefit from being able to spread repayment over a long

period. The terms of that financing typically allow 40

years to repay the project's costs, and they delay the

start of the repayment period up to 10 years from the

date the project is completed. For farmers, that is analogous to a 50-year interest-free loan for building irrigation projects.

Finally, in addition to being relieved of the obligation to pay interest charges, farmers may be obligated

to reimburse the federal government for only a portion

of their share of a project's construction costs. If the

bureau determines that the portion of costs allocated to

farmers will result in a price that exceeds the farmers'

ability to pay—that is, the amount farmers can pay and

still realize a minimal profit—the repayment obligation

is reduced to the amount the bureau calculates that

farmers can pay. Electric power users must pay the

difference between the amount of project costs allocated to agricultural uses and the amount that agriculture will pay (based on the reduced repayment obligation). 21

Substantial federal subsidies for irrigation-related

construction costs arose from that combination of pricing policies. The present value of federal outlays made

between 1902 and 1986 for such projects was $22 billion to $23 billion (in 1986 dollars). The present 22

value of the money repaid by irrigators over that same

period was $2 billion. The repayment figure may ultimately increase by another $1 billion, based on existing

contracts. Thus, the federal government's contribution

to the cost of constructing and financing irrigation projects amounts to about 85 percent to 90 percent of the

total cost allocated to irrigation.

The Relationship Between Costs Allocated to Water

Districts and Prices Paid by Farmers. Contracts

made with water districts, rather than directly with

farmers, create a buffer between the Bureau of Reclamation and farmers that may impede the effectiveness

of reforming water prices. Farmers make decisions

about water use based on the prices that districts charge

them, not on the rates that the bureau charges districts

for the water. Districts charge farmers in one of two

ways: on the amount of water they use (dollars per

acre-foot) or on the size of their farm (dollars per acre)

regardless of the quantity of water actually used. Those

pricing structures, which are designed simply to generate enough revenue to meet the district's repayment obligations, often provide no incentive to farmers to use

water efficiently and may even encourage them to increase their water use.

21. For a more complete description of the historic development and components of the bureau's subsidies of water prices, see Richard W.

Wahl, Markets for Federal Water: Subsidies, Property Rights, and

the Bureau of Reclamation (Washington, D.C.: Resources for the

Future, 1989), Chapter 2. 

22. Wahl, Markets for Federal Water, pp. 34-38, presents these estimates

of costs and repayment. The range of costs reflects different assumptions about interest rates. 

T

Chapter Three

Issues in Reforming Federal Water Policy

he problems outlined in Chapter 2 suggest

three potential objectives for reforming water

policy. The first objective is to improve the

efficiency of water allocations among the primary commercial water uses—agriculture, municipal and industrial uses, and production of hydroelectric power. Current allocations often result in vastly different values of

water being placed on those different uses. Some reallocation could improve social welfare. The second

objective is to increase the amount of water allocated to

public purposes, such as meeting environmental needs

(improving water quality and providing habitat for fish

and wildlife) and satisfying the claims of Native Americans. The third objective is to address distributional

issues: Who benefits from current and new policies?

Who pays? Should the federal government capture

more of the value of water through higher fees? 

Different objectives can require different policy

tools. Improving the allocation of water among commercial uses, for example, could be accomplished with

water markets that allow farmers to sell, or "transfer,"

their water allocation to the highest bidder. But that

policy tool probably would not work as well for addressing environmental concerns, which typically are

not well represented in markets. In addition, a policy

tool that is best for achieving one objective may actually work against a different objective. For example, an

out-of-basin water transfer—that is, the diversion of

water from one river basin into another—could improve

the efficiency of water use but could hurt fish and wildlife inhabiting the stretch of river below the diversion

point.

Policy tools that would be effective individually

could become ineffective if implemented in combination with other policy tools. For example, reforming

water prices—that is, changing the price the Bureau of

Reclamation charges for water—might not motivate

changes in behavior if combined with a water market,

although it would still raise federal revenues. Because

no one policy tool is best at achieving all three objectives, a package of policy tools may be necessary for

addressing them.

Tools for Reforming Federal

Water Policy

An underlying implication of reform objectives is that

farmers use too much water and pay too little for it as a

consequence of the Bureau of Reclamation's policies on

water supply, and that farmers will continue to do so in

the absence of reform. Policy tools in that context are

the actions that the bureau can take to require or create

incentives for current water users to change their patterns of use.

A critical component in reforming water policy is

the effort by farmers to conserve water. Because all

options for conserving water are costly, farmers will

voluntarily undertake them only if the economic or opportunity cost of using water exceeds the costs of conserving—that is, if water becomes more expensive, if

the value of not using water increases relative to conservation costs, or if the cost of conserving water is
16 WATER USE CONFLICTS IN THE WEST August 1997

reduced. An alternative is a mandatory reduction in the

quantity of water available. Tools for reforming the

bureau's policies on water supply typically address one

of those conditions. Broadly defined, those policy tools

include:

o Creating water markets,

o Reforming water pricing policies,

o Mandating water reallocations for public purposes,

and

o Setting up (or mandating) water conservation programs.

Both the cost and the effectiveness of policy reform will

depend on the package of policy tools selected. Moreover, a tool that works well on its own may have little

or no effect if combined with other tools.

Creating Water Markets

Water markets can create a win/win situation for participants. Farmers will be better off because they will

transfer water only if the benefit from doing so is

greater than the cost (or forgone profits) of not using

the water. Water users with insufficient supplies—primarily urban customers—will also be better off because

purchasing water from farmers can cost significantly

less than buying water from the next-cheapest source.

The total benefit of using the bureau's water will increase because the transfers allow water to be put to

higher-valued uses. 

Water markets are most effective for addressing the

first objective—improving the efficiency of water allocations among private economic uses. In the southwest

regions such as California and the lower Colorado

River basin, where excess demand by cities is great,

water markets can be particularly effective in moving

water from agricultural uses to urban uses. In the

Pacific Northwest, the value of water used in producing

hydropower may be higher than its value in agriculture

in drought years. A water market can, in theory, re- 1

duce inefficiencies in allocations between those two

uses, although state laws such as those in Idaho may

create a greater impediment to water markets in the region than do the Bureau of Reclamation's policies. 

Water markets will be less effective for addressing

the second and third objectives—public purposes and

fairness. Purchases of water for public purposes have

occurred and could be encouraged in the future. Environmental advocacy groups occasionally are able to buy

water for in-stream uses in much the same manner that

the Nature Conservancy, for example, buys land to preserve open space. Government agencies also purchase

water for public purposes. The Bureau of Reclamation

recently purchased water in California, Nevada, and

Idaho to protect endangered fish species in those areas.

The Department of the Interior may also buy water as

part of a settlement of Native Americans' claims to water rights.

Even so, environmental uses may have great difficulty competing in a water market with uses that carry a

high economic value, such as municipal and industrial

uses. Environmental uses are inherently public and

therefore diffuse or even abstract, whereas the benefits

from economic activities are local and observable. In

an era of declining agency budgets and financially

strapped environmental organizations, water markets

may provide water for public purposes only when combined with a tool, such as an environmental surcharge,

that provides funds for that purpose. Even if public

interests are not represented in the market, the environment can be affected by changes brought about by

water markets.

Although a water market is a relatively simple concept, establishing one can be quite complicated. Policymakers will have to resolve such issues as who will receive the water, how much water can be transferred, the

legal constraints on the transfer, and the potential effects on local communities, water districts, and the environment. Authorizing legislation and regulations

could include provisions to address those concerns.

Whose Water Is It? One question that arises in discussions about water markets is: Who has the right to

capture the benefits from the proceeds of water sales?

Some analysts argue that the government itself ought to

sell federal water rather than allow farmers to capture

the windfall profits from the transaction. After all, the

argument goes, the water was developed with taxpay1. Joel R. Hamilton, Norman K. Whittlesey, and Philip Halverson, "Interruptible Water Markets in the Pacific Northwest," American Journal of Agricultural Economics, vol. 71, no. 1 (February 1989), pp.

63-75.
CHAPTER THREE ISSUES IN REFORMING FEDERAL WATER POLICY 17

ers' dollars, so taxpayers—not farmers—should benefit

from selling it. 

The question of ownership has traditionally been

resolved in favor of the farmers. Although water rights,

which are issued by states, have been obtained by the

Bureau of Reclamation in most cases, the U.S. Supreme

Court has ruled that those rights are vested in the water

user, not the federal government. Moreover, the laws 2

governing the bureau's policies contain many provisions designed to give water districts that have a contract with the federal government long-term rights to

water deliveries. For example, the 1956 amendments to

the Reclamation Project Act of 1939 give districts the

right to renew contracts issued under the act. In addi- 3

tion, once districts have paid the construction costs for

which they were obligated, their rights to water deliveries are permanent as long as they continue to pay operation and maintenance costs. Those provisions created

an expectation that water deliveries would continue indefinitely. Transfers of water by districts or farmers,

rather than transfers by the bureau (that is, sales to noncontractors), are consistent with that expectation. 

Allowing contractors to transfer their allotment

leaves the government no worse off than it would be

under current laws and practices, and it may accomplish

societal goals of reducing inefficiencies in water use

and allocations. In the absence of a water market, districts would continue to accept delivery of contract allotments. The bureau should be indifferent about

whether water is delivered to the districts it has contracts with or to the recipient of a water transfer, as

long as any additional transportation costs are paid for

and the canals have sufficient capacity to carry the water. In fact, the government (and taxpayers) could benefit from a transfer because the bureau can charge more

for water used by nonfederal contractors. For example,

if an agricultural water contractor transferred water to

an urban water district, that contractor would have to

pay the Bureau of Reclamation for the water at the

higher municipal and industrial rate, which incorporates

interest charges, rather than at the contract rate, which

is based on interest-free repayment.

How Much Water Can Be Transferred? The issue

of how much water is eligible for transfer typically

arises in the context of the effects on third parties.

Farmers often divert significantly larger quantities of

water than their crops consume. Much of the excess

water returns to waterways and is subsequently diverted

by farmers downstream. Transfers are typically limited

to water that is used consumptively; that restriction

avoids penalizing the farmers downstream whose water

supply would otherwise be reduced but who would not

be compensated for the water transfer. In practice,

however, quantifying consumptive use is not a straightforward task.

One approach to defining the quantity of water eligible to be transferred requires that farmers who transfer water leave land fallow and gives them "credit" for

the average consumptive use of the crop historically

planted on that land. That approach limits the potential

benefits of markets because it precludes options for

increasing the efficiency of farms' irrigation as a means

of freeing up water to be transferred. Water transfers

based on improved irrigation systems or management

would probably be significantly less disruptive to the

agricultural community than would transfers based on

fallowing land, and investments in new irrigation systems could even increase regional economic activity. 

Are Transfers Consistent with Prevailing Laws?

Some states have laws that preclude or limit water

transfers. In general, state water law takes legal precedence over federal water policies. Some states—such

as Colorado, Arizona, New Mexico, and Wyoming—

have allowed relatively active water markets to develop.

Other states impose constraints that severely limit the

benefits of water transfers. In Idaho, for example,

transfers typically operate through the Idaho State Water Bank. The bank limits payments to no more than

the cost of the water to the farmer; farmers cannot

profit from the transaction. Participating farmers also

lose their priority for water deliveries in subsequent

years.

2. The two primary cases addressing the issue are Ickes v. Fox, 300 U.S.

82 (1937), and Nevada v. United States, 463 U.S. 110 (1983). Those

cases and the general issue are discussed in General Accounting Office, Water Transfers: More Efficient Water Use Possible, If Problems Are Addressed, GAO/RCED-94-35 (May 23, 1994), pp. 49-50.

For more detail, see Brian E. Gray, Bruce C. Driver, and Richard W.

Wahl, "Transfers of Federal Reclamation Water: A Case Study of

California's San Joaquin Valley," Environmental Law, vol. 21, no.

911 (1991), pp. 912-983.

3. Richard W. Wahl, Markets for Federal Water: Subsidies, Property

Rights, and the Bureau of Reclamation (Washington, D.C.: Resources for the Future, 1989), p. 130. Also, see Chapter 6 for more

detail on the relationship between the Bureau of Reclamation's policies

and water transfers.
18 WATER USE CONFLICTS IN THE WEST August 1997

States may also be subject to compacts that guide

interstate water allocations and can inhibit water transfers. For example, some water transfers in the Colorado River basin are subject to approval by a multistate

commission operating under the Colorado River Compact, which divides available water flows between

upper- and lower-basin states.

Even states that allow water markets may have

laws that discourage the purchase of water for environmental purposes. Most western states recognize instream water uses (only New Mexico, Oklahoma, and

South Dakota do not). Nevertheless, the level of pro- 4

tection for in-stream flows varies significantly from

state to state. Although case law and legislation are

beginning to deal with that issue, the diversion of water

remains a necessary condition to obtain an appropriative water right in many states. Consequently, no right

can be granted for in-stream uses in those states, and

water purchased for that purpose can be diverted by

another water user. States can, however, build environmental protection into the laws governing water transfers. In Oregon, for example, water users may transfer

water that has become available through conservation.

However, only 75 percent of the conserved water may

be transferred; the other 25 percent is reserved for instream uses.5

Are Local Communities, Water Districts, and the

Environment Protected? Opposition to water markets often revolves around concerns for local communities, the integrity of water districts, and the environment. Local communities may be hurt if water transfers

result in a significant drop in agricultural production.

Water districts may feel threatened by water transfers

made by farmers. Transfers by individual farmers may

adversely affect the district's operations and planning

process. In very large districts, the local impact of water transfers may be larger if transfers originate from a

single farm than if a reduction in water use is spread

over the entire district. In addition, a district's water

delivery systems may require a minimum flow to be

operative. Thus, water deliveries for farmers who do

not participate in a water market could be adversely

affected by farmers who do.

Because urban areas can generally outbid farmers

in a water market, irrigated farming could be eliminated

in many areas, and agriculture-based economies could

collapse. However, with more than 80 percent of all

water used in the West allocated to agricultural production, even a slight but sudden increase in available water can overwhelm the market; supply can easily exceed

demand, causing prices to plummet. For example, adding just 10 percent of agricultural water to the market

will increase urban water supplies by nearly half—more

than is required under reasonable projections of demand

for water in urban areas. Thus, a market will probably

not transfer enough water out of agriculture to collapse

local economies. For example, experience with the

1991 California Water Bank—a temporary water market established in response to a drought emergency—

supports that argument. The bank purchased 800,000

acre-feet of water from farmers for $125 per acre-foot.

Even though the bank's participants fallowed 166,000

acres, the negative impact on local economies was

small. Even under prevailing drought conditions, 6

much of the water stored in the water bank went unsold.

A major concern about water markets is the potential impact on groundwater supplies. In some cases,

farmers will want to substitute groundwater for the allocation of surface water that is transferred. In many

areas, more groundwater is being withdrawn than is

replenished. The declining supplies of groundwater

raise two concerns about the relationship between water

markets and groundwater reserves. First, the temptation to replace transferred water with groundwater may

increase pressures on a resource that is already under

stress. In the extreme, the overdraft of water tables can

cause the aquifer to collapse, thus eliminating the possibility of future refill and use. Second, concerns arise

about the fairness of one farmer using a common resource, which all farmers rely on, in order to profit from

transferring an allocation of water.

The environment may be worse off or better off as

a secondary effect of water markets. If water transfers

divert water upstream from where it would otherwise be 4. Joseph L. Sax, Robert H. Abrams, and Barton H. Thompson, Jr., Legal Control of Water Resources: Cases and Materials, 2nd ed.,

American Casebook Series (St. Paul, Minn.: West Publishing Co.,

1991), p. 160.

5. Ibid., p. 235.

6. Richard E. Howitt, Nancy Moore, and Rodney T. Smith, "A Retrospective on California's 1991 Emergency Drought Water Bank" (report prepared for the California Department of Water Resources, Sacramento, Calif., March 1992).
CHAPTER THREE ISSUES IN REFORMING FEDERAL WATER POLICY 19

used, less water will be left in-stream between the old

and new diversion points than without the transfer, and

the environment will be worse off. That impact will be

greatest with new out-of-basin transfers. Conversely,

the environment may be better off if the new point of

diversion is further downstream than the existing diversion. In addition, the environment will generally be

better off if excess demand for water is satisfied by

transfers rather than by building a new water supply

project.

The environment may also be better off if water is

transferred out of an agricultural region experiencing

problems with water quality. For example, water markets can serve as an indirect solution to agricultural

drainage problems in California or salinity problems in

the Colorado River, or they can be used to replace diversions from water sources where the ecological implications would be greater. 7

Reforming Water Pricing Policies

Price reform is a broad category that generally includes

changing the price structure, changing the levels of

prices, or changing both. Charging water districts

higher prices for federal water may provide taxpayers

with a better return on the government's investments in

water projects and help efforts to reduce the federal

deficit. Price reform is the most direct, and potentially

the most effective, tool for reducing subsidies and addressing equity concerns regarding the portion of project costs that the federal government pays.

Higher water prices may also encourage efficient

use of federal water. To do so, three conditions must

hold:

o Farmers must pay a per-unit price for water, and

the price must not decline with the volume of water

used.

o Reforms must apply to the prices that farmers pay

for water rather than simply changing the prices

that districts pay.

o Conserved water must be put to a higher-valued

use.

Several factors make it difficult to design a federal

water pricing policy that addresses the objective of allocating water more efficiently. First, as discussed in

Chapter 2, the Bureau of Reclamation charges districts

for water, but the farmers decide how the water is used.

Furthermore, the bureau has no control over how districts pass the costs on to farmers. Some districts may

not even have the capability to charge per-unit water

prices. To do so, districts must have or install devices

for measuring water use and a system of accounting for

it. Without information about the exact level of water

use, farmers would be unable to respond to price signals. To facilitate the use of per-unit water prices, the

bureau could require districts to install measuring devices.8

Even if districts charge farmers per-unit water

prices, however, those prices may not incorporate reform of the prices that districts pay the Bureau of Reclamation. For example, districts could charge farmers a

single price for all water used based on the average of

tiered rates, or they could cover the additional costs of

price increases with a per-acre charge. Under either

option, the price farmers paid would be lower than the

price implied by the policy reform and thus would diminish the intended effect.

Second, whether water price reform will achieve

efficient water allocations or environmental objectives

will depend on the ultimate disposition of the conserved

water. Even if districts charge farmers higher prices

and farmers respond by using less water, the resulting

greater efficiency in water use would not necessarily

improve the allocation of water. Depending on federal

and state law and district policy, that water could be left

7. For information about drainage reduction from water markets, see

Gray, Driver, and Wahl, "Transfers of Federal Reclamation Water";

Marca Weinberg, Catherine L. Kling, and James E. Wilen, "Water

Markets and Water Quality," American Journal of Agricultural Economics, vol. 75 (May 1993), pp. 278-291; and Ariel Dinar and John

Letey, "Agricultural Water Marketing, Allocative Efficiency, and

Drainage Reduction," Journal of Environmental Economics and

Management, vol. 20 (May 1991), pp. 210-223. For information

about salinity reduction from water markets, see J.F. Booker and R.A.

Young, "Modeling Intrastate and Interstate Markets for Colorado

River Water Resources," Journal of Environmental Economics and

Management, vol. 26 (January 1994), pp. 66-87. An example of the

potential for water markets to offset disparate environmental problems

appears in Richard Coniff, "A Deal That Might Save a Sierra Gem,"

Time, April 3, 1989, pp. 8-12.

8. This requirement is included in the Central Valley Project Improvement Act and has been proposed for inclusion in conservation plans

required under the Reclamation Reform Act of 1982 (discussed later

in this chapter).
20 WATER USE CONFLICTS IN THE WEST August 1997

in-stream for environmental purposes, appropriated by

another farmer in the basin, or used to irrigate additional cropland within the district. 

A third factor is relevant to all three objectives.

Contractual and legal restraints may inhibit the ability

of the Bureau of Reclamation to impose water price

reforms in some cases. The bureau has authority to

revise prices only when contracts are new, renewed, or

amended in response to a request by the contracting

district. The authority to impose environmental sur- 9

charges on existing contracts may be less restricted.

Reforming Price Structures. Changes in the price

structure relate to how prices are conveyed to districts

or farmers. Prices can be the same regardless of the

quantity of water used or the type of use, or they can

vary according to those factors. They can increase or

decrease as the quantity consumed increases. Public

utilities, for example, may offer lower prices to larger

customers (bulk discounts), or they may charge higher

prices for quantities consumed above a basic level. In

the water arena, reclamation law includes a pricing

preference for agricultural water users, who do not have

to pay interest charges, over urban users, who do. 

There are three types of price structures: uniform,

tiered, and a per-acre or per-household charge. Uniform price structures charge the same per-unit price no

matter how much water is used. Tiered, or block-rate,

prices rise or fall in discrete jumps as the total quantity

purchased rises. For example, the price might be $10

per unit for the first 10 units, $15 each for the next 10

units, $20 per unit for the next 10 units, and so on. An

individual purchasing 13 units would pay $145 ($10 x

10 units plus $15 each for the next three). The marginal price—the price for the last unit—would be $15.

By comparison, the average price would be $11.15.

 Uniform prices can motivate farmers to use water

efficiently if the price is set correctly. Tiered price

structures can motivate the same decisions as uniform

prices, but tiered prices have a smaller impact on farmers' income. According to economic theory, farmers

decide whether to apply an additional unit of water

based on the relative benefits and costs of using that

unit. That decision is independent of the price of earlier

units. Therefore, raising the price for all units or only

for applications that exceed a specified number of units

can encourage farmers to reduce their water use. 

From a farmer's perspective, the advantage of a

tiered pricing structure over a uniform price increase is

that the higher price has to be paid on a smaller quantity of water. In addition, tiered water prices may seem

fairer to farmers because they penalize the least efficient farmers most. Farmers who conserve water may

pay the higher price on very few units, or on none at all.

As with any policy-motivated price increase, the effectiveness of tiered water prices depends on the price levels and quantities in each tier. 

If the objective of the policy reform is to reduce

federal subsidies of water prices, the uniform price increase can be significantly more effective than tiered

prices. Depending, of course, on the level of the price

increases, tiered prices can preserve existing subsidies

on a large portion of the water.

A per-acre or per-household charge is independent

of the quantity of water used. In that case, the marginal

price is zero. Such charges can never motivate an efficient decision about water use unless the supply of water exceeds demand.

Reforming Price Levels. The relative effectiveness of

a price increase will depend on the level of the new

price or prices. If target prices are below the value that

farmers place on using water, increasing prices to that

level will probably not change decisions about water

use. The highest price that the Bureau of Reclamation

can charge for water under reclamation law is the fullcost price, which covers the cost of construction (and

the interest paid on the financing) and operation and

maintenance. But that rate is an option only in limited

cases (see Box 2). Once projects are repaid, the bureau

can charge rates that cover only operation and maintenance costs. For older projects, prices that reflect the 10

full cost of water use are generally lower than prices

that reflect the opportunity cost (the forgone value of

water used for its best alternative purpose). For new

9. For an excellent discussion of the issue, see Duane Meacham and Benjamin M. Simon, "Forging a New Federal Reclamation Water Pricing

Policy: Legal and Policy Considerations," Arizona State Law Journal,

vol. 27, no. 2 (Summer 1995), pp. 507-557. 10. Ibid.
CHAPTER THREE ISSUES IN REFORMING FEDERAL WATER POLICY 21

Box 2.

Terms Relating to Water Prices

Rates Used by the Bureau of Reclamation

Contract Rate: Refers generally to the price of water

specified in contracts between the Bureau of Reclamation and water districts for the delivery of water; that is,

the price that districts are obligated to pay the bureau.

Contracts will generally be one of two kinds: water service contracts or repayment contracts. Rates established

in water service contracts typically were fixed in the

contract at a level (specified in dollars per acre-foot)

that was expected to cover operation and maintenance

(O&M) costs associated with delivering water and to

repay a portion of the construction costs. However, because of inflation, most rates do not currently cover even

the O&M costs. Some newer contracts specify adjustable prices to be set at the cost-of-service rate (see below). Contract rates under repayment contracts were

designed to recover the portion of project costs allocated

to agriculture over the life of the contract and are not

based on the quantity of water delivered in a given year.

Operation and Maintenance Rate: Covers the bureau's variable costs for operating and maintaining a

project in order to deliver water to districts.

Cost-of-Service Rate: Covers the O&M and construction costs.

Full-Cost Rate: Covers all costs included in the costof-service rate, plus a component to cover interest

charges for financing construction costs. A full-cost rate

is defined in the Reclamation Reform Act of 1982 as the

annual rate that amortizes, with interest, the outstanding

(nonreimbursed) portion of expenditures allocated to

irrigation facilities. Note that that price may be adjusted

downward based on irrigators' ability to pay the costs.

Thus, it includes the cross-subsidy from power users to

irrigators.

Transfer Rate: Used in this report to refer to the price

that water districts must pay to the Bureau of Reclamation if the district transfers water to another user. For

example, under the Central Valley Project Improvement

Act, districts that transfer water to farmers who did not

previously receive federal water must pay the bureau the

full-cost rate for the portion of water transferred, even if

they would have paid only the contract rate had they

used that water themselves.

Economic Concepts 

Marginal-Cost Prices: Prices that reflect the change in

the total cost associated with water use resulting from a

one-unit increase in the quantity of water consumed.

Prices equal to the marginal cost of a resource (including private costs and social costs, such as the cost to the

environment) would motivate economically efficient

decisions about water use.

Average-Cost Prices: Prices that spread the total cost

associated with water use equally among all units.

Prices are calculated as the total cost divided by the total

quantity consumed. Those prices mask the fact that developing the last unit for consumption typically costs

significantly more than developing the first unit.

Opportunity Cost: The forgone value of water used in

its best alternative use. Suppose, for example, that a

farmer pays $10 for an acre-foot of water and uses it to

produce $10 worth of tomatoes. If that water could

have been used for a different purpose valued at $100

an acre-foot, the opportunity cost of using it for tomatoes is $100 even though the out-of-pocket cost is only

$10.

projects, however, full-cost prices may be significantly

higher than most farmers can afford.

Environmental Surcharges. Environmental surcharges are price increases that can be applied generally

or targeted toward certain user groups. They can be

designed to discourage water use that is particularly

damaging locally, or they can be intended simply to

raise funds for environmental restoration projects. The

Bureau of Reclamation can add surcharges to the rates

it charges water districts and earmark the money for

specific environmental purposes. The general principle

behind environmental surcharges is to require the beneficiaries of a project (the water users) to help fund activities to alleviate any environmental damage the project creates. 
22 WATER USE CONFLICTS IN THE WEST August 1997

The two possible objectives for imposing environmental surcharges—financing environmental restoration projects and encouraging farmers to conserve

water—can conflict. For example, setting a surcharge

high enough to promote water conservation could result

in lower total collections for the restoration project (see

Appendix B). 

As with other price reforms, achieving the second

objective requires that the surcharges be added to the

prices that farmers pay for water. Districts could decouple the surcharges from decisions about water use

by imposing per-acre charges sufficient to cover the

district's payment obligation to the bureau. In that case,

farmers' water use would not change.

Mandating Water Reallocations for

Public Purposes 

Directly reallocating water from current uses may be

the best way to obtain water for public purposes. If

water is taken without compensation, however, that tool

is potentially costly for current water users, primarily

agriculture. The environmental impact of projects that

develop the water supply and divert water for irrigation,

for example, might best be addressed by increasing the

amount of water that must be left in-stream. 

The most direct manner of providing that water

would be to mandate the allocation. A mandate would 11

probably arbitrarily reduce agricultural water supplies

and would almost certainly be more expensive, or less

economically efficient, than an alternative approach to

securing the water that incorporates its worth to different farmers. Farmers would respond to economic incentives to reduce water use by eliminating the lowestvalued uses (for example, less profitable crops, such as

wheat, or fields with low yields), and farmers with

lower-valued uses would cut back more than farmers

with higher-valued production (for example, more profitable specialty crops such as fruits and vegetables). In

contrast, a mandatory reduction in water supply could

affect high- and low-valued farming operations equally.

Setting Up or Mandating Water 

Conservation Programs

Conservation programs can range from requirements to

improve the efficiency of irrigation to incentives for

farmers to use less water, such as cost sharing for improvements in irrigation technology. The Reclamation

Reform Act of 1982 requires all agricultural water districts to have water conservation plans that have been

approved by the Bureau of Reclamation, but implementation of those plans typically has not been enforced.

The bureau is now revising the rules and regulations

necessary to fully implement and enforce the act's provisions. It released an environmental impact statement

for the proposed rules and regulations in February 1996

that addressed conservation plans. 12

The proposed rule for the water conservation programs identifies four critical components that all plans

must include. They are:

o A system for measuring and accounting for all water delivered by districts;

o A water pricing structure for farmers that is designed to encourage more efficient use of water;

o An information and education program for farmers

that also promotes efficiency; and

o Designating a district coordinator for water conservation.

The first two were identified above as critical to an effective policy for reforming water prices. The ultimate

disposition of conserved water is uncertain. The documents from the water conservation program clearly

state that the bureau will leave that decision to the district.

11. The Congress would probably first have to reauthorize the project and

define fish and wildlife protection and enhancement as a purpose of the

project.

12. Bureau of Reclamation, Final Environmental Impact Statement:

Proposed Acreage Limitation and Water Conservation Rules and

Regulations (February 1996). The proposed rules and regulations are

published in the Federal Register, vol. 60, no. 63 (April 3, 1995), pp.

16922-16960.
CHAPTER THREE ISSUES IN REFORMING FEDERAL WATER POLICY 23

Implications of Policy

Combinations: Interactions

and Redundancies

Policy tools can be implemented independently or in

combinations, with varying effects. Different combinations of water markets, water allocations, and water

price reforms can result in different outcomes. To be

effective, economic incentives to motivate water conservation must change costs relative to benefits. If one

policy results in a bigger change in costs than another,

the latter policy could become redundant and therefore

ineffective.

Combination 1: Water Markets and

Tiered Water Prices

Combining tiered water prices with provisions for

transferring water may render the tiered prices ineffective as a tool for encouraging water conservation. As

long as the price at the top tier is below the market

price, the tiered prices will not affect either the water

market or a farmer's decisions about using or transferring water. As a result, less water may be allocated for

environmental uses when water markets are combined

with tiered water prices than when tiered prices are implemented alone. The water market creates an alter- 13

native, higher-valued use for water that might have

gone unused in response to the tiered prices. Thus, the

incentive that tiered water prices may create to leave

water in-stream may be eliminated when the tiered

prices are combined with a water market.

Combination 2: Water Markets, Tiered

Water Prices, and Repayment Rates

Combining a water market with the requirement that

contractors reimburse the Bureau of Reclamation at a

higher rate for water that they transfer—referred to as

the repayment rate provision—than for water that they

use themselves will increase agricultural water use and

reduce water transfers relative to a scenario with a water market alone. The one case in which adding tiered

water prices might affect the level of water transfers is

when they are combined with the repayment rate provision. By increasing the cost for water that is used, the

tiered prices will probably decrease agricultural water

use and increase water transfers relative to a scenario

with only a water market and repayment rates. However, that effect holds only for the portion of water subject to higher-priced tiers.

Combination 3: Water Markets, 

Tiered Water Prices, and 

Environmental Surcharges

Environmental surcharges on agricultural and urban

users impose opposite incentives to change patterns of

water use. By effectively imposing a tax on water used

for agriculture, a surcharge tends to reduce the incentive

to use water and increases the incentive to transfer it.

Compared with a scenario with a water market alone,

imposing a surcharge on agricultural water use but not

on municipal and industrial use will probably cause

agricultural water use to decline and transfers to increase. 

If surcharges are in place for both agricultural and

urban users, the impact will be driven by the larger

charge. The addition of surcharges and repayment

rates that are higher for water transferred than for water

used in agriculture tends to reduce the incentive to

transfer water. Farmers will use more water and transfer less than in a scenario with water markets and tiered

water prices but no surcharges. That impact is determined by the surcharge; the tiered water prices have no

additional effect on water use or transfers as long as the

top tier is below the market price. An agricultural surcharge in that case reduces the magnitude of the

changes in quantity relative to a scenario with a surcharge for urban users but not for agricultural users.

Combination 4: Water Markets and 

Water Allocations for Public Purposes

Water allocations for public purposes guarantee that

water will be available for environmental uses and Na13. This discussion assumes that state water laws are consistent with allowing water conserved in response to tiered water prices (or other

policy tools) to remain in-stream. In some states, other irrigators

would have the right to divert that water. 
24 WATER USE CONFLICTS IN THE WEST August 1997

tive American tribes. Because most developed water is

fully allocated, allocations for "new" uses generally

must be taken from current users. Uniform methods for

taking the water, such as across-the-board decreases in

water for current users, generally do not result in a

least-cost approach to acquiring that water. Combining

the water reallocation policy with a water market allows

for an efficient allocation of the remaining water between agricultural and urban uses and within agriculture. 

Matching Reform Objectives

with Policy Tools

Whether any single policy tool or combination of tools

is appropriate will depend on the objective of the policy

reform. The actual effectiveness of a policy will depend on a myriad of details regarding the nature of the

problem and the specific provisions of the regulation or

legislation. Nevertheless, some general conclusions can

be drawn. Table 2 summarizes the probable effectiveness of different tools for meeting the three objectives

of reform.

Encouraging voluntary water transfers through a

water market will be most effective in improving the

allocation of water among competing economic uses.

Water markets may alleviate conflicts between urban

and agricultural water users as well as facilitate the

movement of water to higher-valued uses within the

agricultural sector. They will be much less effective in

areas where urban and agricultural water users are not

competing for a given water source. In some areas, environmental groups or government agencies might purchase water for environmental purposes, but because

environmental water uses typically do not generate revenues, society's preferences for environmental water

may not be fully represented in a water market. Water

markets can help increase payments to the federal Treasury because water transferred to municipal and industrial purposes is repaid at higher rates than irrigation

water, but that return to the Treasury would probably

be small. 

Water price reform can be an effective tool for encouraging water conservation and increasing the return

to the federal Treasury from investments in water projects. However, a legal foundation for price increases

may not exist under current laws and contracts. Moreover, the disposition of conserved water is uncertain. It

could be diverted by other farmers. If a water market is

in place, it could go to urban communities. Price increases would be effective in addressing environmental

problems only if water use was reduced in response to

the price increase and the conserved water remained inTable 2.

Potential Effectiveness of Selected Policy Tools for Alternative Conflicts and Reform Objectives

Policy Tools

Water Environmental Conservation

Reform Objectives Water Markets Price Reform Allocation Programs

Address Inefficient 

Allocations Between 

Economic Uses

Intra-agriculture Strong positive effect Possible positive effect No effect Possible positive effect

Agriculture/urban Strong positive effect Probably no effect No effect Uncertain effect

Address PublicPurpose Needs Possible positive effect Possible positive effect Strong positive effect Possible positive effect

Address Fairness

Issues/Deficit

Reduction Probably no effect Positive effect Negative effect Negative effect

SOURCE: Congressional Budget Office.
CHAPTER THREE ISSUES IN REFORMING FEDERAL WATER POLICY 25

stream, or if the price increase was an environmental

surcharge and the receipts were earmarked for spending

on environmental purposes. A surcharge would not

reduce the deficit, however, unless those funds financed

environmental projects that the federal government

would otherwise have undertaken.

Combining an environmental surcharge with a water market creates a source of revenue for the environment that can increase the potential of water markets to

address environmental objectives. However, that combination can reduce the effectiveness of price increases

and surcharges in encouraging farmers to conserve

water.

Of all the policy tools, allocating water for public

purposes is the most likely to protect those uses. In

contrast, reallocating water from current users reduces

the system's flexibility to address inefficiencies in allocating water among agricultural users or between agricultural and urban users. In addition, if the allocation

for fish and wildlife increases the nonreimbursable portion of project expenses, returns to the Treasury will

decrease and the federal deficit might increase under

that policy.

Conservation programs may be appropriate for

meeting environmental objectives in allocating water if

the conserved water remains in the river, but the water

might not stay there. For example, if a farmer who conserved water on one field used it to irrigate another,

total water consumption could increase and water for

environmental uses could decrease. Furthermore,

states' water rights may allow other irrigators to divert

any water freed up through conservation programs. In

that case, conservation programs could be effective in

addressing intra-agricultural inefficiencies but would be

less so in addressing the environmental objectives. 

Conservation programs, however, generally help

reduce problems with water quality. Contaminants

such as salinity and agricultural chemicals typically are

moved to rivers by excess irrigation water. Encouraging or requiring more efficient irrigation practices

would reduce that transport mechanism. Conservation

programs that rely on incentives, such as cost sharing

for improvements in irrigation systems, could increase

the cost of operating the Bureau of Reclamation's programs.

C

Chapter Four

Water Development, Use, Conflicts, and

Reform in California’s Central Valley

onditions in California's Central Valley illustrate both the success and the problems associated with the development of large-scale water

projects by the Bureau of Reclamation. California's

agricultural and urban economies are fueled by water

imported from northern California. As in many other

arid states, the location of demand for water does not

coincide with supplies: 75 percent of water use in California occurs south of Sacramento, but 75 percent of

water supplies are north of the city. Nearly 60 percent

of the surface water used in California originates in the

Central Valley rivers, and half of that is controlled by

the Bureau of Reclamation in its Central Valley Project.

Conflicts over the allocation of water in California

arise between agricultural water users, who historically

have received federal water and have built economies

based on having access to it; urban water users, who

increasingly are facing water shortages and restricted

opportunities for growth; and environmental uses,

which are suffering from insufficient water supplies.

Those conflicts are pressing on two fronts: among water uses and between geographic areas. Urban water

districts outside the Central Valley recently joined

forces with environmental interests in an attempt to

gain access to water currently allocated to farmers in

the Central Valley. 

Several urban water districts developed secure,

high-quality municipal water supplies early in the century. In each case, however, regional population growth

has exceeded the system's capacity or is projected to do

so within the planning horizon. In addition, each system is vulnerable to drought or environmental concerns.

The Los Angeles metropolitan area is a case in point:

the combination of population growth, reduced supplies

of water from the Colorado River, and reduced diversions from the Mono Lake region have increased the

pressure on remaining supplies. 

Conflicts and conditions in California include a

majority of those found in other western states. For

that reason, and because it was the focus of recent legislation attempting to address those conflicts, the Central Valley Project (CVP) is the subject of a case study,

presented here and in Chapter 5, designed to measure

the potential impact of water policy reform.

In addition to describing historical water use and

conflicts, this chapter provides context for empirical

analysis of provisions of the Central Valley Project Improvement Act by describing base conditions in the agricultural and urban sectors directly affected by the act.

Base conditions include historical levels of water supply in different uses and regions in California, and the

crops that farmers produce with the water allocated to

them. The conditions of supply and demand for urban

water districts not currently using CVP water create a

foundation for analyzing how municipal water districts

might take advantage of the act's provisions for water

transfers.

The Central Valley Project

and Its Stakeholders

By many measures, the Central Valley Project dominates all other projects and most states in its impor-
28 WATER USE CONFLICTS IN THE WEST August 1997

tance to the Bureau of Reclamation. Initially authorized

in 1935, the CVP now consists of 20 dams and more

than 500 miles of major canals that, in years with a normal water supply, store and deliver 7 million to 8 million acre-feet of water. It is the largest, most ambitious

water supply project in the country. Federal costs for

constructing it totaled $3.6 billion. Agricultural water

users are obligated to repay $1.3 billion, or 40 percent.

Municipal and industrial and power customers are obligated to repay another $1.1 billion. The remainder is

nonreimbursable and must therefore be paid by taxpayers. Thus far, water users have paid roughly $500 mil- 1

lion of their share of the costs. 2

Agriculture in the 

Central Valley

Water supplies developed by the Central Valley Project

have been instrumental in turning the valley, much of

which is essentially a desert, into one of the world's

most fertile agricultural regions. The CVP service area

encompasses 2.6 million acres of cropland managed by

16,000 full-time farmers and 6,000 part-time farmers.

Those farmers produce at least 60 different crops; three

dozen are produced in significant quantities. 

Most CVP farmers are organized into water districts that contract with the Bureau of Reclamation for

CVP water and operate the distribution systems that

deliver water to farms (see Box 1 in Chapter 2). Districts receive an average of 4.3 million acre-feet of project water in years without restrictions caused by

droughts. Another 2.3 million acre-feet are delivered to

farmers who hold their own rights to the water. In an 3

Table 3.

Selected Crops Produced with Water from the

Central Valley Project as a Percentage of Total 

U.S. Production, 1987

Percentage

CVP of U.S.

Crop Production Production

Alfalfa Hay 1,726,000 tons 2

Almonds 106,000 tons 32

Apricots 86,000 tons 76

Barley 2,933,000 bushels 1

Beans (Dry) 1,134,000 cwt 4

Cotton 1,422,000 bales 10

Grapes (Table) 377,000 tons 7

Grapes (Wine, raisins) 1,253,000 tons 31

Honeydew Melons 2,702,000 cwt 56

Lettuce 5,087,000 cwt 7

Onions (Dry) 6,708,000 cwt 15

Peaches 172,000 tons 14

Prunes 152,000 tons 16

Rice 12,100,000 cwt 9

Sugar beets 1,331,000 tons 5

Tomatoes (Processing) 3,653,000 tons 48

Walnuts 44,000 tons 18

Wheat 11,219,000 bushels 1

SOURCE: Congressional Budget Office based on data from Bureau of Reclamation, 1987 Summary Statistics: Crop,

Land, and Related Data (1987); and Department of Agriculture, Agricultural Statistics (1990).

NOTES: To avoid distortions brought about by drought conditions,

the table presents data for 1987, the most recent year for

which data are available and normal water conditions prevailed. However, figures for 1992&a drought year&are

very similar to those presented here.

CVP = Central Valley Project; cwt = hundredweight. 

average year, roughly 90 percent of the water the CVP

delivers is for agricultural uses. 4

Annual revenue from the sale of crops produced

with CVP water typically exceeds $3 billion. In 1990,

the CVP accounted for 41 percent of the gross value of

crops produced with the bureau's water throughout the

1. Bureau of Reclamation, Mid-Pacific Region, Central Valley Project:

Plant in Service Cost Allocation (Sacramento, Calif., September 30,

1994).

2. Smith Barney, "Central Valley Project Acquisition: Preliminary Valuation Analysis" (review draft prepared for the Central Valley Project

Authority, Sacramento, Calif., September 11, 1995). 

3. Farmers with rights to water from the Sacramento and San Joaquin

Rivers before the CVP was established are generally in districts known

as water rights holders (Sacramento River) or exchange contractors

(San Joaquin River). To obtain permission to divert the San Joaquin

River's flows to farmers on the east side of the valley, the Bureau of

Reclamation offered water from the delta to preexisting rights holders

in exchange for those water rights. Similarly, the bureau had to guarantee water to rights holders along the Sacramento River to gain permission to dam the river's flows. The bureau is obligated to deliver

water without charge to those districts. In addition, the bureau's ability

to reduce the quantity of water delivered is strictly limited. For example, when drought necessitated reductions of 75 percent for project

contractors, deliveries to rights holders and exchange contractors were

reduced by only 25 percent.

4. Congressional Budget Office estimate based on information contained

in Bureau of Reclamation, Summary Statistics: Water, Land, and

Related Data (1979-1991).
CHAPTER FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA’S CENTRAL VALLEY 29

West, 21 percent of the acres irrigated by its projects,

and 9 percent of the water it delivered to farms.

Crop Production. Much of the CVP water and acreage

is devoted to producing staple commodities such as

cotton, rice, alfalfa hay, and small grains. CVP farmers

grow roughly 10 percent of all U.S. cotton and rice (see

Table 3). Processing tomatoes (used for canned tomato

products such as paste, sauce, and ketchup), melons,

and grapes are also produced in large quantities and

represent a large share of the U.S. supply of those

crops. Smaller shares of the acreage produce a myriad

of higher-valued vegetables, fruits, and nuts.

The CVP has three regions: the Sacramento Valley, the western portion of the San Joaquin Valley, and

the eastern portion of the San Joaquin Valley served by

the Friant division (see Figure 1). Although CVP farmers have much in common, significant differences exist

among the regions in such characteristics as the water

supply conditions (price and quantity), climate, and

soils. Differences in those factors manifest themselves

most obviously in cropping patterns. For example,

nearly all the rice grown in California, but virtually

none of the cotton, is produced in the Sacramento Valley (the northern third of the Central Valley). To the

south, in the San Joaquin Valley, the growing season is

longer, warmer, and drier&conditions that are more

conducive to growing crops such as cotton, grapes, and

citrus trees. Average revenues and prevailing irrigation

practices also vary by region.

Prices of CVP Irrigation Water. The Bureau of Reclamation's water supply policies, described in Chapter

2, combine with California's state water laws to create

the particular set of conditions in the CVP. CVP water

contractors are parties to renewable 40-year water service contracts that provide for the delivery of water but

not necessarily for having the contractors repay the bureau for their share of the cost of the project by the end

of the contract term. More than 200 entities contract

with the bureau for water deliveries. The first of the

original contracts expired in 1989, more than one-third

have already expired, and nearly all will be up for renewal by 2008. Contract renewal presents the best opportunity to modify water prices.

Prices for water in the CVP contracts range from

$2 to $31 per acre-foot. Those prices were intended to

cover operation and maintenance expenses as well as a

portion of construction costs. Nearly all prices were

fixed in the original contracts and are not adjustable.

However, contract rates were insufficient to cover

O&M expenses, which have increased over the past

four decades. Thus, payments were not made for construction costs, and deficits accrued in the O&M accounts. Since 1986, water districts have been subject to

interest charges for O&M deficits. Nevertheless, those

deficits continue to grow. Outstanding O&M deficits

were $57 million for irrigation and $162 million for

municipal and industrial uses as of 1995.5

The contract prices the districts pay are below the

government's costs for the project as a matter of policy.

That policy evolved during the first half of this century,

when the bureau was attempting to develop water supplies to encourage settlement in the West. Full-cost

prices&prices that include construction costs, operation

and maintenance charges, and interest charges for payment obligations outstanding as of 1982 (see Box 2 in

Chapter 3)&also are less than the government's total

cost, but they are closer to it than contract rates. Fullcost prices vary based on the location of the district and

the age of the project component that is serving the district. In the CVP, full-cost prices range from $8 to

$255 per acre-foot, but those in 92 percent of all districts fall between $10 and $40 per acre-foot. Districts 6

in the Sacramento Valley are nearest the water source

and are charged the lowest prices&the contract rate for

most districts is $2 per acre-foot, and the full-cost price

is roughly $15 per acre-foot. The high value of $255

per acre-foot is for a suburban district in the Sierra

foothills that drastically reduced its supplies of water

for irrigation when renewing its contract. The second

highest value is $188 per acre-foot for out-of-basin

transfers in the San Felipe division, the project's newest

component. Its costs more closely reflect the marginal

costs of project development than do other cost measures because it is the only division whose costs were

not averaged with those of other CVP divisions.

Approximately one-third of all irrigation water in

the CVP is priced by water districts on a per-acre fee

assessment rather than on a per-unit usage basis.

5. Bureau of Reclamation, Mid-Pacific Region, 1997 Irrigation Water

Rates: Central Valley Project (Sacramento, Calif., 1997); Bureau of

Reclamation, Mid-Pacific Region, 1997 Municipal and Industrial

Water Rates (Sacramento, Calif., January 27, 1997). 

6. Bureau of Reclamation, 1997 Irrigation Water Rates.
30 WATER USE CONFLICTS IN THE WEST August 1997

Figure 1.

Water Projects and Agricultural Regions of California's Central Valley

SOURCE: Congressional Budget Office adapted from California Department of Water Resources, California Water Plan Update, vols. 1 and 2,

Bulletin 160-93 (Sacramento, October 1994).
CHAPTER FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA’S CENTRAL VALLEY 31

Where charges are based on usage, however, the prices

that farmers pay are often significantly greater than the

contract rates that water districts pay to the Bureau of

Reclamation. Nevertheless, prices do not necessarily

reflect either the value of water in alternative uses&a

factor that defines prices in well-functioning markets&or the environmental costs associated with water

development and use.

Water Supply for Irrigation. Crop production in the

Central Valley depends on the availability of water supplies. Average rainfall for the summer growing season

is generally less than two inches, but the minimum

amount of water needed to produce most crops is two to

four feet. The CVP is designed to move water both

temporally (to store winter runoff for use in the summer

and fall and to store water in wet years for use in dry

ones) and spatially (from the wet north to the drier

south). Nevertheless, six consecutive years (1987-

1992) of drought stretched the ability of even that massive project to produce uniform quantities of water in

each year.

In addition, conditions in the environmentally sensitive Sacramento-San Joaquin Delta constrain the

movement of water to farms and cities south of the

delta (see Figure 1). The delta region includes dozens

of islands and hundreds of miles of rivers, sloughs, and

channels and spans nearly 1,200 square miles. It has a

population of 200,000, contains more than 500,000

acres of farmland producing an average of $375 million

worth of crops per year, and supports 200 species of

birds, 115 species of fish and wildlife, and 150 species

of flowering plants.7

The delta region is also the hub of the CVP and an

important bottleneck for moving water south. The CVP

relies on the Sacramento River to move water as far

south as the delta, but to move the water farther

south&to the western San Joaquin Valley region or to

urban areas&it relies on massive pumps that lift water

out of the delta and into artificial canals. Water moving

through the delta to the pumps can reverse the river's

natural flow, thus allowing salt water from San Francisco Bay to move deep into the delta. Measures to

protect the delta ecosystem from reverse flows, problems with water quality, and the presence of endangered

fish limit the operations of CVP pumps.

Characteristics of the water supply vary by region.

Significantly more water is available in the Sacramento

Valley than in the other regions. That area is north of

the delta and thus is less subject to disruptions in water

supplies to protect the delta's ecosystem. The Friant

region is served by the Friant-Kern Canal, which diverts

the San Joaquin River. It is not directly linked to the

water supply of other CVP units, however, and so

Friant farmers are not affected by the limits on pumping at the delta. Because the Friant region is a relatively small drainage basin, its water supplies are more

variable than those of other CVP regions, but groundwater is more plentiful. Many water districts also have

rights to water from local streams.

Districts in the western San Joaquin Valley region

are most vulnerable to policy-induced reductions in water supply. Those districts depend on water exported

from the delta. They have fewer alternative water

sources than districts in the Friant region, have a lower

priority for Sacramento River water than most districts

in the Sacramento Valley, and are south of the delta and

therefore most affected by environmental restrictions on

water pumped from the delta.

Urban Water Use in California

Most of California's population lives outside the Central Valley, in regions with insufficient local water supplies. The state's population has been growing rapidly,

nearly doubling between 1960 and 1990. Broadly defined, the most populous areas are the southern California and the San Francisco Bay regions; in 1990, those

regions accounted for 22 million people, or 73 percent

of the state's total population.

Much of the water used for municipal and industrial purposes is supplied by regional wholesalers.

Those wholesalers generally develop water elsewhere in

the state and import it to the region. Several also receive water from at least one of the two big water projects in the state&the CVP and California's own State

7. California Department of Water Resources, Sacramento-San Joaquin

Delta Atlas (Sacramento, Calif., August 1987), p. 60.
32 WATER USE CONFLICTS IN THE WEST August 1997

Water Project (SWP). Although the Bureau of Recla- 8

mation historically has delivered less than 5 percent of

CVP water supplies to urban uses, nearly all major cities have or are developing the capability to receive CVP

water.

The reliability of the water supply is perhaps the

biggest issue facing the managers of urban water districts in California. For many, water supplies are sufficient unless drought or policy-induced reductions in

water deliveries occur. Several urban water districts,

however, forecast water shortages. Unique conditions

facing each district include water supplies, the system's

capacity and reliability, and current and projected demand.

At least conceptually, urban district managers have

several options for increasing their water supply, including developing new supplies by building new dams,

reclaiming saline water or wastewater, and purchasing

water from current users. Because the cost of developing new supplies exceeds the value of water used in

agriculture, the most economical of those options is to

purchase water from current agricultural users. For

example, the central coast city of Santa Barbara constructed an ocean desalinization plant in the mid-1980s

to meet its needs for a secure water source, and other

coastal communities are considering that option. The

cost of current technology for producing water of drinking quality from ocean water ranges from $900 to

$2,500 per acre-foot. Likewise, the estimated cost of 9

water from the proposed Auburn Dam ranges from

$416 to $451 per acre-foot. In contrast, the Bureau of 10

Reclamation will provide irrigation water to CVP water

districts for $2 to $31 per acre-foot in 1997.

Those costs, however, are not directly comparable.

Providing drinking water to municipal areas in the

southern and coastal portions of the state involves additional transportation, including pumping the water over

the Tehachapi or Coast Range Mountains and treating

the water. Those costs, which are not incurred in providing water for agriculture, may be significant&$40 to

$80 per acre-foot for treating the water and another $70

to $200 per acre-foot for transporting it. Neverthe- 11

less, the marginal value of water for agricultural use is

clearly below that for municipal use, and conserving

agricultural water generally represents a lower-cost alternative to developing new water supplies.

Southern California. The Metropolitan Water District

of Southern California (MWD) provides wholesale water for cities and counties serving 16 million people

throughout the southern part of the state. MWD receives most of its water from two sources: 1.2 million

acre-feet from the Colorado River via the Bureau of

Reclamation's Boulder Canyon Project, and 1.0 million

to 1.3 million acre-feet from the Sacramento River via

the California State Water Project. Water supplies

from both sources are uncertain. 12

In many years, MWD will have sufficient supplies

to meet its needs. However, in drought years, it may

come up short. MWD hopes to purchase water from

the Central Valley to help make up possible shortfalls

in its existing supplies, and it projects the need for that

water as often as one year in four (25 percent of the

time). Its objective is to purchase 300,000 acre-feet of

water, primarily through option contracts. Option 13

contracts take many forms but generally involve MWD

paying farmers a certain amount for the guarantee that

it can purchase a specified amount of water, at a given

price, if and when it needs it, or with a given frequency&for example, five times in a 20-year contract.

Those arrangements reduce the expense and uncertainty

involved in attempting to purchase water in a spot

(current-year) market during a drought, when demand

8. In the 1960s, California built the State Water Project to parallel the

CVP. The SWP provides water to farms on the eastern side of the

Central Valley and supplements water supplies for the Los Angeles

metropolitan area. The SWP is the second largest water system in

California, with one-third the capacity of the CVP. 

9. Metropolitan Water District of Southern California, Southern California's Integrated Water Resources Plan, vol. 1, The Long-Term Resources Plan, Report No. 1107 (Los Angeles: MWD, March 1996),

pp. 3-12.

10. Sacramento Metropolitan Water Authority and Bureau of Reclamation, American River Water Resources Investigation (draft environmental impact report/environmental impact statement, January 1996).

11. Personal communications from Dan Masnada, Executive Director,

Central Coast Water Association, May 13, 1994, and February 18,

1997; and Brent Walthall, Metropolitan Water District of Southern

California, February 18, 1997.

12. MWD is legally entitled to only about 500,000 acre-feet from the Colorado River but will continue to take about 1.2 million acre-feet as

long as other states are taking less than their allocation. SWP deliveries are in flux because of state and federal proceedings (discussed at

the end of this chapter) that may place constraints on the SWP for releases of freshwater and restrict pumping to protect water quality and

habitat in the delta.

13. Metropolitan Water District of Southern California, Southern California's Integrated Water Resources Plan.
CHAPTER FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA’S CENTRAL VALLEY 33

and prices are high and supplies are low, while simultaneously avoiding the cost of purchasing permanent water rights that would be surplus in many years.

San Francisco Bay Region. Several local water districts serve nearly 5.5 million residents in the San Francisco Bay region. That region comprises about 3 percent of the state's land mass and nearly 20 percent of its

population. The region imports roughly 66 percent of

the water used for urban purposes from surface water

systems developed in the Sierra Nevada Mountains 150

miles east of San Francisco and by hooking into the

CVP and SWP systems. Total water use in the region

is 1.2 million acre-feet per year. Supplies are generally

sufficient in normal years but are extremely vulnerable

to drought.

Water Uses for Fish and Wildlife

As regional water development and withdrawals have

increased over time, so have the environmental consequences. Those consequences affect not only fish and

wildlife dependent on the quantity or quality of river

flows but also waterfowl and other wildlife dependent

on off-stream wetland habitat. Fish populations in the

Central Valley have suffered significant declines: of 29

fish species native to the Sacramento and San Joaquin

Rivers and the delta, two species are extinct, three species are listed (or proposed for listing) as endangered or

threatened under the Endangered Species Act, three

more are listed by the state as a "species of special concern," another five are rare, and nine others are declining. Reduced outflows of freshwater from the delta&

resulting in part from the CVP's water diversions&are a

primary cause of decline in many of those species.14

Adult winter-run chinook salmon returning to the Sacramento River to spawn numbered 120,000 as recently

as 1969, but only 191 adults returned in 1991. In addition, the striped bass population, a species used as an

indicator of the health of the delta, was at an all-time

low in 1990, in part because of the extreme drought

conditions present at that time. However, those species

may be more vulnerable to drought conditions because

modifications in their habitat associated with water development had critically depleted population levels

even before the drought. 

Other problems for fish and wildlife related to water development include depletion of wetlands (with

consequences for migratory birds along the Pacific Flyway&the route most migratory birds follow when traveling over the western states) and, in the early 1980s,

selenium poisoning of waterfowl at the Bureau of Reclamation's Kesterson Reservoir and the Kesterson National Wildlife Refuge. The selenium was traced to the

storage of agricultural drainage water discharged from

farms in the San Joaquin Valley.

Large portions of the Central Valley were originally

wetland habitat, but most have since been drained and

developed for agriculture. The first survey, in 1906,

identified 3.7 million acres of wetlands in the Central

Valley. Wetland acreage has been declining since the 15

mid-1800s. The Swamp Lands Act of 1850 encouraged the conversion of wetlands to farmland. Dams

and levees constructed for flood control, irrigation, municipal water supplies, and power production contributed to the decline of natural wetlands.

As of 1986, only 319,000 acres of freshwater

wetlands remained, less than 10 percent of the original

quantity. Of that total, 86,700 acres are contained in

eight national wildlife refuges and four state wildlife

management areas. Central Valley wetlands provide

habitat for nearly 20 percent of the wintering waterfowl

in the continental United States. Approximately three

million ducks annually&half the duck population of the

Pacific Flyway&wintered in the Central Valley between

1981 and 1990. Species dependent on those wetlands

include eight species listed as endangered or threatened

under the Endangered Species Act.

The Central Valley Project

Improvement Act

The Central Valley Project Improvement Act has

largely been hailed as pathbreaking legislation. After

14. Department of the Interior, Fish and Wildlife Service, Recovery Plan

for the Sacramento/San Joaquin Delta Native Fishes (Portland, Ore.,

November 1996).

15. This section draws heavily from material in Chapter 11 of Department

of the Interior, The Impact of Federal Programs on Wetlands, vol. 2

(report to the Congress by the Secretary of the Interior, March 1994).
34 WATER USE CONFLICTS IN THE WEST August 1997

years of debate, the Congress passed the CVPIA as title

34 of the Reclamation Projects Authorization and Adjustment Act of 1992. Despite many reservations, 16

primarily directed at the CVPIA, President Bush signed

the omnibus water bill, which has 39 separate titles,

into law on October 30, 1992. Purposes of the CVPIA

include protecting, restoring, and enhancing fish, wildlife, and associated habitats in the Central Valley and

Trinity River basins and increasing water-related benefits provided by the CVP through expanded use of voluntary water transfers and improved water conservation, among others. The latter purpose reflects a recognition that the Bureau of Reclamation's water policy

generally, and operations of the CVP in particular, have

resulted in an inefficient allocation of water among uses

and users in California.

The provisions of the act span a broad range of

policy tools. All options for reforming the Bureau of

Reclamation's water supply policies identified in Chapter 3 are present in the CVPIA. The act's many provisions make it a good case study of the implications of

various options for reforming the bureau's water policies.

Provisions of the CVPIA

The various provisions of the Central Valley Project

Improvement Act generally fall into one of two categories: those that directly address the objective of preserving fish and wildlife and their habitats, and those

that address the objective of enhancing the CVP's benefits by increasing efficiency in all water uses. To accomplish those objectives, the CVPIA allows the project's contractors to participate in water markets,

changes the pricing structure for them, creates a restoration fund to finance activities that enhance fish and

wildlife and their habitat, and allocates water for instream uses. These and other provisions of the act are

discussed in detail in Appendix A.

Voluntary Water Transfers. The CVPIA grants any

CVP contractor the right to sell water to any user for

any (beneficial) use at any price. Contractors repay 17

the Bureau of Reclamation at rates that include interest

charges on all sales to non-CVP contractors and pay a

surcharge of $25 per acre-foot on all sales to non-CVP

urban uses. Transfers are subject to approval by the

Secretary of the Interior, who must ensure that the

transfer does not damage the areas from which the water originates, contracting districts, groundwater, and

fish and wildlife habitat. Transfers are also subject to

approval by the district if they involve more than 20

percent of the CVP water within that district. Transfers

are limited to water that would have been consumptively used or otherwise lost to future beneficial uses.

Tiered Water Prices. The CVPIA specifies tiered

prices for both agricultural and urban water users. The

first 80 percent of the water allotment is repaid at the

contract price (the price the bureau charges districts),

the next 10 percent at the average of the contract and

the full-cost price (which includes costs for construction and for operation and maintenance (O&M) as well

as an interest charge for financing construction costs),

and the last 10 percent at the full-cost price. Tiered

prices are imposed on districts rather than on individual

farmers. In addition, they do not go into effect until

long-term contracts are renewed, which cannot occur

until a programmatic environmental impact statement

(PEIS) is completed, currently scheduled for fall 1997.

Fish and Wildlife Restoration Fund. The CVPIA

establishes a fund to finance the restoration, improvement, and acquisition of habitats for fish and wildlife.

It authorizes appropriations of up to $50 million per

year for the Central Valley Project Restoration Fund.

The tiered water prices and surcharges on water transfers noted above, including the difference in repayment

rates, are deposited into the fund. In addition, the act

imposes surcharges of up to $6 per acre-foot on all agricultural water users and $12 on all urban water users

(in 1992 dollars&for example, those rates are $6.70

and $13.39 for 1997 and 1998); an additional charge of

16. For more information on the debate, see U.S. House of Representatives, Committee on Natural Resources, Legislative History, Miscellaneous Articles, and Background Information Related to Public Law

102-575, Reclamation Projects Authorization and Adjustment Act of

1992, Committee Print No. 4, parts 1 and 2 (prepared by the majority

staff of the House Committee on Natural Resources, November 1993).

17. The bureau's policy has evolved to the point that many water transfers

would have been allowed before the CVPIA. The main contribution of

the CVPIA in this regard may have been to allow transfers as a matter

of law rather than policy, to publicize that capability, and to make

clear the conditions under which transfers would be allowed. In addition, the CVPIA specifies that individual farmers, and not simply water

districts, have the right to transfer water. It may allow transfers from

exchange contractors, which would have been more difficult without

the CVPIA. That potential benefit is somewhat controversial, however. In contrast to the bureau's interpretation of the act, the exchange

contractors do not believe that the CVPIA applies to them.
CHAPTER FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA’S CENTRAL VALLEY 35

$4 per acre-foot on all contractors in the Friant region

(increasing to $5 as of October 1, 1997, and $7 after

1999); and an annual charge of approximately $9 per

acre-foot on districts that wait until their contracts expire before renewing them. The remainder of the 18

funding comes from power users.

Allocation of Water to Fish and Wildlife. Three separate provisions could eventually provide an annual

total of approximately 1.30 million to 1.40 million

acre-feet of water for fish and wildlife. First, the act

allocates 800,000 acre-feet of water to protect and enhance fish and wildlife habitat in Central Valley rivers

and the delta ecosystem. That water "comes off the

top" of CVP water supplies and is to be dedicated, in

consultation with the Fish and Wildlife Service, to

meeting the needs of fish and wildlife in the Sacramento

River/Delta system.

Second, the act allocates another 400,000 acre-feet

for wildlife in wetland reserves in the Central Valley.

Of that total, 260,000 acre-feet of CVP water are allocated immediately, bringing the total mandatory CVP

environmental allocation to 1.06 million acre-feet. The

remaining 140,000 acre-feet for the wetlands are to be

secured from voluntary transactions at the rate of 10

percent a year over the 1992-2002 period. The water

for fish and wildlife and for the reserves may be reduced by as much as 25 percent in drought years.

Third, the act protects water that comes from the

Trinity River. The CVP currently diverts water from

that river into the Sacramento River. Thus, increasing

in-stream flows in the Trinity River could require reducing the volume of water diverted out of the basin

and consequently would reduce CVP water supplies.

However, the CVPIA's Trinity River provision does not

specify a water quantity, and it is not yet clear what its

impact will be on CVP water supplies. The Fish and

Wildlife Service and the Bureau of Reclamation are

establishing objectives for in-stream flows in the Trinity River. In years with average rainfall, the in-stream

flow objectives would result in reductions in CVP supplies of 100,000 acre-feet to 200,000 acre-feet of water

under several alternatives being considered. The anal- 19

ysis in Chapter 5 uses the midpoint of those values, or

150,000 acre-feet, as the estimate of the impact of the

CVPIA's Trinity River provision.

Implementing the CVPIA

Implementation of the CVPIA is proceeding steadily.

The water transfer provisions are in effect, and the fish

and wildlife fund is active. Litigation by water contractors, however, initially impeded the allocation of water

for fish and wildlife. Many other provisions were designed to go into effect only over time. Several key

provisions, such as those involving water pricing structures and contract terms, cannot go into effect until contracts are renewed. The act directs the Bureau of Reclamation to complete a programmatic environmental impact statement before renewing or writing any longterm contracts. The bureau is working on the PEIS but

is behind schedule and did not meet the act's targeted

completion date of fall 1995. The PEIS is now scheduled for completion in fall 1997. Implementation of

provisions dependent on completing the statement has

likewise been delayed.

The Bureau of Reclamation has not yet promulgated any formal rules and regulations for implementing the act. It has written interim guidelines for many

CVPIA provisions, and those guidelines will form the

basis for the formal rules and regulations. However,

they have proved to be quite controversial in many

cases. Completion of the rulemaking process clearly

will be an important phase in fully implementing the

CVPIA.

The bureau delayed the rulemaking process to accommodate an administrative review of its options for

implementing key CVPIA provisions. The review,

commonly referred to as the Garamendi Process because it was initiated by Deputy Secretary John

Garamendi, identified 12 priority areas for consideration:

o Water transfers,

o Management of the restoration fund,

18. Contract prices cannot be adjusted until the contract has been renewed.

The annual charge provides an incentive for districts to renew their

contracts before they expire, if possible. See Appendix A for a more

detailed discussion of the early-renewal incentive.

19. Department of the Interior, Fish and Wildlife Service, Trinity River

Activities Update (Sacramento, Calif., September 1996).
36 WATER USE CONFLICTS IN THE WEST August 1997

o Management of the 800,000 acre-feet of water allocated to fish and wildlife,

o Criteria for water conservation,

o Contracting policies,

o Water supplies for wildlife refuges,

o Reliability of urban water supplies,

o Trinity River, 

o Stanislaus River, 

o San Joaquin River,

o Anadromous Fish Restoration Program, and

o Stakeholder process.

After several months and numerous meetings between

agency personnel, interested members of the public, and

agricultural, environmental, and urban stakeholders, the

bureau released draft proposals on each topic. Those 20

proposals identify areas of consensus as well as areas

of continuing disagreement. In some cases, they also

identify areas in which Congressional direction is

needed to resolve an issue. The first three issues&

water transfers, the restoration fund, and the allocation

of water for environmental purposes&were among the

most controversial and are discussed below. The final

issue&the stakeholder process&arose in recognition of

the desirability of a formal process through which

stakeholders would have input into the bureau's decisions about implementing the CVPIA. An ongoing

stakeholder "roundtable" is being formed to meet that

need.

Water Transfers. As of January 1997, no long-term

transfers of CVP water or transfers to a non-CVP contractor had occurred. Thus far, the bureau has received

only one proposal for a long-term transfer. In June

1994, the Metropolitan Water District and Arias Farms

(a dairy farm in the San Joaquin Valley) agreed that

MWD would purchase 4,600 acre-feet of water in

seven of 15 years at a price of $175 per acre-foot delivered, exclusive of transportation costs. MWD would

also have paid the surcharge of $25 per acre-foot that

the CVPIA imposed on transfers of water to urban users. However, the proposal proved to be so controversial that the parties withdrew it. Controversial issues

included the potential impact on the local community

and how Arias Farms' proposal to use groundwater to

replace the quantity of water transferred would affect

groundwater reserves.

Numerous short-term transfers have occurred between CVP water contractors within the same portion

of the CVP service area. Many probably would have

occurred without the CVPIA authority, but several

others&for example, the transfer of 35,000 acre-feet of

water from exchange contractors to Westlands Water

District in 1993&were possible only because of the act.

Many factors have contributed to the relative lack

of water transfers since the CVPIA was enacted. The

program is still new, and long-term deals are often quite

complicated. Inherent uncertainty in water supplies and

the system's capacity to conduct transfers must be addressed in negotiations about the quantity and price of

water to be transferred. Furthermore, in order to secure

the Secretary's approval, contractors must be able to

show that the potential local and environmental implications of transfers will be minimal. The bureau recently issued blanket approvals for short-term transfers

of water within two distinct CVP service areas&the

Friant division and the western San Joaquin Valley&

but no such approval exists for transfers between regions or outside the CVP. Very few potential participants have experience with negotiations for long-term

water transfers, and they need time to understand the

act and learn how to take advantage of its provisions.

The uncertain implications of regulations regarding endangered species and water quality in the delta may also

have contributed to the lack of transfers in the first five

years of the program.21

The necessary learning process may be prolonged

by confusion about the interpretation of certain portions

of the transfer provision. For example, the Bureau of

20. The proposals are available on the bureau's Mid-Pacific Region Web

page at http://www.mp.usbr.gov/cvpia.html.

21. Note, however, that the State Water Bank operated in 1991, 1992, and

1994 (an extremely wet year made it unnecessary in 1993) and successfully transferred water from north of the delta to buyers south of

the delta in each year. Also see Richard W. Wahl, "Market Transfers

of Water in California," West-Northwest Journal of Environmental

Law, Policy, Thought, University of California, Hastings College of

Law, vol. 1, no. 1 (Spring 1994), pp. 45-69.
CHAPTER FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA’S CENTRAL VALLEY 37

Reclamation identified four primary issues relating to

water transfers that need to be clarified in the formal

rules and regulations.22

Two issues involve the role of the contracting district in transfers negotiated with individual farmers: the

20 percent threshold that triggers a review and approval

of a transfer by the district (section 3405(a)(1)), which

was one of the sticking points in the failed transfer of

water between MWD and Arias Farms; and the requirement that transfers have "no unreasonable impact on

the water supply, operations, or financial conditions of

the transferor's contracting district" (section

3405(a)(1)(k)). Those issues point to a more general

question of the role of individual farmers in relation to

contracting districts in negotiating and approving transfers. District managers generally would prefer that the

district conduct the negotiations. In that case, the benefits from water transfers could be spread among all district farmers. Many farmers, however, would prefer to

conduct their own negotiations; they may feel that interference by the district would inhibit their ability to benefit financially from water transfers. 

A third issue identified as needing clarification is

how to calculate the amount of water that is consumptively used or irretrievably lost to beneficial use. That

issue must be resolved before potential market participants can discern the quantity of water eligible to be

transferred.

The fourth issue is the right of first refusal granted

to entities within the CVP service area for any agreement to transfer water outside the service area. Under

that provision, a CVP contractor agreeing to abide by

the terms and conditions of the agreement can take the

water instead of the transferee who is a party to the

agreement. The rulemaking process will attempt to

clarify the phrase "terms and conditions."23

The Central Valley Project Restoration Fund. The

Central Valley Project Restoration Fund is well established. In the first fiscal year of the program (1993),

the bureau collected $8.8 million in surcharges in the

Friant region. That money carried over to 1994, when

collections totaled $21 million, including an estimated

$6 million in Friant surcharges. Collections for 1995

and 1996 were $34 million and $47 million. Power

users accounted for slightly more than one-quarter of

those amounts. Actual 1994 outlays were $9.3 million.

Outlays were $24 million in 1995 and $30 million in

1996.24

As required in the act, approximately two-thirds

(67 percent) of the outlays in each year are used for

restoring and improving the habitat and acquiring more

water, with the remainder used for other restoration

activities that benefit fish and wildlife. The latter category contains specific activities defined in the act.

Most such activities involve structural improvements to

control water temperatures or minimize damage at diversion dams, intake canals, and pumps and include

requirements for cost sharing by the state. The Bureau

of Reclamation intends to use $11 million to acquire

water for the environment. However, many stakeholders are unhappy with the bureau and the Fish and

Wildlife Service's priority-setting policies for fund expenditures. Issues of greatest concern involve the inflexibility and inefficiency of annual expenditure

goals. For example, the benefit of purchasing water 25

in wet years is minimal, but it may be quite high, and

quite expensive, in dry years. Carrying the money over

from wet years for use in dry ones could increase the

total benefit of the fund. Similarly, the money might be

spent more efficiently if the 67/33 split was met on a

multiple-year, rolling-average basis rather than in each

year.

22. These issues, and others, were raised during the Garamendi Process

meetings. A summary of the issues and the bureau's response are

available on the bureau's Web page (http://www.mp.usbr.gov/cvpia/

proposals/transfer.html).

23. For another discussion of issues to be addressed, see Wahl, "Market

Transfers of Water in California," pp. 49-69.

24. Budget of the United States Government, Fiscal Year 1997: Appendix, pp. A-568 and A-569.

25. Bureau of Reclamation, CVPIA Administrative Proposal: Restoration

Fund (draft, May 31, 1996), available at http://www.mp.usbr.gov/

cvpia/proposals/restfnd.html.
38 WATER USE CONFLICTS IN THE WEST August 1997

Allocation of Water for Environmental Purposes.

The Bureau of Reclamation allocated the required

800,000 acre-feet to in-stream fish and wildlife purposes in 1993. In 1994, however, it dropped the allocation by the maximum 25 percent, to 600,000 acre-feet,

because of the drought conditions. The impact of that

water allocation was borne almost exclusively by contracting districts in the western San Joaquin Valley because they are south of the delta. In addition, the bureau has increased the amount of water it diverts from

rivers for wildlife refuges&wetlands that benefit ducks,

birds, and other wildlife as well as fish&as specified in

the CVPIA and is actively seeking to acquire additional

water for them.

The allocation of water for fish and wildlife is perhaps the most contentious of all CVPIA provisions.

Several water districts in the western San Joaquin Valley have challenged those allocations in court. In the

spring of 1994, a federal district court judge issued a

preliminary injunction against the bureau's implementation of those provisions. However, the federal gov- 26

ernment won its appeal of the decision, and the allocation of water for fish and wildlife proceeded on schedule.27

Debate is ongoing about the intent of the in-stream

water allocations for fish and wildlife under the CVPIA

in relation to those under the Endangered Species Act.

Some people interpret the CVPIA as stating that all

water used to protect ESA-listed fish (including water

not delivered because of constraints on pumps or fish

screens) should be counted against the 800,000 acrefeet of water set aside in the act. Others argue that water allocated under the ESA should be in addition to the

800,000 acre-feet. The latter view is based on the assumption that the CVPIA was designed to provide additional protection for fish and wildlife. If the 800,000

acre-feet is credited to the ESA, then the CVPIA is redundant and gives no more water than could have been

taken under existing laws. The act itself appears to

take a middle ground. Sections 3406(b)(1)(c) and

3406(b)(2) state that the water is to be used to improve

anadromous fish populations (those that leave the sea

to breed in fresh water), which would include the ESAprotected salmon, as well as to meet "additional obligations under the Federal Endangered Species Act." Yet

another aspect of the debate is whether water that is

used to enhance fish habitat in the upper stretches of

the river but is then diverted for agriculture farther

downstream is counted against the 800,000 acre-feet.

In practice, the answer will probably lie between

those competing views. In the act's first year, approximately half of the 800,000 acre-feet were used to protect threatened or endangered fish. For example, the

Bureau of Reclamation had to shut down the pumps

because too many endangered winter-run chinook

salmon had been drawn into the pumps and killed.

That shutdown caused a loss of 300,000 acre-feet of

water that otherwise would have gone to farmers in the

San Joaquin Valley. The formal rulemaking process

will attempt to clarify the system for managing and accounting for the water. On December 15, 1994, representatives of all relevant parties signed an agreement&

the Bay/Delta Accord&that provides guidance on that

issue for a three-year period. However, this is one area

in which the Garamendi Process was unsuccessful in

attaining consensus and, with the accord expiring at the

end of 1997, is likely to be hotly contested in the near

future. The bureau is planning public meetings and

discussions with stakeholders in an attempt to resolve

this issue.

The Regulatory Environment

for Implementing the CVPIA

Other federal and state legislation and regulatory actions, such as those involving the Endangered Species

Act or the Clean Water Act, will influence both the allocation of water in California and the health of fish

and wildlife populations and their habitat. By affecting

26. The judge held that the bureau must comply with the National Environmental Protection Act before it can allocate to fish and wildlife any

water that would otherwise go to agricultural uses. That act requires

completion of an environmental impact statement before undertaking

any federal action with potentially negative environmental impacts.

The districts argued that removing water from agriculture could adversely affect the environment in the agricultural service area. The

CVPIA provisions involved in the lawsuit are section 3406(b)(2),

which sets aside 800,000 acre-feet of water for fish and wildlife purposes, and section 3406(d), which guarantees increased water deliveries for national wildlife refuges and wildlife management areas in the

Central Valley. Those provisions are discussed in greater detail earlier

in the chapter and in Appendix A.

27. The appellate court judge ruled that language in the CVPIA requiring

the Secretary of the Interior "upon enactment of this title" to allocate

and manage the water for fish and wildlife indicates that the Congress

did not intend for the allocation to be postponed while the bureau was

completing an environmental impact statement.
CHAPTER FOUR WATER DEVELOPMENT, USE, CONFLICTS, AND REFORM IN CALIFORNIA’S CENTRAL VALLEY 39

baseline levels of water, those laws and regulations may

significantly change the impact of various CVPIA provisions. In addition, obligations to allocate water to

fish and wildlife will overlap, and attributing specific

consequences to a given piece of legislation will be difficult.

Endangered Species Act

Two fish species with habitat in the Sacramento River

have been listed under the federal Endangered Species

Act&the winter-run chinook salmon as endangered, and

the delta smelt as threatened. An "endangered" species

is in danger of extinction throughout all or a significant

portion of its range; a species listed as "threatened" is

likely to become endangered within the foreseeable future. The California splittail has also been proposed for

listing as a threatened species.

As a federal agency, the Bureau of Reclamation

must operate its facilities in a manner that will not further jeopardize the survival of those species. The ESA

also prohibits any action that leads to a "take," loosely

defined as the harming or killing of a member of a

listed species. Consequently, water must be released at

certain times of the year to help flush juvenile fish

downstream and to maintain a hydraulic barrier to prevent salt water from San Francisco Bay from entering

the delta; more water must be stored in Shasta Dam to

maintain the cold water temperatures necessary to protect salmon eggs; and operation of pumps that convey

water south of the delta into the San Joaquin Valley and

to urban areas in southern California may be curtailed if

the number of fish drawn into the pumps, which is considered a take, exceeds acceptable levels.

As a result of takes that exceeded acceptable levels,

only 50 percent of water deliveries to which CVP contractors south of the delta were entitled were made in

1993, a year classified hydrologically as a wet year. In

other words, water supplies in 1993 were sufficient to

meet all contractual and environmental obligations, but

agricultural water supplies were reduced because the

pumps were shut down at key points in the year. The

ESA also was invoked in 1991 to reduce water supplies

to the Glenn-Colusa Irrigation District in the Sacramento Valley after fish screens on its canal intake failed

to prevent endangered fish from being drawn into the

system that delivers water for irrigation. Similarly, 28

districts receiving water from the CVP's TehamaColusa Canal may be adversely affected by restrictions

on the operation of the Red-Bluff diversion dam that

are necessary to protect endangered winter-run

salmon.29

The extent to which the requirements of the CVPIA

will overlap with those of the ESA is unclear. Depending on the ultimate resolution of that issue, implementing the ESA could increase the quantity of water allocated to fish and wildlife beyond that required by the

CVPIA.

The Clean Water Act and the State's

Bay/Delta Proceedings

After nearly a decade of unsuccessful attempts to establish standards for water quality for the San Francisco

Bay/Sacramento-San Joaquin Delta regions, as required

by the Clean Water Act, the California State Water Resources Control Board initiated the so-called Bay/Delta

estuary proceedings in 1987. The central purpose of

the proceedings was to develop and implement water

quality standards needed to protect beneficial uses

within the Bay/Delta estuary and by users who divert

water from rivers flowing into the delta.

The first step in the proceedings was to establish

water quality standards. The next step is to identify the

water flows necessary to achieve the quality objectives.

In that step, the board will also determine which water

users will be required to help meet those standards and

how the standards are to be implemented. In other

words, the outcome of those proceedings could alter

existing water allocations. Thus, so long as the process

is ongoing, districts' water supplies will remain uncertain.

California's inability to establish water quality standards for the bay and delta automatically triggered a

28. Bureau of Reclamation, Mid-Pacific Region, Biological Assessment

for U.S. Bureau of Reclamation Long-Term Central Valley Project

Operations Criteria and Plan (Sacramento, Calif., October 1992),

pp. 7-4 and 7-5.

29. Department of Commerce, National Oceanic and Atmospheric Administration, National Marine Fisheries Service, "Biological Opinion for

the Operation of the Federal Central Valley Project and the California

State Water Projects" (Silver Spring, Md., February 12, 1993).
40 WATER USE CONFLICTS IN THE WEST August 1997

requirement under the Clean Water Act that the Environmental Protection Agency (EPA) step in and set

standards of its own. In December 1993, it did just

that, issuing a draft ruling on water quality to protect

beneficial uses in the Sacramento-San Joaquin Delta.

That action was the culmination of a lengthy process in

which environmental groups sued EPA, claiming that it

had been negligent in its responsibility to find California's water quality standards inadequate and issue standards of its own. EPA estimates that approximately

450,000 acre-feet of water will have to be released to

meet water quality standards in the delta. Whether 30

part of the 800,000 acre-feet set aside by the CVPIA

can be used to meet those requirements is unclear. 

Bay/Delta Accord

The Bay/Delta Accord is a federal/state agreement that

protects water quality for the San Francisco Bay/

Sacramento-San Joaquin Delta environment for three

years, through 1997. Signed by California Governor

Pete Wilson, Secretary of the Interior Bruce Babbitt,

EPA Administrator Carol Browner, and several representatives of interested parties on December 15, 1994,

the agreement is the outcome of negotiations between

state and federal agencies and representatives of interested agricultural, urban, and environmental organizations. It specifies guidelines for pumping water from

the delta that vary with water supply conditions. The

agreement also addresses the regulatory environment.

It supersedes EPA's 1993 decision on water quality for

the Bay/Delta area; EPA withdrew the standards set

pursuant to the Clean Water Act after the state adopted

a plan consistent with the agreement (as required by the

agreement). The agreement also specifies that CVP

water used to meet those new standards will be credited

against the 800,000 acre-feet the CVPIA allocates to

fish and wildlife. It also guarantees that no additional

water will be taken to protect any species not currently

protected by the ESA, even if that species is listed as

threatened or endangered in the three years covered by

the agreement.

30. Environmental Protection Agency, Region 9, Water Management Division, Regulatory Impact Assessment of the Final Water Quality

Standards for the San Francisco Bay/Delta and Critical Habitat

Requirements for the Delta Smelt (San Francisco, December 15,

1994), with technical assistance from Jones & Stokes Associates, Sacramento (JSA 94-130).
T

Chapter Five

Quantitative Analysis of the Central Valley

Project Improvement Act

he provisions of the Central Valley Project Improvement Act that are most likely to affect

agricultural and urban water use include facilitating water markets, allocating water to environmental

purposes, and directly increasing water prices (environmental surcharges, tiered water prices, and adjustments

in the repayment rate). The Congressional Budget Office's (CBO's) analysis finds that water markets would

benefit both farmers and urban consumers. The largest

impact arises from the environmental water allocations.

Farmers' income falls in years when the water supply

has to be reduced to provide water for fish and wildlife.

In contrast to the environmental water allocations, price

changes and surcharges have only minor effects. Urban

consumers are better off with the entire CVPIA package but not as well off as they would be with water

markets alone.

For the entire package of CVPIA provisions, CBO

estimates that farmers' gross crop revenues would decline by $105 million a year (or about 5 percent) under

normal water supply conditions and in the absence of

other regulatory effects on the water supply. Given that

reduction in gross revenues, farmers' net revenues

(gross revenues less the cost of inputs) could drop by

$44 million. Offsetting that cost would be the $7 million in proceeds that farmers would gain from water

transfers. Regional income, which includes farmers'

income as well as that of people directly and indirectly

involved in the agricultural sector, would decrease by

$69 million. The environment would benefit from the

water allocated to it. CBO did not estimate the value of

those environmental benefits, but some studies indicate

that they could exceed $100 million a year. The benefit

to urban consumers would increase by $11 million relative to a pre-CVPIA base case, although $7 million of

those benefits would be paid to farmers. In addition,

the Central Valley Project Restoration Fund collects

$30 million from the agricultural and urban sectors to

benefit fish and wildlife.

Although the CVPIA's effect on farmers may be

relatively small on average—average gross crop revenues could fall by 5 percent in a year with average

rainfall—the effects are not distributed uniformly. The

resource base varies among geographically distinct agricultural regions. Thus, farmers' flexibility to address

changes in the water supply also varies. In general,

farmers with more options for selecting which crops to

grow, how to irrigate, and where to get their water will

better withstand reductions in water supply and increases in prices. Farmers with a larger initial water

supply and those who are protected from reductions in

supply by institutional priority or geographic separation

from problem areas will probably receive a greater

share of benefits from the provisions governing water

transfers.

Estimates of the costs of CVPIA provisions are

sensitive to assumptions about hydrologic conditions

and the regulatory environment. In a dry year, the cost

of the CVPIA to agriculture could double, but the benefits to urban consumers would be higher than in a year

with an average water supply. In a wet year, however,

the cost to agriculture could be significantly less, perhaps limited to moneys paid into the restoration fund.
42 WATER USE CONFLICTS IN THE WEST August 1997

For example, in 1995, the Bureau of Reclamation delivered all of its water allocations under contract to agriculture and met all water allocations for environmental

purposes under the CVPIA. In 1996, all users received

100 percent of supplies, except for agricultural contractors in the western San Joaquin Valley, who received 95

percent.

The estimates of the cost of CVPIA provisions are

also sensitive to assumptions about the amount of water

allocated to the environment by other laws. The Clean

Water and Endangered Species Acts could require water flows to protect water quality in the delta in addition

to the 800,000 acre-feet of water set aside by the

CVPIA for fish and wildlife. If so, the cost of the

CVPIA provisions could increase.

The environmental sector will benefit from increased water flows and expenditures on the CVPIA's

projects to restore wildlife habitats. As fish and wildlife populations increase, benefits associated with those

resources will also increase. Benefits will accrue to

people who use the resource—such as participants in

commercial and recreational fishing industries, birdwatchers, and duck hunters—as well as to those who

derive benefits simply from knowing that the resource

exists and is healthy. Because such benefits are inherently difficult to evaluate, CBO does not attempt to do

so. Rather, the analysis describes variations in costs

associated with achieving specific objectives for providing water and money for environmental purposes. It

also describes the least-cost approach for achieving a

given environmental objective. Although CBO has not

estimated the benefits, this chapter describes the environmental services provided by resources in the Central

Valley, along with alternative estimates of possible

benefits.

Empirical Framework

CBO developed a computer model to simulate economic responses to the provisions of the CVPIA. The

model focuses on three agricultural regions (the Sacramento Valley, the west side of the San Joaquin Valley

(western SJV), and the Friant division) and two urban

regions (the southern California urban sector served by

the Metropolitan Water District and the San Francisco

Bay region).

The agricultural component of the model describes

changes in gross revenues from crop production associated with changes in water deliveries to the three agricultural regions. That measure does not incorporate 1

the impact of changes in the cost of inputs, such as irrigation technology and management, in response to

changes in levels of water use, but it does incorporate

adjustments in cropping patterns (including fallow

acres) and yields and any resulting changes in the price

of agricultural products. It also allows farmers to

change their mix of inputs and estimates the effect of

that adjustment on gross crop revenues. The advantages and disadvantages of using changes in gross

rather than net revenues as a measure of the impact on

agriculture are described in Box 3.

The value of water to urban users is measured as

the amount that urban districts pay for the water plus

the amount that urban consumers would be willing to

pay over and above the amount they actually do pay.

For urban areas in southern California, the estimate of

demand is based on analysis by the Metropolitan Water

District. For the San Francisco region, the estimate is 2

based on two studies of the East Bay Municipal Utilities District, adjusted by CBO to reflect regional water

use.3

1. For this portion of the model, CBO used a time-wise autoregressive

and cross-sectionally heteroskedastic method to econometrically estimate multioutput revenue functions for each of the three regions.

Econometric analysis is a statistical means of examining the impact of

a change in one variable (water) while holding the effects of all other

variables constant. The data for this analysis are crop and water use

reports submitted by water districts to the Bureau of Reclamation for

the 1979-1991 period. Those data are summarized in Bureau of Reclamation, Summary Statistics: Water, Land, and Related Data (1979-

1991). Districts in the Friant region that receive only small portions of

their total water use from the CVP were excluded from the analysis.

2. Metropolitan Water District, Municipal and Industrial Water Use in

the Metropolitan Water District Service Area: Interim Report No. 4

(report prepared by Planning and Management Consultants, Ltd., Carbondale, Ill., June 1991), updated with 1990 census figures provided

by Grace L. Chan, Principal Engineer, Water Supply and Demand

Branch, Metropolitan Water District, June 1994.

3. The resources used to develop the estimate of the demand function

include Anthony Fisher and others, Optimal Response to Periodic

Shortage: Engineering/Economic Analysis for a Large Urban Water District, Working Paper 629 (Berkeley: University of California,

Department of Agricultural and Resource Economics, June 1992);

Jack A. Weber, "Forecasting and Measuring Price Elasticity," Journal

of the American Water Works Association, vol. 81 (May 1989), pp.

57-65; and California Department of Water Resources, California

Water Plan Update, vols. 1 and 2, Bulletin 160-93 (Sacramento, October 1994).
CHAPTER FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 43

Box 3.

Using Changes in Gross Revenues as a Measure of the Impact of

Water Policy Reform on Agriculture

Whether the change in gross revenues or net revenues (profits)

is the preferred measure of the impact of policy reform depends on the objective of the analysis and the mobility of resources. Net revenues are better when the impact on farmers

is of most interest, but gross revenues may be a better measure

of the change in income for the agricultural sector as a whole

that would arise directly from policy changes. 

The difference between changes in gross and net revenues

is the change in production costs. The real question, then,

revolves around how changes in costs should be accounted

for. Changes in costs represent a real cost (or saving) to farmers but may not reflect a net change for the regional economy.

Increased costs to a farmer—for example, the cost of additional fertilizers, pesticides, or irrigation technology—imply

increased sales for the input supplier. Conversely, reduced

purchases of inputs may imply lower costs to the farmer (and

thus produce higher net revenues for a given change in gross

revenues) but can reduce revenues in the supply industry. The

impact on input supply and processing industries (canning,

packing, and freezing) is an important component of the regional economic effects of policy reform but should be

counted only after adjusting for the portion of the industries'

revenues that is spent outside the region.

Inferring Regional Economic Effects and Farmers' Net

Revenues from Changes in Gross Revenues. If total costs

do not change, a change in net revenues is identical to a

change in gross revenues. If total costs change in proportion

to the change in gross revenues, the change in net revenues

can be deduced from the change in gross revenues. For example, production costs average 54 percent of gross revenues in

the Central Valley, so net revenues average 46 percent of

gross revenues. If that percentage remains constant, a $100

million change in gross revenues implies a $46 million change

in net revenues. 

Changes in gross revenues are the appropriate measure for

examining the regional economic impact of policy changes.

When multiplied by relevant factors (multipliers), a change in

gross revenues indicates the total benefit from agricultural production as it moves through processing and trade channels.

Effects on employment, induced effects of changes in household income (demand for goods and services from the community), and secondary effects (including changes in income

and expenditures by individuals participating in the processing

and input industries) can all be inferred from changes in gross

revenues. A secondary-effects multiplier, which incorporates

the effects on input suppliers and their employees but does not

include induced effects, accounts for the fact that input supply

and processing industries spend a portion of their revenues

outside the region. For example, if an input supplier sells $100

worth of fertilizer to a farmer in the Central Valley but purchases that fertilizer from a firm in Iowa, only the difference

between what the farmer pays and what the input supplier

pays adds to the valley's economy. Thus, a multiplier of 0.66

implies that for every $1 change in gross farm revenues, the

direct regional economic impact is 66 cents.

Changes in Production Costs. The total variable cost of

production will probably change for most farmers in two ways

as they adjust to water policy reforms. First, as water becomes

more scarce or more expensive (either because real prices rise

or because the opportunity cost of using water rises), farmers

may fallow a portion of their land. Although farmers will still

pay fixed costs associated with fallowed land, variable costs

will decline significantly. Savings from forgone input expenses will offset the reduction in revenue resulting from

forgone crop output. In that case, the change in gross revenue

will overstate the impact on farmers.

The second type of adjustment occurs on land remaining

in production. On those acres, production costs will probably

increase. In the face of water policy reform, farmers will probably adjust their crop mix toward crops with a higher value

and a lower level of water use. Those crops often have higher

input costs. Farmers might also choose to irrigate remaining 1

crops more carefully, either by increasing management and

labor for a given technology or by switching to more efficient

irrigation technologies such as specialized pipes, sprinklers, or

drip systems. If those adjustments increase total costs, the 2

change in gross revenues will understate the policy's effect on

farmers.

Implications of Input Mobility. If inputs are geographically

mobile, changes in input expenses may imply only short-term

or distributional effects; they may not result in changes in the

nation's economic efficiency. For example, farm labor is typically thought to be relatively mobile. If farmers hire fewer

laborers because of reductions in the water supply in the Central Valley, employment might decline there, but those laborers

could move to other agricultural regions in the Southwest or

Northwest. If they find jobs in those other regions, the full

value of their forgone wages in the Central Valley will overestimate the cost of the adjustment. Other inputs, such as capital, are less mobile. In the very long run, only land is a truly

immobile input.

1. For information on average input costs, see Environmental Protection Agency, Region 9, Water Management Division, Regulatory Impact Assessment of the Final Water Quality Standards

for the San Francisco Bay/Delta and Critical Habitat Requirements for the Delta Smelt (San Francisco, December 15, 1994),

with technical assistance from Jones and Stokes Associates, Sacramento, Calif. (JSA 94-130), p. 5-4.

2. For information on irrigation technology costs, see Dennis

Wichelns and others, "Labor Costs May Offset Water Savings of

Sprinkler Systems," California Agriculture, vol. 50, no. 1 (February 1996), pp. 11-18.
44 WATER USE CONFLICTS IN THE WEST August 1997

Results of the Empirical

Analysis

The model estimates the annual costs and benefits of

the CVPIA's provisions for allocating and transferring

water under several scenarios incorporating institutional and physical constraints. The costs of changes

in water allotments are modeled as estimates of forgone

agricultural revenues from crop production resulting

from reductions in water use in the agricultural sector.

Table 4.

Effect of the Central Valley Project Improvement Act on Agricultural Water Use and Revenues

Western

San Joaquin Sacramento Total

Valley Valley Friant Agriculture Water Market

Water Crop Water Crop Water Crop Water Crop Water Water

Use Revenues Use Revenues Use Revenues Use Revenues Transfers Revenues a

(Thousands (Millions (Thousands (Millions (Thousands (Millions (Thousands (Millions (Thousands (Millions

Scenario of acre-feet) of dollars) of acre-feet) of dollars) of acre-feet) of dollars) of acre-feet) of dollars) of acre-feet) of dollars)

Baseline 1,906 1,111 2,045 344 1,198 1,191 5,149 2,645 n.a. n.a.

Change from Baseline

Water Markets -120 -8 -123 -9 0 0 -243 -17 243 18

Change from Scenario with Water Markets

Water Markets 

and Water 

Allocated for 

Environmental 

Purposes

800,000 

acre-feet -375 -31 -383 -32 0 0 -758 -62 -42 0

1.2 million 

acre-feet -541 -47 -594 -52 0 0 -1,134 -99 -66 0

1.35 million 

acre-feet -595 -52 -668 -60 -12 -1 -1,276 -113 -74 0

Change from Scenario with Water Markets and 1.2 Million Acre-Feet of 

Water Allocated for Environmental Purposes

Surcharges 35 3 47 5 0 0 82 8 -82 -9

Surcharges 

and Rate 

Increases 47 5 64 6 0 0 110 11 -110 -11 b

Change from Baseline

Package 

of CVPIA 

Provisions -613 -51 -653 -54 0 0 -1,266 -105 66 7 c

SOURCE: Congressional Budget Office.

NOTE: n.a. = not applicable.

a. To urban areas in southern California.

b. Tiered water prices and repayment rates.

c. Includes 1.2 million acre-feet of water allocated for environmental purposes.
CHAPTER FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 45

The effects on the agricultural economy will not be

uniform. The benefit from using water is greater in

some areas than in others. Farmers in the regions

where water is scarce may purchase water from farmers

in regions where it is more plentiful and may subsequently see increases (or smaller decreases) in their

crop revenues. However, most of the benefits from water markets will accrue in urban areas.

Baseline

For its analysis, CBO developed a baseline scenario

that describes levels of water use and associated benefits using estimates from the simulation model for a

year with average rainfall under pre-CVPIA conditions.

Gross revenues from crop production using 5.15 million acre-feet of CVP water total $2.6 billion (see Table

4). As a result of institutional constraints that inhibit

the movement of water between regions, the marginal

value of water differs for each region. The implicit

value of water in the Friant region is significantly

higher (over $100 per acre-foot) than in the western

SJV and Sacramento regions ($65 to $70 per acrefoot). Baseline levels of water use in the urban areas

generate consumer benefits of $4.5 billion (see Table

5). Of that amount, $3.3 billion accrues in southern

California and $1.2 billion in the San Francisco Bay

region.

Table 5.

Effect of the Central Valley Project Improvement Act on Urban Water Use

Water Transfersa

Benefits to Amount Price

Urban Consumers (Thousands (Dollars Cost of Water

(Millions of dollars) of acre-feet) per acre-foot) (Millions of dollars)

Baseline 4,500 n.a. n.a. n.a.

Change from Baseline

Water Markets 30 243 74 -18

Change from Scenario with Water Markets

Water Markets and Water Allocated 

for Environmental Purposes

800,000 acre-feet -3 -42 91 0

1.2 million acre-feet -6 -66 101 0

1.35 million acre-feet -7 -74 105 0

Change from Scenario with Water Markets and 1.2 Million Acre-Feet of

Water Allocated for Environmental Purposes

Surcharges -10 -82 99 9

Surcharges and Rate Increases -14 -110 98 11 b

Change from Baseline

Package of CVPIA Provisions 11 66 98 -7 c

SOURCE: Congressional Budget Office.

NOTE: n.a. = not applicable.

a. To urban areas in southern California.

b. Tiered water prices and repayment rates.

c. Includes 1.2 million acre-feet of water allocated for environmental purposes.
46 WATER USE CONFLICTS IN THE WEST August 1997

CBO developed a set of policy scenarios to examine the effects of the CVPIA provisions. The first scenario models a water market. Each subsequent scenario

adds a provision or increases the level of one of the provisions. The scenarios are:

o Water markets alone;

o A combination of water markets and three different

levels of water allocations for fish and wildlife

(800,000 acre-feet, 1.2 million acre-feet, and 1.35

million acre feet);

o A combination of water markets, an allocation of

1.2 million acre-feet of water for fish and wildlife,

and surcharges (includes charges of $6 per acrefoot for agricultural water use, $12 per acre-foot

for urban water use, and $25 per acre-foot for water transferred to urban regions); and 

o A combination of water markets, an allocation of

1.2 million acre-feet of water for fish and wildlife,

surcharges, and other water rate increases (tiered

water prices and higher repayment rates for water

that is transferred). This scenario represents the

full set of CVPIA provisions analyzed in this study.

Economic Impact of Water Markets

The first set of policy simulations examines the implications of CVPIA provisions that allow for water transfers. CBO assumes that water can be transferred out of

and within the Friant region but not into it because of

physical constraints of the delivery system. The capacity of the system also limits the quantity of water transferred into urban areas. According to the California

Department of Water Resources, limited capacity exists

for transferring water to the San Francisco Bay region.

Water districts in that area will probably purchase water only if drought or other environmental legislation

limits their ability to take their full allotment. During a

drought, the system can transfer about 300,000 acrefeet a year. Capacity for transferring water to the Metropolitan Water District in southern California ranges

from 600,000 to 1.4 million acre-feet, depending on the

quantity of water available.4

Given the system's constraints, CBO estimates that

farmers would transfer 243,000 acre-feet of water, or 5

percent of the water used for agriculture in the baseline,

to urban uses at a price of $74 per acre-foot (see Table

5). Those sales would reduce gross agricultural crop

revenues by $17 million from baseline levels (see Table

4); farmers' revenues from the water sales would be

$18 million.

The benefits of urban areas would increase by $30

million in that scenario. Of those benefits, $18 million

would be transferred from urban consumers in southern

California to agriculture as water payments.

Economic Impact of Allocating Water

for Fish and Wildlife

This scenario examines the costs and adjustments related to the allocation of water to fish and wildlife. The

baseline for this analysis is a scenario that allows water

transfers but allocates no additional water to fish and

wildlife uses. The cost to agriculture of allocating water for environmental uses is expressed as forgone gross

crop revenues. Both average and marginal costs increase as environmental allocations increase (see Figure

2). CBO did not analyze the benefits of providing water for fish and wildlife purposes, but those benefits are

discussed at the end of this chapter.

Three sets of environmental water allocations,

based on various CVPIA provisions, are examined in

more detail: 800,000 acre-feet for fish and wildlife, 1.2

million acre-feet that includes protected water from the

Trinity River and an increase in water for wildlife refuges (level-2 supplies), and 1.35 million acre-feet that

includes a higher volume of water that must be purchased for wildlife refuges (level-4 supplies). The 5

4. California Department of Water Resources, California Water Plan

Update, vol. 1, p. 317.

5. Level-2 and level-4 water needs are defined in Bureau of Reclamation,

Report on Refuge Water Supply Investigations (March 1989). They

represent 66 percent and 100 percent, respectively, of the water supply

needed for full development of habitats in the Central Valley refuges

and wildlife management areas. The CVPIA requires that refuges be

guaranteed level-2 water supplies immediately and level-4 supplies by

2002.
500 1,000 1,500 2,000

0

20

40

60

80

100

120

Average Cost

Marginal Cost

Water Allocated to the Environment

(Thousands of acre-feet)

Dollars per Acre-Foot

CHAPTER FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 47

Figure 2.

Cost of Environmental Water Allocations Under

Average Water Supply Conditions, as Measured

by Reductions in Agricultural Revenues

SOURCE: Congressional Budget Office.

cost of providing the first 800,000 acre-feet of water

for the environment is $62 million in forgone agricultural revenues (see Table 4). That value represents 2

percent of the net benefits realized without the environmental water allocation. Agricultural water use declines by 758,000 acre-feet in that scenario, and water

transfers to urban areas in southern California decline

by 42,000 acre-feet from the 243,000 acre-feet that

would be transferred without the environmental allocation. 

The cost of allocating an additional unit of water to

the environment (the marginal cost) will increase as the

total quantity allocated increases. In fact, increasing

the environmental allocation by 50 percent, from

800,000 acre feet to 1.2 million acre-feet, increases the

cost to agriculture of that allocation to nearly $100

million—an increase of $37 million, or approximately

60 percent. Efficiently allocating the reduction of 1.2

million acre-feet in the water supply within agriculture

reduces the use of water by 541,000 acre-feet in the

western San Joaquin Valley and by 594,000 acre-feet in

the Sacramento Valley. Water transfers to southern

California decline by 66,000 acre-feet, from 243,000

acre-feet to 177,000 acre-feet. That allocation reduces

crop revenues by 16 percent in the Sacramento Valley

and by 4 percent in the western SJV region. Payments

for the remaining water transfers to urban areas at a

price of $101 per acre-foot increase net agricultural

benefits by $18 million.

Allocating 1.35 million acre-feet of water for environmental uses reduces agricultural revenues by $113

million. That represents a reduction of 4 percent relative to revenues realized without such an allocation.

Economic Impact of Provisions for

Pricing Water

Provisions that increase water rates—surcharges for the

fish and wildlife restoration fund, tiered water prices,

and requirements that transferred water be repaid at

different rates—will have two general effects: they will

reduce net benefits to the agricultural and urban sectors

by the amount paid in additional charges, and they will

change the relative benefits of agricultural and urban

water use. Consequently, the quantity of water used in

the two sectors also will change. Those changes, however, are estimated to be relatively small. 

Adding surcharges to the scenario with water markets and an environmental water allocation reduces water transfers to urban uses by 82,000 acre-feet (see Table 4). Keeping that water in agriculture increases revenues from crop production by $8 million. Gains in

farmers' revenue are offset by a loss of $9 million from

water sales. That loss arises because a small reduction

in the market price reduces the payment for each unit

transferred and because fewer units are transferred.

Urban benefits from water use decrease by $10

million, but urban consumers pay $9 million less for

water transfers. The net decrease in consumers' benefits is thus $1 million. In addition, agricultural and urban water users pay $23 million in surcharges for the

restoration fund. Despite levels of water use that are

similar to the other regions, payments to the fund are

lowest in the Sacramento Valley because tiered prices

and surcharges apply only to deliveries of CVP water to

regular contractors (termed project water). On average,

nearly two-thirds of all CVP water delivered to farmers

in the Sacramento Valley is delivered to water rights

holders. That so-called nonproject water would not be

subject to the price increases.
48 WATER USE CONFLICTS IN THE WEST August 1997

Adding rate increases (tiered water prices and repayment rates) to the scenario with surcharges, water

markets, and an environmental water allocation amplifies the results described above. Water transfers fall by

an additional 28,000 acre-feet—a total of 110,000

acre-feet less than without the surcharges or rate increases (see Table 4). Urban benefits fall another $4

million, to $14 million less than without the additional

charges (see Table 5). Payments to the restoration fund

increase to $30 million.

Economic Impact of a Package of

CVPIA Provisions

In a year with average rainfall, the total cost to CVP

farmers of the combined provisions for a water market,

for allocating 1.2 million acre-feet of water for environmental purposes, and for imposing all rate increases is

about $125 million (5 percent of baseline revenues).

That number includes a reduction of $105 million in

revenues from agricultural production, partially offset

by $7 million in proceeds from water sales. In addition,

farmers contribute $27 million to the restoration fund.

The decline of $105 million in gross revenues implies a reduction of $44 million in net revenues, assuming that cost and revenue changes move in tandem.6

Thus, the direct cost to farmers of using less water is

roughly $38 million. The direct cost of the CVPIA results in a chain reaction of purchases among firms,

caused by and including the changes in farmers' purchases of inputs and sales of crops. 

A comprehensive measure of those direct and indirect effects of the CVPIA on the regional economy

should include effects on suppliers of agricultural inputs as well as changes in farmers' revenues, but it

should not include the portion of revenues that is spent

outside the state (see Box 3). The Department of Commerce's regional earnings multipliers translate changes

in gross revenues into one such measure. The regional 7

earnings multiplier for agriculture in California is

0.6557, which means that household earnings in California will fall by 66 cents for every $1 decrease in

gross revenues from crops. Thus, the $105 million reduction in gross revenues caused by the CVPIA translates to a reduction of roughly $69 million in state income. That measure does not include induced effects

—that is, the changes in purchases by households resulting from changes in the income of employees of

affected firms.

The total benefit to urban consumers is $11 million, but $10 million of that is used for water purchases

and CVPIA surcharges. A total of $3 million is paid to

the restoration fund for the $25 surcharge, the surcharge of $12 per acre-foot that municipal and industrial users pay, and repayment rates for water transfers.

Another $7 million compensates agricultural contractors for the water transfers. Thus, the increase in net

benefits to consumers from those provisions is $1 million.

Throughout this analysis, total water use in the

Friant region remains unchanged. Despite the impact

of the reduced availability of water in the western San

Joaquin Valley and the Sacramento Valley and the price

increases, the implicit value of water in the Friant region remains higher than that for the other regions. The

CVPIA prohibits taking water from the Friant region to

comply with the provisions that allocate water to fish

and wildlife. In addition, Friant's geographic location

inhibits its ability to transfer water. For that reason,

and because of the relatively high values for water use,

transferring water out of the region is not economically

efficient. The Friant region is not completely unaffected, however; water is transferred within the region,

and restoration payments are higher there than in other

regions.

The package of CVPIA provisions also benefits the

environment. It increases the amount of water for instream flows and temperature control (approximately 1

million acre-feet intended primarily for fish habitat),

increases the water available for wetlands (250,000 to

400,000 acre-feet intended primarily for waterfowl hab6. CBO calculates net revenues to be 36 percent of gross revenues in the

Sacramento Valley and 49 percent in the San Joaquin Valley. Those

calculations rely on Bureau of Reclamation figures reported in Environmental Protection Agency, Region 9, Water Management Division,

Regulatory Impact Assessment of the Final Water Quality Standards

for the San Francisco Bay/Delta and Critical Habitat Requirements

for the Delta Smelt (San Francisco, December 15, 1994), with technical assistance from Jones and Stokes Associates, Sacramento, Calif.,

(JSA 94-130), p. 5-4.

7. Department of Commerce, Bureau of Economic Analysis, Regional

Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II) (May 1986).
CHAPTER FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 49

itat), and improves the habitat for fish and wildlife with

money from the restoration fund. The costs of the

CVPIA can be viewed as a lower bound to the environmental benefits the act needs to provide to achieve positive net social benefits. If environmental benefits (including benefits derived from the restoration fund)

equal or exceed the impact on agricultural and urban

water users, the act's net value to society will be positive. In a recent paper on the subject, Loomis estimates

the value of providing 260,000 acre-feet (level-2 water)

to wildlife refuges alone to be $79 million. 8

The CVPIA mandates that the 1.2 million acre-feet

of water allocated for environmental purposes be taken

"off the top" of CVP water supplies. In contrast, the

additional 140,000 acre-feet needed to provide wildlife

refuges with the higher level-4 water supplies must be

acquired voluntarily. The Bureau of Reclamation must

compete with urban districts and water-short agricultural districts to acquire that water. The analysis suggests that if that water comes solely from CVP water

users, the bureau will have to pay roughly $14 million—the difference between gross revenues with 1.2

million acre-feet of environmental water and those with

1.35 million acre-feet—to fully compensate those users

for the additional 150,000 acre-feet of water for wildlife refuges.

Sensitivity of the Results to the

Availability of Water

The CVPIA's impact on agricultural and urban users is

likely to be sensitive to factors that change initial water

supply conditions. For the analysis reported above,

CBO assumed an average water supply and the absence

of other legislation that might alter the availability of

water. Such assumptions isolate the effects of the

CVPIA from those of a drought, the Clean Water Act,

and the Endangered Species Act. To determine how

those assumptions affect the results, CBO repeated the

analysis using alternative assumptions.

The Implications of a Fluctuating Water Supply.

Hydrologic conditions vary significantly from year to

year. Conditions range from critically dry years, such

as those experienced in California between 1987 and

1992, to wet years, such as 1983 and 1995, in which

significant flooding may occur. 

Large water projects provide some degree of protection against those fluctuations. Figure 3 illustrates

fluctuations in CVP water supplies over time. The

CVP's storage capabilities isolated most farmers from

reductions in the water supply during the first three

years of the drought (1987-1989). By 1990, however,

reservoirs were at extremely low levels, and the Bureau

of Reclamation was forced to limit water deliveries.

Water supplies to farmers in the western San Joaquin

Valley were cut by 50 percent in 1990 and were only 25

percent of contract allotments in 1991 and 1992. Supplies for water rights holders in the Sacramento Valley,

urban water districts, and wildlife refuges were between

25 percent and 100 percent of historical averages in

those years. In the Friant region, only water with the

highest priority was delivered from 1988 to 1992.

In contrast, 1995 was an extremely wet year, and

water supplies to all users were 100 percent of normal,

even after satisfying all of the CVPIA's allocations for

fish and wildlife. Thus, in wet years, the cost the

CVPIA imposes on agriculture may be limited to payments to the restoration fund; the act would not reduce

crop revenues in those years.

The costs of the act's provisions would be significantly greater than those estimated above if drought

conditions persisted, although transfers would have a

bigger net benefit. To illustrate potential differences in 9

results under drought conditions, CBO repeated the

analysis using the following assumptions:

o CVP water supplies to agricultural contractors are

reduced by 50 percent.

o Water rights holders and exchange contractors receive 75 percent of their allocations.

o Urban contractors in the San Francisco Bay region

receive 75 percent of their entitlements.

8. John Loomis, "Water Transfer and Major Environmental Provisions of

the Central Valley Project Improvement Act: A Preliminary Economic

Evaluation," Water Resources Research, vol. 30, no. 3 (March 1994).

9. Environmental damages related to water projects also increase in

drought years. Therefore, benefits from the CVPIA would probably

increase in those years. However, CBO has not estimated those benefits.
San Luis Canal

DeltaMendota

Canal

New Melones

Dam

Trinity River

Diversion

Millions of Acre-Feet

Folsom Dam

Friant-Kern

Canal

1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993

0

2

4

6

8

10

50 WATER USE CONFLICTS IN THE WEST August 1997

Figure 3.

Total Amount of Water Delivered by the Central Valley Project, 1949-1995

SOURCE: Congressional Budget Office using data from the Bureau of Reclamation, Mid-Pacific Region, Water Operations Record Keeping

(WORK) system for applicable years; and personal communication from the Public Affairs Office, July 18, 1996.

NOTE: The shaded vertical bars indicate periods of drought. The arrows indicate the year in which a project was completed.

o The Metropolitan Water District's water supplies

are reduced by 10 percent (reflecting a 75 percent

allocation from the State Water Project).

Under those conditions, the water allocation for environmental uses is also reduced by 25 percent, and the

constraints on water imported to the San Francisco region are relaxed by 50,000 acre-feet. 

CBO developed a drought baseline to isolate the

impact of a drought from that of the CVPIA. The

drought baseline shows that the cost of a drought of the

severity outlined above would be $266 million relative

to the original baseline. Implementing the CVPIA under extreme drought conditions raises the cost to agriculture—including lost crop revenues, proceeds from

water sales, and payments to the restoration fund—by

$258 million, an 11 percent reduction from the drought

baseline. Crop revenues decline by $275 million in that

scenario. Even though a relatively small quantity of

water (only 50,000 acre-feet) is transferred, farmers'

proceeds from water sales are $23 million—higher than

in any other scenario—because of the high marginal

values for water. Payments from agriculture to the restoration fund total $6 million.

In contrast to the previous scenarios, the drought

scenario includes reduced water use in the Friant region

because neither the Sacramento Valley nor the western

San Joaquin Valley can provide the amount of water

needed. The least-cost solution to the problem of providing water for fish and wildlife is to significantly reduce water deliveries in the Sacramento Valley, but the

bureau's obligation to holders of senior water rights

(farmers whose rights to the water predate the Bureau

of Reclamation's) means that those deliveries will probably be reduced by no more than 25 percent. The burden of providing that water therefore falls most directly

on farmers in the western San Joaquin Valley. However, the drought baseline includes less than 900,000

acre-feet of water—the quantity the CVPIA allocates to

environmental uses in drought years—for that region.
CHAPTER FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 51

Therefore, at least some portion of the environmental

water must come from elsewhere in the Central Valley

Project.

Moreover, farmers in the Friant region have better

access to alternative water sources—both groundwater

and surface water from local streams—than do farmers

in the western SJV region and thus will lose less revenue from reductions in the water supply in the short

run. Consequently, the least-cost solution to that problem includes reducing water use in both the Friant region and the western San Joaquin Valley. Because

Friant water users are not directly liable for water for

fish and wildlife, reductions in their water use would

probably come in the form of water transfers purchased

by western SJV farmers.

The cost of the drought scenario would be lower if

rights holders in the Sacramento Valley contributed a

greater share of the environmental water. Although the

authority for taking that water may exist under the Endangered Species Act, a more likely outcome is that

voluntary water transfers would occur between Sacramento water rights holders and western SJV farmers.

That benefit is not attributed to the CVPIA, however,

because the right of water rights holders to transfer that

water conveys from state law rather than the CVPIA in

most cases.

The value of water transferred to urban use is significantly higher under drought conditions. Because

demand for water in urban areas is relatively inflexible,

the impact of drought-reduced base supplies in the San

Francisco region is quite large. The benefit to urban

users of offsetting those losses with transfers of CVP

water is therefore quite large as well; benefits increase

by $31 million for transfers of 50,000 acre-feet. In the

drought scenario, transferring water to urban areas in

southern California is not optimal. The Metropolitan

Water District's water supply from the Colorado River

buffers it from the effects of the drought felt in northern

California, so the value of water for MWD consumers

is lower than that for urban consumers in the San Francisco region or for the more severely water-constrained

farmers in the San Joaquin Valley.

Additional Regulatory Obligations. Both the Clean

Water Act and the Endangered Species Act could inhibit the ability of the Bureau of Reclamation to divert

CVP water—for example, by placing restrictions on

pumps drawing water from the delta for export. The

ESA prohibits the taking of any member of a species

listed as threatened or endangered. However, the federal agencies responsible for carrying out the ESA—the

National Marine Fisheries Service and the Fish and

Wildlife Service—often issue incidental take permits,

thus recognizing that a certain number of accidental

takes may be unavoidable. The agencies have issued

incidental take permits for a fixed quantity of fish for

the delta pumps. Those pumps inadvertently draw juvenile winter-run chinook salmon, an endangered species, along with water during normal operations. If the

permitted incidental take is reached, the pumps may be

shut down until the juveniles are thought to be no longer present near the pumps. Restrictions on pumping

are also imposed to minimize reverse flows in the delta

that can confuse migrating fish and cause them to swim

toward, rather than away from, the pumps. 

Restrictions on delta pumping may reduce the supply of water for farmers in the western San Joaquin

Valley and limit the capacity for north-to-south transfers of water for agricultural or urban uses. The pumping restrictions would generally not affect water use in

the Sacramento Valley, although they would limit the

region's ability to participate in water transfers. Friant

districts would also be unaffected, except that their water might become more valuable for transfer to urban

uses because of their location south of the delta.

Another possible impact of regulation is a requirement to increase outflows from the delta. Water flowing west out of the delta helps to maintain a hydraulic

barrier to salt water intruding from San Francisco Bay,

thus improving water quality in the delta. It can also

help flush juvenile salmon out of the Sacramento River

and delta systems, thus improving survival rates. Water used for that purpose may be unavailable for diversion south of the delta. Both the CVP and the California State Water Project would probably be required to

contribute water for that purpose. If CVP contractors

contributed water to protect the delta environment in

addition to the water dedicated to environmental purposes by the CVPIA, their costs could rise.
52 WATER USE CONFLICTS IN THE WEST August 1997

Environmental Benefits and 

Issues in Estimating Their

Values

Environmental benefits from the CVPIA will include

improved habitat for flora and fauna that spend at least

a portion of their life cycle in the rivers and wetlands of

the Central Valley. Central Valley watersheds support

more than 120 distinct fish species. Some, such as the

fall run of the Sacramento River chinook salmon, have

commercial importance. Others are not plentiful or

valuable enough to support a commercial fishing industry but are valued as recreational and sport fisheries.

Still others, such as the federally protected delta smelt,

provide neither commercial nor recreational values but

may be important links in the food chain or serve as

indicators of the general health of the aquatic ecosystem. The health of those fisheries depends on the

volume, temperature, salinity, and timing of water

flows in the Central Valley's rivers and the delta. Central Valley wetlands also provide important habitat for

waterfowl wintering in California. As with riverine

ecosystems, the quality and quantity of wetland habitat

is directly affected by the quality and quantity of available water supplies.

Economic benefits of the CVPIA will arise from

increases in economic activities making use of the fish

and wildlife populations affected by the act. A primary

example of a use value is the commercial fishing industry. Revenues from commercial fishing activities will

probably increase if improvements in the habitat

brought about by the CVPIA result in large fish populations and thus in larger harvests. Benefits from economic activities are relatively straightforward to measure because the market establishes a value for the activity. Recreational activities, such as sportfishing and

duck hunting, also generate economic values, but those

values cannot be measured directly. 

Values not related to use may also increase. Nonuse values are based on the awareness of the existence

of a good that is not a function of the actual use of that

good. For example, people may derive benefits from

knowing that an endangered species is saved from extinction (existence value), even if they never come in

contact with it. Other benefits accrue to people who do

not actually use a resource but want the option of doing

so in the future (option value) or want their children and

future generations to have that option (bequest value).

Several methods exist for estimating the value of nonuse benefits, but the procedures are even less straightforward than those for calculating use values.

CBO does not quantify benefits to the environment

from the CVPIA, but some studies indicate that those

benefits could be large. The nature of those benefits

and some estimates of their economic value are presented below to provide context for the cost analysis

above. However, the range of estimated values is extremely large. Moreover, the biological relationships

describing changes in fish and wildlife populations associated with changes in water flows or habitat restoration projects are not yet available. For example, the

CVPIA includes a stated goal of doubling the anadromous fish population. It is not clear, however,

whether the CVPIA provisions examined in this study

will be sufficient to achieve that goal. Nor are estimates available of changes in salmon populations as a

result of those provisions. For those reasons, CBO

does not attempt to tie estimates of environmental benefits to CVPIA provisions.

Use Values

The CVPIA's environmental provisions may significantly improve the quality of commercial and recreational fisheries in central California. Important commercial fisheries whose populations may increase as a

result of the CVPIA are salmon, striped bass, starry

flounder, bay shrimp, and Pacific herring. Important

recreational fisheries include salmon, striped bass,

green and white sturgeon, American shad, white catfish,

and starry flounder. The CVPIA may also improve

wetlands.

Commercial Fisheries. Several fish species have been

plentiful enough to sustain commercial and recreational

fishing industries, but annual catch rates have fallen

dramatically in recent years. Between 1976 and 1992,

for example, commercial fishers caught an average of

580,000 chinook salmon along the California coast annually. Historically, an estimated 66 percent of those 10

10. Marc B. Carey, Mark E. Evans, and James E. Wilen, Water and California's Salmon Resources: A Review (report prepared for the U.S.

Department of Agriculture, Economic Research Service, Natural Resources Division, September 30, 1994).
CHAPTER FIVE QUANTITATIVE ANALYSIS OF THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 53

fish originated in the Central Valley. In recent years, 11

Central Valley salmon have become even more important, accounting for 90 percent of chinook salmon

caught by commercial fishers in California waters between 1990 and 1995. Statewide, the value of the commercial salmon fishery peaked at $42 million in 1988

but plummeted to $9 million in 1991. Those values

represent 21 percent and 7 percent, respectively, of the

total value for all fish commercially caught in California in 1988 and 1991.12

A 1994 study by the Environmental Protection

Agency provides estimates of the value of increased

water flows in the delta for commercial and recreational

fisheries. In that study, EPA estimated that protecting

water quality in the delta and designating an average of

450,000 acre-feet of water for environmental uses there

would increase the salmon population enough to raise

the commercial salmon catch by between 7 percent and

81 percent—an increase of 41,000 to 468,000 fish.

The large variance in that range reflects scientific uncertainty about the relationship between water flows

and the abundance of salmon. The average value per

salmon is estimated to be $41. The direct benefits of

improved water quality to the commercial salmon fishery are thus $2 million to $19 million annually.13

Those numbers convert to a benefit of roughly $4 to

$43 per acre-foot.

Recreational Fisheries. According to one study, people in northern and central California took 2.5 million

saltwater sportfishing trips in 1985 and 1986. Of that 14

total, 38 percent were for salmon or striped bass, the

two recreationally important species most dependent on

water conditions in the Sacramento River/Delta.

Estimates of the value of water for recreational

fisheries are lower than those for commercial fisheries.

The EPA estimates that the increase in the salmon population resulting from the CVPIA provisions protecting

the delta would increase sportfishing trips for salmon

by between 4,000 and 39,000 per year, or roughly 0.4

percent to 4.0 percent of historical averages. The annual value of those additional recreational fishing trips

ranges from $300,000 to $2.4 million. Those values 15

imply an estimated benefit of $1 to $5 per acre-foot.

Another study estimates the value of in-stream water to

recreational fishers in the Central Valley at $4 to $38

per acre-foot (in 1980 dollars), depending on the location. 16

A different study examines benefits from achieving

the CVPIA's goal of doubling the anadromous fish populations. It estimates that doubling the salmon populations would increase benefits for recreational fishers by

$10 million to $25 million per year. 17

Wetlands. Available wetland habitat can be improved

by acquiring land and using it to create new habitat or

by providing water to improve the quality of existing

wetlands. The CVPIA partially addresses the latter

need by providing guaranteed water supplies for wildlife refuges in the Central Valley. Incentives to encourage farmers to manage cropland as a wetland habitat in

winter may also enhance wildlife populations.

Estimated values of the benefit to hunters of increased water deliveries for wildlife refuges in the San

Joaquin Valley range from $1 to $20 per acre-foot, according to one study. Another study estimates the 18

benefit of increased water supplies at all Central Valley

wildlife reserves for hunters, fishers, and bird-watchers

at $300 per acre-foot. Both studies measure use val- 19

ues only.

11. Congressional Budget Office estimate based on data in Pacific Fishery

Management Council, Review of 1995 Ocean Salmon Fisheries

(Portland, Ore.: PFMC, February 1996).

12. Environmental Protection Agency, Regulatory Impact Assessment of

the Final Water Quality Standards, p. 6-10.

13. Ibid., p. 6-14.

14. Ibid., p. 6-17.

15. Ibid., p. 6-21.

16. LeRoy T. Hansen and Arne Hallam, "National Estimates of the Recreational Value of Streamflow," Water Resources Research, vol. 27, no.

2 (February 1991), pp. 167-175.

17. Carey, Evans, and Wilen, Water and California's Salmon Resources,

p. 44.

18. Joseph Cooper and John Loomis, "Testing Whether Waterfowl Hunting Benefits Increase with Greater Water Deliveries to Wetlands,"

Environmental and Resource Economics, vol. 3 (1993), pp. 545-561.

19. Michael Creel and John Loomis, "Recreation Value of Water to

Wetlands in the San Joaquin Valley: Linked Multinomial Logit and

Count Data Trip Frequency Models," Water Resources Research,

vol. 28, no. 10 (October 1992), pp. 2597-2606.
54 WATER USE CONFLICTS IN THE WEST August 1997

Nonuse Values

The presence of endangered and threatened species in

Central Valley rivers and wetlands, as well as the international importance of the wetlands to the Pacific Flyway, suggest that nonuse values may be an important

component of benefits from the CVPIA. Estimates of

nonuse values tend to be significantly larger, and more

controversial, than estimates of use values. In contrast

to use values, which typically accrue to residents within

a limited area near the site, nonuse values may accrue to

a much larger portion of the population. 

The estimate of a relatively small value per person

may become quite large when it is multiplied by the

number of people potentially affected. For example,

one study estimated an average annual benefit of $254

per household for use and nonuse values from improving Central Valley wetlands and $183 per household

from restoring the San Joaquin River salmon fishery.20

Multiplying those figures by 9.8 million households in

California yields estimates of $2.5 billion and $1.8 billion for the total annual benefit from improving wetlands and the salmon fishery, respectively. Those values convert to estimates of $6,100 per acre-foot for all

use and nonuse values (including existence, option, and

bequest values) associated with improved Central Valley wetlands and $41,000 per acre-foot for water to

restore salmon to the San Joaquin River.

Caution should be taken in evaluating those estimates of nonuse benefits, for two reasons. First, recent

studies have shown that values from alternative environmental programs within a region may be substitutes

for each other. Consequently, it would be misleading to

add estimates for the value of improving habitat in different areas in the Central Valley. For example, researchers using the same data as Loomis and colleagues

found the average household value for both improved

wetlands and improved salmon fishery to be $229 per

household. Using the same conversions provided by 21

Loomis and colleagues yields estimates of benefits

ranging from $4,800 to $5,000 per acre-foot for allocating enough water to complete the projects for improving the wetlands and the salmon habitat.

A second issue involves a potential upward bias in

estimates of nonuse benefits. At one point, the Department of Commerce recommended that estimates of nonuse values derived with contingent valuation methods

be multiplied by 0.5. The department dropped that 22

recommendation in the final rules and regulations defining the appropriate use of that method. But even with

that calibration factor, the estimates for nonuse values

reported here are two orders of magnitude greater than

the estimates for use values.

20. John Loomis and others, "Willingness to Pay to Protect Wetlands and

Reduce Wildlife Contamination from Agricultural Drainage," in Ariel

Dinar and David Zilberman, eds., The Economics and Management

of Water and Drainage in Agriculture (Boston: Kluwer Academic

Publishers, 1991). That study used a telephone survey to derive an

estimate of the value for an average California household. 

21. John P. Hoehn and John Loomis, "Substitution Effects in the Valuation of Multiple Environmental Programs," Journal of Environmental

Economics and Management, vol. 25, no. 1 (July 1993), pp. 56-75.

22. Department of Commerce, National Oceanic and Atmospheric Administration, "Oil Pollution Act of 1990: Proposed Regulations for Natural Resource Damage Assessments," Federal Register, vol. 59, no. 5,

part 2 (January 7, 1994), pp. 1062-1191.
T

Chapter Six

Lessons for the West

he Central Valley Project Improvement Act

contains many policy tools with which to address the problems related to the Bureau of

Reclamation's policies throughout the West. However,

the extent to which lessons from the analysis of the

CVPIA extend to policy changes for the bureau's other

projects is an open question. The answer depends, in

part, on regional similarities and differences in underlying factors. 

In general, urban water users, the environment, Native Americans, and taxpayers can all benefit from reforms that allow market forces to allocate water, that

allocate water to public purposes, and that increase returns to the Treasury from water projects. The real

question in evaluating the potential success of water

policy reform concerns the magnitude of those benefits

relative to the costs that would almost certainly be

borne by the agricultural sector.

The Congressional Budget Office estimates that in

a year with average rainfall, CVPIA provisions that

protect and enhance the habitat of fish and wildlife and

reduce economic inefficiencies in water allocations

would impose relatively modest costs on the Central

Valley's agricultural sector as a whole. Gross revenues

would fall by less than 5 percent of pre-CVPIA levels

(see Chapter 5). That estimate reflects the generally

high value of crops produced in the CVP service area

and the relative flexibility that CVP farmers have to

adjust cropping patterns and irrigation practices in response to changes in water supply policies. Farmers in

other areas, however, may not have the same degree of

flexibility. Local institutions and conflicts about water

use, both of which differ from river basin to river basin

and state to state, also have an important effect on the

appropriateness and applicability of carrying out

CVPIA-type reforms in other regions.

Three factors are critical in considering whether the

results of the CVPIA can apply to other regions. First,

the goals of policy reform may be different from those

embodied in the CVPIA. Because problems vary from

region to region, the objective of the policy reform may

vary as well. A policy option that addresses problems

in one region may be inappropriate in another simply

because that problem does not exist there.

The second factor is the extent to which the policy

tool motivates farmers to change their patterns of water

use. Although all farmers should respond to an increase in water price by using less water, farmers in one

region may be more or less sensitive to a price change

than those in another. At the extreme, farmers who

have less water than they want may not respond at all to

small changes in price. Examining the variables likely

to influence farmers' response to price changes may

help predict whether policy tools will elicit the intended

response.

The third key factor is the level of the policy tools.

One lesson of the analysis in Chapters 3 and 5 is that

the levels of policy tools (specific prices and water

quantities) are as important as the type of policy (price

increases, water transfers, and environmental water allocations) in driving the ultimate response to the reforms. The CVPIA contains many elements explicitly

stated in quantitative terms. For example, it imposes

agricultural surcharges of $6 per acre-foot and water

transfer charges of $25 per acre-foot, and it allocates
56 WATER USE CONFLICTS IN THE WEST August 1997

800,000 acre-feet of water to fish and wildlife. Different levels would elicit different responses.

Regional Differences in 

Variables That Influence

Farmers' Response to Reform

The Bureau of Reclamation has divided its jurisdiction

into five geographic regions, each roughly coinciding

with a major river basin (see Figure 4).

o The Pacific Northwest Region includes projects in

Idaho, Montana, Oregon, Washington, and Wyoming.

o The Mid-Pacific Region includes the Central Valley Project as well as smaller projects in California,

western Nevada, and southern Oregon. The CVP

accounts for about three-quarters of federal funds

to that region.

o The Lower Colorado Region includes projects serving Arizona and southeastern portions of California

and Nevada.

o The Upper Colorado Region includes projects in

Colorado, southeastern Idaho, New Mexico, Utah,

and Texas.

o The Great Plains Region includes projects in the

Missouri River basin and the Arkansas River basin

serving eastern Colorado, Montana, Nebraska,

Figure 4.

The Bureau of Reclamation's Five Regions in the Western United States

SOURCE: Congressional Budget Office based on information from the Bureau of Reclamation.
CHAPTER SIX LESSONS FOR THE WEST 57

North Dakota, South Dakota, and Wyoming, as

well as small projects in Kansas, Oklahoma, and

eastern Texas.

No two of the Bureau of Reclamation's project areas are

alike; economic, agronomic, climatic, hydrologic, and

institutional settings all may differ. Without conducting an in-depth study of each project, it is impossible to

predict how farmers in a given project will respond to a

specific policy change. Nevertheless, some variables

can serve as indicators of potential similarities and differences between the predicted response of CVP farmers and that of farmers in other regions. Ideally, analysts would like to know exactly how much water is

being applied on each crop, the bureau's share of total

water supplies, water's share of total production costs,

and net returns to land and management from crop production. However, that information is not available.

Data that are available include averages of gross revenues, land values, patterns of crop production, and the

amount of water the bureau supplies. 

No region clearly dominates the others in terms of

farmers' ability to adjust to water policy reform. In addition, within each region, some farmers face more favorable conditions than others. However, enough variables indicate favorable conditions for CVP farmers

that they are more likely, on average, to adapt to water

policy reform with less disruption to the agricultural

economy than farmers in other regions. Based on such

variables as the concentration of high-revenue crops

and the volume of water delivered, farmers in the Lower

Colorado and Pacific Northwest Regions are most

likely to make adjustments that are similar to those predicted for CVP farmers in response to the CVPIA. The

Great Plains Region appears to be the most dissimilar

of all the regions, and the results of the CVPIA analysis

are least likely to hold there.

The Role of Key Variables

as Predictors of Farmers' 

Response to Water Supply

Policies

Revenues from crop production, the value of land, patterns of crop production, and the volume of water delivered by the Bureau of Reclamation are variables that

may predict farmers' response to water supply policies,

and data on them are readily available.

Crop Revenues

Gross revenues per irrigated acre are one measure, albeit an imperfect one, of the ability of farmers to survive changes in the price and availability of water. In

general, the higher the value of the crops produced, the

better the farmers can absorb increases in water prices

and finance improvements in irrigation systems. 

Gross revenues are an imperfect measure of the

financial strength of an individual farming operation

because they do not reflect costs, but average gross revenues are one indicator of the potential capability of a

region to tolerate modifications in the price and availability of water. Clearly, a farm that generates $300

per acre and uses three acre-feet of water per acre to

irrigate the crop could not remain profitable in the face

of water charges of $100 per acre-foot. In other words,

relatively high revenues may be necessary to adapt to

changes in water prices without major disruptions in

production, but they may not always be sufficient to do

so. Likewise, high gross revenues may be necessary to

justify and finance expensive new irrigation systems

that allow farmers to maintain levels of crop production

with reduced water supplies.

Based on average gross revenues alone, farmers in

the Lower Colorado Region would probably respond

most similarly to CVP farmers, and reform would be

less disruptive to agriculture there than in other regions.

Revenues per acre are highest in California and Arizona. In 1990, California ranked first with an average

of $2,050 in gross revenues per acre irrigated with water from the Bureau of Reclamation, followed by Arizona with $1,384 per acre and Washington with $1,251

per acre (see Figure 5). The average for all 17 western 1

states was $643, but nine states averaged less than

$500 per acre. Thus, gross revenues in more than half

the western states were less than 25 percent of those

received in California. 

1. The relative rankings of California and Arizona may be somewhat

skewed by the drought conditions present in both states in 1990. Arizona ranked first in years before 1990. For example, average values in

1987 were $1,750 per acre in Arizona and $1,501 per acre in California.
Arizona

California

Colorado

Idaho

Kansas

Montana

Nebraska

Nevada

New Mexico

North Dakota

Oklahoma

Oregon

South Dakota

Texas

Utah

Washington

Wyoming

Average

0 500 1,000 1,500 2,000 2,500

Revenues (Dollars per acre)

58 WATER USE CONFLICTS IN THE WEST August 1997

Regional rankings correspond to state rankings.

Average values were highest in the Mid-Pacific and

Lower Colorado Regions, and the Pacific Northwest

Region ranked third. Average revenues were lowest in

the Great Plains Region, with a regional average of

$383 per acre in 1990.

Land Values

High values for irrigated farmland may signify that

farmers will be able to adapt to changes in water policy

over the long run, but adjustments may not be easy in

the near term. Figure 6 presents average values for

Figure 5.

Average Gross Revenues from Crops Irrigated with Water from the Bureau of Reclamation’s

Projects in 1990, by State

SOURCE: Congressional Budget Office using data from Bureau of Reclamation, 1990 Summary Statistics: Water, Land, and Related Data (1990).
Arizona

California

Colorado

Idaho

Kansas

Montana

Nebraska

Nevada

New Mexico

North Dakota

Oklahoma

Oregon

South Dakota

Texas

Utah

Washington

Wyoming

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Land Value (Dollars per acre)

Irrigated

Dryland

CHAPTER SIX LESSONS FOR THE WEST 59

farmland in the 17 western states. Values for irrigated

land are highest in the southwestern states (Arizona,

California, and New Mexico). The difference between

land values for irrigated farms and those for dryland or

grazing uses indicates the value farmers place on access

to irrigation water at prevailing quantities and prices.

In other words, the benefit of access to irrigation water

is reflected in higher prices for buying and renting land.

Consequently, land values could fall if reforms significantly reduced the water supply or increased its price.

If so, farmers who have paid the higher price for their

land could be hurt by the policy change.

In the long run, agriculture could remain profitable.

Reform that either significantly increases water prices

or reduces available water supplies may temporarily

Figure 6.

Agricultural Land Values for Irrigated and Dryland Uses in 1988, by State

SOURCE: Congressional Budget Office using data from Rajinder S. Bajwa and others, Agricultural Irrigation and Water Use, Agriculture Information

Bulletin No. 638 (Department of Agriculture, Economic Research Service, January 1992).
60 WATER USE CONFLICTS IN THE WEST August 1997

disrupt land markets, but economic theory suggests that

land markets will return to equilibrium after a permanent change in water supply policies. Thus, although

policy changes could have a dramatic effect on some

individual farmers in the short run, the long-run effect

on the agricultural sector as a whole could be more

moderate. Regions with lower land values might be

less able to adjust both in the near term and over the

long run.

High land values imply high profits (revenues net

of production costs). Only when profits are high will

farmers be willing and able to pay high prices for land.

High gross revenues do not necessarily imply high profits, but they often coincide. In the West, they also coincide with the availability of cheap and plentiful water

supplies. The high correlation between gross revenues

from farmland irrigated with the bureau's water and

average values for irrigated farmland in each state can

be seen by comparing Figures 5 and 6. Other important

factors that determine the value of irrigated land include

pressures from urban development and the profitability

of dryland agriculture.

The relationship between revenues from crop production and the value of irrigated land suggests a qualification to the result that large crop revenues increase

an area's ability to adapt to changes in water policy

(discussed in the previous section). That result may be

true only in the long run. In the near term, if farmers

with high crop revenues are paying higher prices for

land, those farmers may not have any more flexibility to

adjust to changes in water prices and availability than a

farmer with low revenues who pays relatively little for

the land. In the long run, however, the price of land

should fall, which would increase the ability of the

farmer to adjust.

Cropping Patterns

Both the variety of crops produced and the concentration of the dominant crops affect how farmers respond

to changes in water policy. As a rule, the more practical options farmers have for adjusting crops in response

to changes in water supply, the less disruptive policy

shifts will be.

Variety of Crops Produced. The number of crops

produced in each region is quite large, ranging in 1990

from a high of 69 in the Mid-Pacific Region to a low of

38 in the Great Plains Region. (Those figures include

all crops to which farmers have allocated at least 160

acres.) Favorable climatic conditions may provide

more options for farmers in some regions than in

others. Crops vary in their water requirements, length

of growing season, cultivation needs, and profitability.

Being able to adjust cropping patterns while accounting

for those factors should allow farmers to moderate the

consequences of changes in the price and supply of

water. 

Concentration of Dominant Crops. The less concentrated the crop production is in a region, the more flexibility farmers are likely to have for changing cropping

patterns and thus minimizing the cost of adjusting to

water policy reform. Despite the large variety of crops

produced, production in each region is concentrated in

relatively few crops. Table 6 presents the top five

crops in each region, ranked by acreage and revenues.

The top five crops in the Mid-Pacific Region account for only half the irrigated acreage in that region,

indicating the relative flexibility of CVP farmers in

choosing among various crops. Fully half of the project's service areas in the Mid-Pacific Region produce

dozens of other crops in significant quantities. Similarly, only 57 percent of the acreage in the Pacific

Northwest Region is devoted to producing the top five

crops, compared with 70 percent to 80 percent in the

remaining three regions. That strong reliance on a relatively small number of crops implies that farmers in

those regions have fewer practical options for adjusting

to changing policies on water supply than those in the

Pacific Northwest and Mid-Pacific Regions.

Equally compelling is the relationship between

acreage shares and shares of regional revenues. In all

but the Great Plains Region, crops that account for the

largest acreage shares contribute significantly less to

total revenues. For example, the top five crops by acreage account for 77 percent of total acreage in the Upper

Colorado Region but only 45 percent of total revenues

(see Table 6). Conversely, the five crops that contribute most (59 percent) to revenues in that region are produced on only 39 percent of the acreage.

The relatively large discrepancy between the acreage share and the revenue share for top-ranked crops

indicates that some changes in water use could occur at
CHAPTER SIX LESSONS FOR THE WEST 61

a relatively low cost. In the Lower Colorado Region,

wheat and hay other than alfalfa account for 19 percent

of the acres but contribute only 3 percent of the revenues. A large reduction in the production of the lowervalued crops, such as irrigated pasture and hay (other

than alfalfa), could occur with much smaller, proportionate reductions in revenues. Both crops require large

quantities of water, so reducing their production could

yield greater than proportionate savings in total water

use.

Farmers' Dependence on Water from

the Bureau of Reclamation

The relative importance of the Bureau of Reclamation's

water for producing crops will be an important determinant in how changes in the bureau's water supply policies affect farmers. Both the number of water sources

and the quantity of water matter. The quantity of water

the bureau makes available to farms varies significantly

Table 6.

Ranking of Crops in the Bureau of Reclamation’s Five Regions, by Acreage and Revenues, 1990

Pacific Lower Upper Great

Rank Northwest Mid-Pacific Colorado Colorado Plains

Crops Ranked by Acreage

1 Alfalfa Hay Cotton Alfalfa Hay Alfalfa Hay Corn

2 Wheat Alfalfa Hay Cotton Pasture Alfalfa Hay

3 Pasture Rice Wheat Other Hay Dry Beans

4 Potatoes Grapes Lettuce Cotton Barley

(Wine/raisins)

5 Barley Tomatoes Other Hay Barley Sugar Beets

(Processing)

Share of Total Acreage 

in Region (Percent) 57 50 79 77 70

Share of Total Revenues

in Region (Percent) 34 38 44 45 71

Crops Ranked by Revenues

1 Apples Grapes Lettuce Alfalfa Hay Corn

(Wine/raisins)

2 Potatoes Cotton Alfalfa Hay Pecans Alfalfa Hay

3 Alfalfa Hay Oranges Cotton Cotton Sugar Beets

4 Sugar Beets Almonds Table Grapes Dry Onions Dry Beans

5 Wheat Tomatoes Cantaloupes Peppers Silage/Ensilage

(Processing)

Share of Total Revenues

in Region (Percent) 55 50 55 59 73

Share of Total Acreage 

in Region (Percent) 49 41 67 39 68

SOURCE: Congressional Budget Office based on data from Bureau of Reclamation, 1990 Summary Statistics: Water, Land, and Related Data

(1990).
62 WATER USE CONFLICTS IN THE WEST August 1997

throughout the West. In addition, some farms have access to other water sources and some do not. That variation occurs within regions as well as between them. A

farmer who relies completely on the bureau's water will

have fewer options for adjusting to a smaller water allocation or higher prices than would one with access to

other sources. Similarly, if two farms are identical except that one has a larger water allocation, the one with

the larger allocation will have more options for adapting to changes in water policy.

Availability of Alternative Water Sources. The Bureau of Reclamation's water projects may be farmers'

sole source of water or may supplement another source.

In general, the better the access to alternative water

sources, the lower the impact of the bureau's policy

shifts. Acreage in the bureau's service areas is classified as eligible for full service, supplemental service, or

temporary service. Full-service acreage has no other

water source. Acreage with supplemental service presumably has at least one other source (locally developed surface water or groundwater). Temporary service is a minor category that includes acreage eligible

for water service under a temporary agreement. 

Categorizing acreage as full service conveys information about the total dependence of farmers on the

bureau's water. Table 7 presents the percentage of

acreage in each region classified as full service. That

measure of relative dependence ranges from 15 percent

in the Mid-Pacific Region to 77 percent in the Lower

Colorado Region; in other words, three-fourths of the

acreage irrigated with the bureau's water in the Lower

Colorado Region has no other water source. In contrast, farmers operating 85 percent of the acreage in the

Mid-Pacific Region may have access to at least one

other water source. Roughly 40 percent to 50 percent

of the eligible acreage in the remaining regions is full

service.

Considering only the percentage of full-service

acreage, the cost of adjusting to changes in water policy

should be highest in the Lower Colorado Region and

lowest in the Mid-Pacific Region. However, the nature

and extent of the dependence of farmers with supplemental service on the bureau's water is not readily discernible. Some districts with supplemental service contracts actually have no practical alternative to the bureau's water for irrigation. Moreover, the volume of

nonbureau water available to districts that have other

Table 7.

Regions' Dependence on Water Deliveries by 

the Bureau of Reclamation, 1989-1990

Percentage Amount of

of Acreage Water the

with No Other Bureau Delivers

Region Water Source (Acre-feet per acre) a b

Pacific Northwest 53 4.1

Mid-Pacific 15 1.6

Lower Colorado 77 5.0

Upper Colorado 39 1.9

Great Plains 43 1.4

SOURCE: Congressional Budget Office based on data from Bureau of Reclamation, Summary Statistics: Water, Land,

and Related Data (1989 and 1990).

a. Full-service acreage reflects 1990 data.

b. Water delivered by the Bureau of Reclamation is the average for

1989 and 1990.

sources may be small or large relative to the bureau's

water allocation, but that information is not generally

available. 

Quantity of Water Delivered. Another measure of

the relative importance of water service to farmers is

the volume of water delivered per acre. Farmers receiving just enough water per acre to meet plants' minimum

requirements will have to adjust cropping patterns&

substituting crops that consume less water for those

with greater water needs&or increase fallowed acreage

in response to a reduction in water supply. At the other

extreme, a farmer using large quantities of water may

be able to adjust to less water by simply monitoring

water applications more carefully. Most farmers are

between those extremes. Nevertheless, some will have

more and better options to adjust irrigation technology

and management for a given set of cropping patterns

than will others.

Determining whether a given water application contains excess water requires information on the crop produced, the location of the district, and the irrigation

technology used. Water requirements&the amount of
CHAPTER SIX LESSONS FOR THE WEST 63

water a plant must absorb to reach maturity&vary by

crop and by climate. In the CVP service area, the average water requirement for alfalfa hay is 3.1 acre-feet

per acre, 2.5 for cotton, roughly 2.0 for tomatoes, 1.6 to

2.1 for grapes, and 0.6 to 0.9 for wheat. In Califor- 2

nia's Imperial Valley (Lower Colorado Region), which

is hotter and receives less rain than the CVP area, those

requirements are roughly 1.0 acre-foot per acre greater.

Water requirements are biologically and climatologically determined; a fixed quantity of water must be

available for consumption by the plant to produce a

successful crop. However, the amount actually applied

may bear little relation to that requirement. For maximum crop yield, farmers must apply more water than

crops actually need; it is virtually impossible to apply

only the quantity of water consumed by the plant. Irrigation that provides twice the amount of water that

crops actually require is not uncommon in western agriculture.

The larger the difference between the quantity of

water applied to a field and the quantity consumed by

the crop, the lower the probability that changes in water

policy will be disruptive to farmers. The amount of the

difference depends on the irrigation technology used

and how efficiently it is managed. For a given cropping

pattern, farmers could respond to incentives or requirements to reduce water use by improving the efficiency

of the existing technology or by switching to a technology that is generally more efficient. Farmers who already are quite efficient&that is, their water applications are close to what their crop needs&would have

fewer remaining options for improving irrigation efficiency, and the remaining options would probably be

significantly more expensive than those available to

farmers with large water applications. 

Interregional Variations in Water Supplies. The

average volume of water that the Bureau of Reclamation delivers to districts varies significantly among the

five regions (see Table 7, which presents the average

amounts of water the bureau delivered to each region

during the 1989-1990 period). Larger deliveries corre- 3

spond roughly with greater percentages of full-service

acreage. On the basis of the bureau's water deliveries

only, resolving water conflicts by transferring water out

of agriculture would be least disruptive, on average, in

the Pacific Northwest and Lower Colorado River Regions. However, those regions have the highest percentages of full-service lands and thus the greatest proportion of acreage without another water source. Nevertheless, average water applications appear to be much

greater than the minimum quantity necessary to produce the current crop mix, so there may well be opportunities to conserve water with minimal disruption to

the agricultural sector in those regions.

Intraregional Variations in Water Supplies. The

amount of the bureau's water that is distributed to districts varies within each of the five regions. A region's

average water delivery may mask important differences

in the distribution of water to individual districts. Average water deliveries to districts are highest in the

Lower Colorado Region and lowest in the Mid-Pacific

Region. Distribution in the Upper Colorado and Great

Plains Regions is similar to that in the Mid-Pacific Region, where more than 70 percent of the districts receive deliveries of less than 2.5 acre-feet per acre.

Some districts receive water quantities that are significantly larger than crop requirements, on average,

and some receive quantities that are insufficient to produce any crop. For example, 20 percent of the districts

in the Mid-Pacific Region receive between 2.5 and 3.5

acre-feet of water per acre (see Figure 7). In the Pacific

Northwest, 35 percent of the districts receive between

2.5 and 3.5 acre-feet per acre, though 14 percent receive more than 5.5 acre-feet and 20 percent receive

less than 2.5 acre-feet per acre. In the Lower Colorado

Region, nearly 60 percent of all districts receive more

than 4.5 acre-feet per acre (including 44 percent that

2. Lloyd S. Dixon and Larry L. Dale, The Impact of Water Supply Reductions on San Joaquin Valley Agriculture, DRU-892-EPA (prepared for the Environmental Protection Agency, Region 9, December

1994); and California Department of Water Resources, California

Water Plan Update, vol. 1, Bulletin 160-93 (Sacramento, Calif., October 1994), Table 7-6.

3. Total water deliveries&including both project and nonproject water&are probably larger than those displayed. Nonproject water use is

reported by districts in their annual water use reports to the Bureau of

Reclamation. Ideally, that category would include all water used for

irrigation other than that delivered under Bureau of Reclamation contracts. However, that does not appear to be the case. Reported nonproject deliveries average 0.5 acre-feet per acre in the Mid-Pacific

Region, 0.9 acre-feet per acre in the Upper Colorado Region, and zero

for the remaining regions for the 1989-1990 period. CBO examined

the data for selected districts for which alternative sources of data on

water use are available and found that groundwater use generally is

not reported. Moreover, many districts report average water applications per irrigated acre that are clearly insufficient to produce the reported crop mix.
Less than 0.25 0.25 to 1.5 1.5 to 2.5 2.5 to 3.5 3.5 to 4.5 4.5 to 5.5 5.5 to 10 More than 10

0

10

20

30

40

50

60

Pacific NW Mid-Pacific Lower Colorado Upper Colorado Great Plains

Percentage of Districts

Water Deliveries (Acre-feet per acre)

64 WATER USE CONFLICTS IN THE WEST August 1997

get more than 5.5 acre-feet), but 20 percent receive less

than 1.5 acre-feet per acre. Those cutoffs are significant, because 4.5 acre-feet per acre is more than the

crop requirement for any crop in any region, and 1.5

acre-feet per acre is insufficient for most of the crops

produced in the Lower Colorado Region.

The large variance in deliveries to districts within a

region indicates that policies applied uniformly

throughout a region could have different effects on

farmers. Many factors could explain the range in deliveries by districts, including the age of districts and projects (older districts generally have water rights with a

higher priority as well as larger water quantities) and

access to alternative water sources. 

Nevertheless, some generalizations can be made.

First, the higher the percentage of districts receiving

large water quantities, the greater the potential for efficiency gains from reforming the bureau's policies in

that region, and the lower the cost to farmers, on average, of adjusting to policy changes. If all other factors

are the same, a farmer with a larger per-acre water supply will always have more options for adjusting to policy reform than a farmer with a smaller supply, and

therefore, the cost of making that adjustment will be

smaller. 

Second, the greater the spread in a district's water

supplies, the greater the distributional implications of

uniform policy changes. Because farmers with larger

supplies can adjust to policy changes at a lower cost

than farmers with smaller water supplies, a policy that

reduces all districts' water supplies by the same quantity will affect some farmers more than others. For example, in the Lower Colorado Region, average water

supplies are high, and more than half the districts receive more than 5.5 acre-feet per acre, so water policy

reform could probably occur with relatively little disruption in that region. However, unless they have other

Figure 7.

Average Amount of Water Delivered to Districts in 1989 and 1990, by Region

SOURCE: Congressional Budget Office based on data from Bureau of Reclamation, Summary Statistics: Water, Land, and Related Data (1989 and

1990).
CHAPTER SIX LESSONS FOR THE WEST 65

sources of water, the 20 percent of districts receiving

less than 1.5 acre-feet per acre may be severely affected.

A Role for Flexibility

A recurring theme in this study is the diversity in the

problems facing the Bureau of Reclamation's projects

and in the performance of the bureau's farmers across

the West. Because of that diversity, a policy instrument

that effectively addresses the problems in one region

may be much less effective in another: the problems to

be addressed could be very different, or the farmers in

one region could respond in a different manner than

those in another. Water markets generally can address

a broader range of reform objectives than other policy

options but may not be able to achieve all objectives;

they may elicit little or no response in some areas. Giving the bureau's managers a menu of policy tools&including water markets, water price reforms, environmental water allocations, and conservation incentives

&from which to choose may be necessary to provide

the flexibility to adapt the policies to the specific problems and conditions that the various regions or projects

face.

Appendixes

T

Appendix A

The Central Valley Project Improvement Act

he Central Valley Project Improvement Act

(CVPIA) contains numerous provisions that

direct the Bureau of Reclamation's operations

for the federal Central Valley Project (CVP) in California. The various provisions of the act generally address

one of two objectives: preserving fish and wildlife and

their habitats or enhancing the project's benefits with

incentives to use agricultural water more efficiently. To

accomplish those objectives, the CVPIA allows contractors to participate in water markets, changes the

pricing structure for the bureau's water contractors, creates a restoration fund to finance activities that enhance

fish and wildlife and their habitat, and allocates water

for environmental uses. This appendix describes the

general features of those provisions. It is not meant to

be inclusive; several CVPIA provisions are omitted

from the discussion or are discussed only in general

terms. 

Water Transfers

Section 3405(a) of the CVPIA authorizes all individuals or districts that receive water from the CVP to

transfer some or all of their allocation to any beneficial

use within, or outside, the CVP service area. All transfers must be approved by the Secretary of the Interior.

The CVPIA also imposes other conditions on transfers.

First, all water transferred outside the CVP is subject to

a set of higher rates and surcharges, depending on the

intended use of the water. The CVP contractor must

pay the full-cost rate for all water transferred to irrigators who have never been CVP contractors, or pay the

municipal and industrial (M&I) rate if the transferred

water is to be used for that purpose by non-CVP contractors. If tiered water prices (described below) are in 1

effect, the price the contractor pays to the bureau is the

higher of the relevant tiered water price and the agricultural full-cost rate if the transferred water is to be used

for irrigation, or the higher of the tiered price and the

M&I cost-of-service rate if the water is to be used for

urban purposes. In addition, water transferred to nonCVP M&I uses is subject to a surcharge of $25 per

acre-foot. Other surcharges, which are discussed below, must be paid at higher M&I rates if water is transferred to M&I uses. 

Second, to reduce the potential impact on third parties, the act specifies that the water transferred "be limited to water that would have been consumptively used

or irretrievably lost to beneficial use during the year or

years of the transfer" (sec. 3405(a)(1)(I)). The precise 2

manner in which the bureau interprets that condition

1. Some provisions in that section merely codify existing policies of the

Bureau of Reclamation. For example, the bureau does allow water

transfers, although they have not been made very often. Also, water

transfers from agriculture to municipal and industrial uses were subject to the M&I rates under pre-CVPIA reclamation law.

2. The Bureau of Reclamation has interpreted that provision in the following manner: (1) crop's consumptive use of water is the total evapotranspiration of applied water minus effective precipitation and does

not include transportation losses, return flows, leaching, frost protection, or deep percolation to usable groundwater basins; (2) project

water irretrievably lost to beneficial use shall mean deep percolation to

an unusable groundwater aquifer (for example, a saline sink or a

groundwater aquifer that is polluted to the degree that water from that

aquifer cannot be directly used). See Bureau of Reclamation, MidPacific Region, Interim Guidelines for Implementation of the Water

Transfer Provisions of the Central Valley Project Improvement Act

(Title XXXIV of Public Law 102-575) (Sacramento, Calif., February

25, 1993).
70 WATER USE CONFLICTS IN THE WEST August 1997

will have important implications for whether being able

to transfer water encourages farmers to conserve. For

example, suppose a farmer who was applying 4 acrefeet per acre to irrigate a field of sugar beets could increase irrigation efficiency through improved technology and management such that 3 acre-feet per acre

would be enough water to produce the same crop with

the same yield. The opportunity to sell the conserved 3

water provides both the incentive and the capital to improve the irrigation system. However, if transfers were

limited to only the amount of water the crop actually

consumed, that scenario would be ruled out. In that

case, the only means of freeing up water for sale would

be to adjust cropping patterns—substituting crops that

have relatively low water requirements (such as vegetables, seed crops, or small grains) for those that have

relatively high water needs (including sugar beets, alfalfa hay, and rice)—or to fallow land. Water transfers

would be more disruptive to the agricultural community

under those conditions.

The implications of the clause that refers to water

irretrievably lost to beneficial use will depend on the

bureau's rulings on the precise areas with unusable

groundwater aquifers. Groundwater aquifers underlying much of the CVP service area in the western San

Joaquin Valley are highly saline and in some areas contain toxic concentrations of naturally occurring elements such as selenium and molybdenum. That water

can be used to irrigate crops, if necessary, but generally

must first be blended with fresh water to reduce salinity

concentrations and even then is applied only on salttolerant crops. In addition, problems with water quality

in local wetlands, rivers, and sloughs resulting from

discharge of contaminated drainage water are prevalent

in the region. Thus, determining that water that infiltrates the aquifer is "not lost to beneficial uses" could

reduce the incentive to conserve and transfer that water.

The paradox here is that since applying more water

than crops consume in that region may be particularly

damaging to the environment, transferring it away from

the region could be especially beneficial. 

Other conditions protect areas of origin, contracting

districts, groundwater, and fish and wildlife habitat

from degradation resulting from water transfers. One

impediment to transfers has been uncertainty about the

status and possible forfeiture of the transferror's water

rights. The CVPIA addresses that concern by specifying that "all transfers . . . shall be deemed a beneficial

use of water by the transferor . . . " (sec.

3405(a)(1)(E)).

Tiered Water Prices

The CVPIA specifies tiered prices for both agricultural

and M&I water users (sec. 3405(d)). Under that provision, the Bureau of Reclamation will charge the contract (subsidized) rate for the first 80 percent of contract water quantities. The last 10 percent is provided

at full-cost rates. Water quantities between 80 percent

and 90 percent of the contract entitlement are the average of the contract rate and the full-cost rate.

The tiered pricing schedule defined in the CVPIA

applies to the prices that districts pay for water. The

conservation incentive created by that policy will depend, in part, on whether the water district passes the

tiered schedule on to the farmer. Some districts may

use a modified schedule or alternative rate to cover the

increased cost of receiving water from the bureau. For

example, a district could simply charge an average price

to all farmers for all water: price = [0.8 x contract rate]

+ [0.1 x 0.5(contract rate + full cost)] + [0.1 x full

cost]. Districts without the management infrastructure

and measuring devices necessary to implement the

tiered pricing schedule defined by the CVPIA will be

more likely to use a simpler price structure. The act

requires districts to install metering devices capable of

measuring the quantity of water delivered within district

boundaries (sec. 3405(b)). But the act does not necessarily specify that the devices be capable of measuring

the amount of water delivered to each field or each

farmer within the district, which would be necessary to

implement tiered prices at the farm level.

The CVPIA specifies that the tiered pricing schedule (and the metering requirement) be used when longterm contracts are renewed and in new or amended contracts. Sixty-seven contracts expired between October

1992 (when the CVPIA became law) and the end of

1996, and nearly all will be up for renewal by 2008.

However, contracts can be renewed only on an interim

—one- to three-year—basis until a programmatic envi3. Irrigation efficiency is typically defined as the percentage of applied

water that is beneficially used by the crop (and typically includes a

minimum leaching fraction). 
APPENDIX A THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 71

ronmental impact statement (PEIS) has been completed

(sec. 3404(c)(1)). The bureau currently expects the

PEIS to be completed in the fall of 1997. Thus, the

earliest those rates must go into effect is late 1997, and

some districts may not face them until 2008, when the

last of the current contracts are up for renewal. Those

rates have, however, been included in some interim and

amended contracts and are included in the bureau's

guidelines for districts' water conservation plans, which

are required under section 3405(e).

The CVPIA exempts from the tiered water rates

any water used to produce crops that provide habitat for

waterfowl. In practical terms, that exemption implies

that rice growers will be eligible for a waiver from the

higher rates of the second and third tiers. Significantly,

rice is among the most water-intensive crops produced

in the Central Valley. However, if farmers keep their

rice fields flooded in the winter rather than following

traditional practices that dictate draining the fields and

burning the rice stubble, those fields will provide

needed wetland habitat for waterfowl on the Pacific

Flyway.

Fish and Wildlife Restoration

Fund

The CVPIA establishes a fish and wildlife restoration

fund to finance activities to restore, improve, and acquire fish and wildlife habitat. The act earmarks onethird of the funds for specific restoration projects (detailed in sec. 3406(b)); the remainder is to be spent at

the discretion of the Secretary of the Interior for similar

purposes. The fund is to be paid for by project water

and power users. However, the use of moneys from the

fund must be appropriated by the Congress. Section

3407 authorizes collections of up to $50 million per

year. Sources of funds include revenues from tiered

water rates and surcharges on water transfers, such as

the $25 surcharge and transferred water rates. In addition, irrigators must pay surcharges on all CVP water of

up to $6 per acre-foot (conditioned on farmers' ability

to pay and indexed to October 1992 price levels) and

up to $12 per acre-foot for all M&I uses (also indexed

to October 1992 price levels). An additional surcharge

is imposed on all contractors receiving water from the

Friant-Kern Canal. The surcharge in the Friant division

is $4 per acre-foot for deliveries before October 1,

1997; $5 between October 1, 1997, and September 30,

1999; and $7 as of October 1, 1999. 

Total surcharges paid by districts and farmers will

depend on the ultimate use of the water, as depicted in

Table A-1. Consider, for example, a hypothetical district in the Friant division with an entitlement of 60,000

acre-feet, and suppose that it renewed its contract in

1995 (contracts for all irrigation districts in the Friant

division expired by or in 1995). If the Bureau of Reclamation delivers the entire allotment for agricultural purposes in the 1997 growing season, which ends October

1, that district will pay tiered water prices plus approximately $10 per acre-foot for the agricultural and Friant

surcharges. The district currently pays $22 per acrefoot for water, and its full-cost rate is $34 per acre-foot.

The impact of the CVPIA, therefore, would be to double the cost of 6,000 acre-feet; prices would increase by

approximately $22 per acre-foot ($10 in surcharges

plus $12 for the tiered water prices). The cost of another 6,000 acre-feet would increase by $16 per acrefoot ($10 in surcharges plus $6 for the second-tier

water rate). Rates for the remaining 80 percent would

increase by the $10 surcharge. 

Now suppose that the same district uses 75 percent

of the entitlement and transfers 25 percent (15,000

acre-feet) to a non-CVP district for urban uses. Further

assume, for simplicity, that the M&I cost-of-service

rate (the transfer rate) is the same as the agricultural

full-cost rate. The surcharges in that case would be $10

per acre-foot for water used and $53 per acre-foot for

water transferred ($12 M&I surcharge + $25 transfer

surcharge + $4 Friant surcharge + $12 difference between full-cost and contract rates).

Allocating Water for Fish and

Wildlife 

Section 3406 dedicates specific quantities of project

yield (defined below) for fish and wildlife. In total, the

CVPIA directly allocates approximately 1.2 million

acre-feet of water—nearly 20 percent of deliveries in a

normal year—to environmental purposes. Three different provisions provide 800,000 acre-feet of water to

help regulate water flows and temperatures in the Sac-
72 WATER USE CONFLICTS IN THE WEST August 1997

ramento and San Joaquin Rivers and the delta to benefit

resident fish and wildlife, allocate water to sustain

wetland habitat in wildlife refuges, and protect water

flows in the Trinity River. 

Project yield refers to the minimum quantity of water that can be expected to be available—that is, the

quantity that could have been delivered during the record drought of 1928-1934 (if the project had existed

then) after meeting preexisting federal and state requirements for releases. In practice, that means the water for the environment comes "off the top"; water will

be delivered to CVP contractors only if total water supTable A-1.

Applicable Charges to Finance the Restoration Fund, by Type of Water Use

Purpose for Water Deliveries

Use in

Rate District for

(Dollars per Agricultural Transfer Within CVP Transfer Outside CVP

Type of Charge acre-foot) Production Agriculture M&I Agriculture M&I

Restoration Payment

Agricultural rate 6 8 8 * 8 * a

M&I rate 12 * * a 8 * 8

Friant Surcharge 4 to 7 b 888 8 8

Tiered Water Rates Variable c 888 8 8 d d

Early-Renewal 

Incentive

Agricultural rate 9a 8 8 * 8

M&I rate 18 * * a 8 * 8

M&I Transfer 

Surcharge 25 * * a 8 * 8

Transferred 

Water Rates Variable * * * e 8 8 d d

SOURCE: Congressional Budget Office.

NOTE: CVP = Central Valley Project; M&I = municipal and industrial; * = charges do not apply.

a. October 1992 prices levels. For example, the 1997-1998 restoration payment rates are $6.70 and $13.39 per acre-foot for agricultural and M&I

uses, respectively. Agricultural rates may be adjusted downward on the basis of the user's ability to pay. The early-renewal incentive charge is

1.5 times the applicable restoration payment rate.

b. Applies only to contractors receiving or transferring water from the Friant division. Charges are $4 per acre-foot for deliveries before October 1,

1997; $5 from October 1, 1997, to September 30, 1999; and $7 thereafter.

c. Tiered prices go into effect when existing contracts are renewed or amended, or new contracts are written. The tiered rates are contract rates for

deliveries up to (and including) 80 percent of entitlements; halfway between the contract and full-cost rates for deliveries between 80 percent and

90 percent of entitlements; and the full-cost rates for deliveries greater than 90 percent of entitlements, for agricultural or M&I use as appropriate.

That provision may be waived if the water is to be used to produce a crop that provides habitat for waterfowl.

d. The contractor must pay the higher of the tiered rate or transferred water rate when both are in effect.

e. Transferred water rates are full-cost rates for water transferred to agricultural uses and cost-of-service rates for water transferred to M&I uses.
APPENDIX A THE CENTRAL VALLEY PROJECT IMPROVEMENT ACT 73

plies exceed obligations to water rights holders (a preCVPIA condition) plus the environmental allocation.

But it also means that agricultural water deliveries will

decline only if water supplies are insufficient to meet all

obligations. Thus, the CVPIA's environmental allocations probably will not reduce agricultural water supplies in wet years. However, wet years occur only infrequently, and contractors can expect reduced water supplies in many years.

Section 3406(b)(2) dedicates 800,000 acre-feet of

CVP yield for restoring fish and wildlife habitat. The

act also provides water for national wildlife refuges and

state wildlife management areas in the Central Valley.

Approximately 260,000 acre-feet above pre-CVPIA

guaranteed supplies for refuges (so-called level-2 water

requirements) were required upon enactment (sec.

3406(d)(1)). A greater level of protection (level-4

water supplies) is to be met by 2002. The Bureau of

Reclamation must acquire the additional water necessary to meet level-4 water requirements (roughly

140,000 acre-feet) at a rate of 10 percent a year over 10

years (sec. 3406(d)(2)). In contrast to the 800,000

acre-feet and the level-2 water, the increment between

level-2 and level-4 water must be acquired voluntarily

—that is, through water transfers, voluntary water conservation measures, and land purchases, among other

options. Another provision protects in-stream flows in

the Trinity River (sec. 3406(b)(23)). CVP water supplies could be reduced by the quantity that the bureau

would otherwise have diverted from the Trinity River

into the Sacramento River and the CVP. 

Water Conservation Measures

Water conservation activities are those that allow the

same beneficial use to occur with less water. Increasing

farms' irrigation efficiency and improving districts' delivery systems are two approaches to conserving water.

Increases in irrigation efficiency allow farmers to produce the same crop and yield with less applied water

and, thus, less water diverted from rivers. Examples

include changes in irrigation technology—for example,

switching from furrow to sprinkler systems and improving the management of existing systems. Improved delivery systems, such as specialized pipe rather

than unlined ditches, allow districts to deliver exact

quantities of water on demand and reduce losses from

evaporation and seepage. Water conservation measures

are likely to be costly and thus must either be mandatory or be motivated directly with economic incentives

or indirectly with decreased water supplies. Two provisions specifically address objectives for conserving agricultural water. 

First, the act creates an office of Water Conservation Best Management Practices and directs it to develop criteria for evaluating districts' water conservation plans (sec. 3405(e)). The 1982 Reclamation Reform Act (RRA) requires that all districts develop such

a plan. However, the RRA requires only that plans be

drafted, not implemented. The CVPIA extends the

RRA provisions by requiring the Secretary of the Interior to develop best management practices and to use

them as a basis for evaluating water conservation plans.

The criteria, which are now available in draft form,

were to be designed to promote the "highest level of

water use efficiency reasonably achievable by project

contractors using best available cost-effective technology and best management practices" (sec. 3405(e)(1)).

The title of that section notwithstanding, it is not

clear that the act mandates implementation of an approved plan. Moreover, phrases such as "reasonably

achievable" and "best available cost-effective" often

lead to ambiguity and difficulty in interpreting and carrying out legislation.

Second, to encourage water users to adopt projects

and measures for conserving water, section 3408(i) authorizes the Secretary of the Interior to pay up to 100

percent of the costs of those modifications. Modifications may range from district projects, such as the lining of delivery canals, to farmers' adopting improved

irrigation technologies, depending on the interpretation

of that provision. Water saved under that provision

will be made available to the Secretary, in proportion to

the percentage of the costs paid by the Secretary, for

supplementing water dedicated to fish and wildlife under the act.
74 WATER USE CONFLICTS IN THE WEST August 1997

Contract Renewals

Besides changes in the price of water and the quantity

available that can be made when contracts are renewed,

the CVPIA shortens the maximum term for new, renewed, or amended contracts. Current contracts between the Bureau of Reclamation and CVP water districts were set for 40 years, as authorized by the 1939

Reclamation Projects Act. Renewed contracts will extend for no more than 25 years (sec. 3404(c)). Furthermore, as discussed above, no long-term contracts will

be written until completion of the PEIS, projected for

late 1997. Until then, contracts may be renewed only

for one to three years.

The length of a contract can affect farmers' ability

to finance long-term investments. Banks are reluctant

to make loans to Central Valley farmers unless they

have secure water supplies. Having a long-term, reliable water supply is especially important for farmers

wishing to establish perennial crops such as tree fruits,

nuts, and vineyards or to invest in new irrigation

systems.

Many CVPIA provisions, such as the tiered water

prices, can be implemented only with new, renewed, or

amended contracts. To encourage districts to renew

their contracts early—or, rather, to discourage districts

from waiting until their current contracts expire before

seeking renewal—the bureau will assess a fee on all

districts failing to renew before October 1, 1997, or

January 1 of the year following completion of the PEIS,

whichever comes first (sec. 3404(c)(3)). The fee is set

at one and a half times the restoration charge and is

imposed for each year between the start date and the

date at which the contract is renewed. For example,

assume that the restoration charge is $6 per acre-foot

and that a hypothetical district has a contract for 50,000

acre-feet of water for irrigation purposes that expires in

1999. If the PEIS is completed in 1997, the charge for

not renewing until the contract expires will be $9 x

50,000 x 2 years = $900,000, payable before the contract is renewed. If the PEIS is not completed by October 1997—so that no long-term renewal is possible, as

discussed above—districts can avoid the early renewal

incentive by signing an agreement that binds them to

renewing their contract upon completion of the PEIS.

Mitigating the Impact

on Fisheries

 

The CVPIA calls for many projects to restore the local

fisheries, including repairing, improving, and constructing facilities. The reimbursable portions of those projects are typically 37.5 percent of the costs and are to

be allocated between the CVP's water users and power

users. Revenues from tiered water prices will be credited to the water users' portion of those costs. Nevertheless, this provision could result in additional charges

to water users.
N

Appendix B

The Economics of Tools for

Reforming Federal Water Policy

umerous policy tools are available to change

the way federal water is priced and allocated.

This appendix addresses the extent to which

each policy tool individually, and in combination with

other tools, can be expected to achieve the objectives of

reform. Related issues are how reforms will affect relevant parties and change the way water is used.

In particular, this appendix provides an economic

framework for predicting whether a particular policy

tool or set of tools will help or hinder the efficient allocation of water. Provisions of the Central Valley Project Improvement Act (CVPIA), which were described

in Appendix A, form a point of departure for that analysis. Water markets and tiered water rates are examined first as tools to motivate, rather than to require,

improved management and allocation of federal water.

Other provisions, such as environmental surcharges and

the allocation of water to fish and wildlife, are also introduced. Policy tools are examined first alone and

then in combination with others. The last section explores the implications of simultaneously implementing

all the provisions contained in the CVPIA.

Farmer's Decision Framework

Given subsidized water rates and the absence of market

forces or limits on quantity, farmers will use more

water than is socially desirable. Economic theory says

that farmers will use water to the point that the economic gain from the last unit is just equal to its price.

If that price is low relative to the true cost of the water,

as in the Bureau of Reclamation's contracts, the quantity farmers use will probably be greater than optimal. 

That principle is illustrated in the first panel of Figure B-1, which portrays the decision framework for a

single farmer. The benefits to the farmer from water

use are reflected in the linear demand curve D , which ag

shows the increase in crop revenues from each additional unit of water. A farmer with access to an unlimited supply of water at a contract price of P will choose c

to apply a quantity of C—the quantity for which the

marginal value in use is just equal to its price. Suppose

the true social value of water is P*. A farmer facing

that price would choose to use a quantity W*—the optimal level of water use for that farmer—and would

forgo using the rest of the allotment. In the absence of

a water market, farmers base their decisions about water use solely on the value of the water in production

and their own costs; the value of water in other uses

does not enter the decision process. Thus, as illustrated

in this example, farmers may rationally use considerably more water than is optimal.

The quantity of water used may be determined by a

constraint rather than by a prevailing price. The supply

of water delivered to districts is typically set at a quantity specified in their contracts with the bureau. That

quantity implies a vertical supply curve at the allotment

quantity, depicted as A in Figure B-1. If the farmer is

constrained to use no more than A, the value of the last

unit used is P . In that case, the value of us a ing the

water is greater than the price paid (P ), indicating that c
S

Pa

D Durban ag

P*

Pu

A T W* * C

Net Social

Benefits

Farmer's Decisions Farmer and Cities' Combined Decisions

Contract

Rate (P ) c

A

Price Price

Quantity of Water Used Quantity of Water Transferred

76 WATER USE CONFLICTS IN THE WEST August 1997

Figure B-1.

The Effects of a Water Market on a Farmer's Decisions About Water Use

SOURCE: Congressional Budget Office.

the farmer would be willing to pay more than the contract price to purchase an additional unit.

Water Markets: Interactions 

Between Farmers and Cities

Water markets leave both farmers and cities better off,

as the second panel in Figure B-1 shows. For diagrammatic purposes, the figure assumes that farmers who

have an allotment of water from the Bureau of Reclamation are the only supplier to the market and that cities are the only source of demand—that is, there are no

unmet environmental or other agricultural needs. The

market supply curve (S) for water transfers made by the

bureau's farmers is presented as the mirror image of the

demand curve (D ) in the first panel. It describes the ag

quantity of water that farmers would be willing to sell

for any given price. The supply curve becomes vertical

at a quantity of A because farmers cannot transfer more

water than they have—their allotment—no matter how

high the price goes. The point at which urban demand

for the farmers' water (D ) and the farmers' supply urban

intersect describes both the quantity of water that

would optimally be transferred from agricultural uses to

cities and the value of water at that quantity. 

Prices and Quantities 

Water markets can lead to an efficient allocation of

water among uses and will define a single price that

represents the marginal value of water to society, even

if the water is initially allocated to a single use at a subsidized price. The initial allocation involves zero transfers of the bureau's water between agricultural and urban uses. The price of water at the initial allocation, in

which agriculture uses its entire allotment, is much

lower in agriculture than in urban uses; the price of

water for urban uses is denoted P . The difference be- u

tween agricultural and urban prices indicates that both

groups could benefit from a trade. Only when the value
APPENDIX B THE ECONOMICS OF TOOLS FOR REFORMING FEDERAL WATER POLICY 77

for water is the same in both agricultural and urban

uses will all possible benefits from trading be exhausted. The "true value" of water is the price that

would clear a fully functioning water market, the point

at which supply and demand intersect, P*. In that case, 1

the farmer would use W* and transfer a quantity T*

(T* = A - W*) on the market. To see that that is indeed

the equilibrium, note that using a quantity greater than

W* would generate a value less than P*. The farmer

would be better off selling that water for P*. Conversely, using less than W* would mean forgoing production worth more than P*, and simultaneously transferring more than T* would result in a transfer price

lower than P*. The farmer would be better off using

that increment.

In summary, prices and quantities of water used

and transferred will be efficient if determined by a

water market. Economic efficiency requires that all

participants use water until the point that the benefit of

using it is the same in all uses. That same condition 2

describes the equilibrium point in a water market.

Thus, a water market can be an effective tool for

achieving an optimal allocation of water among all

uses.3

Net Benefits 

Net social benefits from a water market are positive

because the gains to urban consumers from the transfer

are greater than the costs to farmers. The net social

benefit associated with moving from the initial allocation, with farmers using A and transferring zero, to the

optimal allocation, in which farmers use W* and transfer T*, is depicted by the shaded area in the second

panel of Figure B-1. In that area under the demand

curve, the benefits from the transfer that urban consumers enjoy are greater than the cost in terms of forgone

revenues for farmers (the area under the supply curve,

which is identical to the area under the farmer's demand

curve in the first panel between W* and A and above

P ). That reduction in the benefits from crop produc- a

tion is based, in part, on the value of selling crops—a

value set in the agricultural markets and representing

consumers' demands for those crops. 

Payments for Water Transfers 

The final aspect of the market is the payments made to

farmers for water transfers. Figure B-1, which illustrates the social gains from the water market, does not

reflect those payments because they do not increase

social output or the value of water. Rather, they represent a transfer payment—a gain in one sector (agriculture) exactly offset by a loss in another sector (urban).

Thus, the payments affect the allocation of income but

not the economic efficiency of using water. Nevertheless, those payments are critically important to the

functioning of a voluntary market. Without them, no

water would be transferred. 

The value of the payments for water transfers is P*

times T* and can be seen in the second panel as the

rectangle traced out by moving from the origin up the

price axis to P*, across to the intersection of the market

supply and demand curves, down to T*, and then back

to the origin. The fact that farmers are better off with

the water market can be seen by comparing the area of

that rectangle (the benefit farmers receive from participating) with the area under the supply curve between

the origin and T* (the cost to farmers from participating). The rectangle is bigger by that portion of the

shaded area below the line representing P*. Urban consumers are also better off, despite having to make the

payments. Their gain is seen by subtracting the payment rectangle from the area under the urban demand

curve between the origin and T*. That difference is

depicted by the portion of the shaded area above P*.

Thus, the portion of the social gain (the entire shaded

area) captured by each sector can also be seen in the

second panel as the relative sizes of the triangles above

(gain to urban consumers) and below (gain to agriculture) P*.

In that diagram, urban consumers appear to capture

most of the benefit. In fact, the relative sizes of the

triangles depend on the slopes of the supply and demand curves. If the supply curve is steeper than the

1. In practice, P* will probably vary among and between sellers and buyers. Differences in transportation costs, reliability of the water supply,

and costs of forging the transaction will result in different prices within

user groups. Other policies, such as surcharges that are paid by only

one user group, can drive a wedge between the price paid by buyers

and received by sellers.

2. The previous footnote describes important exceptions to this notion.

3. That point is true as long as all uses are represented in the market. For

example, fish and wildlife interests typically are not well represented,

so a water market will tend to allocate too little water to that use.
Full-Cost Rate

Quantity of Water Used

Price

P*

Contract Rate (P )

W* 0.8A A 0.9A

TWP-CVPIA

Dag

TWP*

c

78 WATER USE CONFLICTS IN THE WEST August 1997

demand curve, the triangle representing gains to agriculture will be larger than that representing gains to

urban consumers. The actual size of the gains is an

empirical question. Chapter 5 addressed that question

in a case study of the Central Valley Project Improvement Act in California. 

Tiered Water Prices

Tiered water prices (TWP) can motivate optimal decisions about water use by charging the true price for the

last units of water consumed. Efficient decisions will

be made only when the decisionmaker faces the true

cost of the resource. Three different policy tools can

ensure that appropriate price signals are observed:

water markets, a uniform price increase, and tiered (increasing block-rate) water prices. 

Because decisions about the use of inputs are made

on the margin—that is, the last unit will be used only if

the benefits to the user exceed the cost—optimal decisions about how much water to use can be motivated by

ensuring that the true price is signaled for just the last

unit. The price schedule (TWP*) in Figure B-2 is an

example of that type of policy. The farmer's water allotment and demand for water are the same as that depicted in the first panel of Figure B-1. Under the twotiered scheme, the current price the farmer pays for

water is charged for most (say, 90 percent) of the optimal levels of water use. The price then rises to P* for

all additional units of water used. The farmer would

respond to that policy by reducing water use from A to

W*—the same quantity induced by a price of P* for all

units—but would pay P* for only 10 percent of the total quantity used rather than for each unit used, thus

incurring a much smaller financial burden.

Tiered prices can be effective tools for achieving

objectives of water conservation, even if the information necessary to design an optimal price schedule is

unavailable. To achieve the optimal design of a tiered

pricing schedule, the policymaker must know the true

price and the optimal quantity to be used. The price

schedule denoted "TWP-CVPIA" in Figure B-2 is an

example of a policy that, although it does not motivate

optimal behavior, could motivate a small reduction in

water use. The figure illustrates the three-tiered schedFigure B-2.

The Effects of Tiered Water Prices and a Water

Market on a Farmer's Decisions About Water Use

SOURCE: Congressional Budget Office.

NOTE: TWP = tiered water price; CVPIA = Central Valley Project

Improvement Act.

ule specified for agricultural water users in the Central

Valley Project Improvement Act. The farmer pays the

contract (subsidized) rate for the first 80 percent of the

water allotment and the full-cost rate for the last 10

percent. For quantities between 80 percent and 90 percent of the water allotment, the farmer pays a rate halfway between the contract rate and the full-cost rate.

That policy would prompt the farmer to use 10 percent

less of the allotment (A), or 0.9A.

The incentive that tiered prices give a farmer to

conserve water will depend on the relative levels of the

upper tiers and the marginal benefits from water use for

that farmer. A demand curve farther from the origin—a

horizontal shift to the right—might indicate no change

in water consumption, and a demand curve shifted to

the left, so that it intersects the second tier, could imply

more than a 10 percent reduction in water use. Likewise, if the same farmer was in a district with a lower

full-cost price, the tiered prices might have no effect; if

the full-cost rate was higher, the tiered prices would

have a greater effect.
APPENDIX B THE ECONOMICS OF TOOLS FOR REFORMING FEDERAL WATER POLICY 79

Environmental Surcharge

Surcharges are like price increases and, thus, reduce

consumption unless the water allotment is less than the

amount the farmer wants to use at the new price. As

described above, a simple price increase can motivate

optimal behavior if it is large enough. The implications

of a surcharge will depend on the level of the new price

(the contract price plus the surcharge) relative to the

value of water use given the allotment (see the first

panel of Figure B-1). If the new price is less than Pa

(the value to the farmer of using the last unit of water

available), the surcharge will not affect how much

water the farmer uses. However, if the new price is

greater than P , then the surcharge gives farmers an in- a

centive to use less water. In either case, the surcharge

raises revenue for environmental purposes. 

Economic theory suggests that the best design for a

schedule of surcharges depends on the objective of the

surcharge program. Surcharges can be imposed to generate revenues for environmental projects and encourage water conservation. Although the primary motivation for the CVPIA surcharge is probably to raise revenues, its potential to encourage farmers to conserve

water should not be ignored. In some situations, a surcharge may be a useful tool for increasing in-stream

flows, which may benefit fish and wildlife. The two

objectives could work against each other, however:

increasing the surcharge from some positive level, for

example, would tend to decrease the quantity of water

used (that is, increase water conservation) and thus to

reduce the quantity of water on which the surcharge

was assessed. 

If the sole objective in establishing a surcharge is to

raise revenues, economic theory suggests that the best

approach is to charge a relatively high price to users

that are less responsive to price changes (those that will

not significantly change the amount of water they use as

prices change) and a lower price to the most priceresponsive users. That form of price discrimination is

termed "Ramsey pricing." It is "'best" in the sense that

it distorts, or changes, users' behavior less than any

other option that raises the same amount of revenue.

Whether they intended to or not, the authors of the

CVPIA created a rough example of Ramsey pricing

when they established a $6 surcharge for agricultural

users, a $12 surcharge for municipal and industrial

(M&I) users, and a $25 surcharge for water transferred

to M&I use. Agricultural users are generally more responsive to price changes than urban users, primarily

because they use more water and have a wider range of

options for adjusting to reduced water supplies.

If the sole objective is to encourage water conservation, however, the optimal pricing structure is to reverse

the order of the surcharges. A high surcharge on priceresponsive users will prompt them to use much less

water. In contrast, increasing the surcharge on nonresponsive users will not motivate them to change the

amount of water they use, so imposing a surcharge on

them yields no advantage. Those differences could be

shown by changing the slope of the demand curve in

Figure B-2. If demand is very steep—indicating a lack

of response to price changes—even a relatively large

price increase results in only a small change in the

quantity of water used. If demand is very flat, however,

a small price increase can motivate a large change in the

quantity used.

Environmental Water 

Allocation

Allocating water to the environment would probably

reduce the total value of agricultural production activities. Assuming that the environmental water would

come first from farmers' water supplies, allocating the

bureau's water to environmental uses would be the

equivalent of shifting the agricultural allocation to the

left, from A to A2, as illustrated in the first panel of

Figure B-3. That action could have three effects: it

could generate increased environmental benefits; it

could reduce farmers' benefits; and, if a water market

existed, it could reduce the benefits that urban consumers gain from water transfers. 

An obvious implication of allocating more water

for the environment is a reduction in the amount of

water available to farmers and a subsequent reduction

in their benefits (see the shaded area in Figure B-3).

Another implication is an increase in the marginal value

of water used in agriculture, from P to P . As dis- a a2

cussed below, that increase in turn influences whether
S2 S

Pa

T**

Durban

Dag

W**

P**

P

u

W* A2 A T*

P*

Pa2

Farmer's Decisions Farmer and Cities' Combined Decisions

Price Price

Quantity of Water Used Quantity of Water Transferred

Loss to

Farmer

80 WATER USE CONFLICTS IN THE WEST August 1997

Figure B-3.

Water Prices and Quantities with a Water Market and an Allocation for Fish and Wildlife

SOURCE: Congressional Budget Office.

and to what extent price increases affect farmers' decisions about how to use their water allotment.

In the presence of a water market, agricultural and

urban areas would share the costs of an environmental

water allocation. Reducing the supply of water to agriculture would reduce the supply of water from agriculture. Farmers facing a reduced supply and a higher

value for water would be willing to transfer less of it at

any given price than they would if they had a full allotment (illustrated in the second panel of Figure B-3 as a

shift up and to the left in the market supply curve, from

S to S2). Therefore, farmers would use less water, urban consumers would receive less water, and the

market-clearing price would be higher than with the

water market but no environmental allocation. (The

benefit to fish and wildlife from increased water for instream uses is not shown in Figure B-3.) 

Assuming that the environmental allocation accurately reflects the value society places on improving the

habitat for fish and wildlife, a water market combined

with an environmental allocation would provide socially

optimal levels of water for each use. The set of outcomes—illustrated in Figure B-3 as (A2 to A) for fish

and wildlife, W** for agriculture, T** for transfers to

urban use, and a price of P**—would generate the

highest total value possible from the Bureau of

Reclamation's water supply. Whether those allocations

actually reflect the true social optimum depends on the

benefits to the environment of increased in-stream water use relative to the costs of reduced supplies in other

sectors. 4

4. Several combinations of policy tools could generate the same solution.

The purpose of this discussion is to define an optimum and examine

deviations from that point, not to declare water markets and an environmental allocation as the best combination.
APPENDIX B THE ECONOMICS OF TOOLS FOR REFORMING FEDERAL WATER POLICY 81

Economic Implications of

Combining Policy Tools

The remainder of this analysis examines potential deviations from the optimal water allocation. Adding policy tools that change water prices or allotments to a

reform package that already includes water markets and

an environmental allocation could result in allocations

that deviate from optimal allocations. This discussion,

using the package of provisions contained in the

CVPIA as a framework, examines the incremental implications of adding other policy tools and describes the

likely outcome of several possible combinations of

tools.

The CVPIA contains water transfers, environmental water allocations, tiered water prices, and several

different kinds of surcharges. In addition, as is true

under general reclamation law, the Bureau of Reclamation must be repaid at rates that include interest

charges—full-cost or municipal and industrial rates—

for any water transferred to a user who has not previously held a contract with the bureau. Because the exact combination of policy tools that might be described

for other regions is unknown, this analysis describes

several different combinations.

Combination 1: A Water Market, an

Environmental Water Allocation, 

and Surcharges

The CVPIA imposes several additional charges on

water transferred from agriculture to non-CVP M&I

users: the act increases the environmental surcharge

from $6 to $12 per acre-foot, imposes a $25 per acrefoot surcharge, and requires farmers to repay the bureau

at the M&I cost-of-service rate. Those charges reduce 5

the benefits of the transfer to both the purchaser and the

transferror: urban districts pay more for a water transfer, and farmers receive a lower price for it. For example, if the urban district agreed to pay $100 per acrefoot, the effective price received would be only $69 per

acre-foot because the farmer or district transferring the

water would have to pay surcharges of $31 per acrefoot to make the transfer.

Who bears the burden of those additional charges

depends on the relative elasticities (price responsiveness) of the parties involved. In other words, although

the surcharges would drive a wedge of $31 per acrefoot between the price paid and the effective price received, it is not clear who will "pay" the $31. Because

urban water users tend to be less responsive to price

changes than agricultural users, they will probably bear

the largest share of that burden.

Having an increased price to purchasers and a decreased price to sellers biases the water allocation toward agricultural use. The surcharges increase the divergence between the price that farmers must pay to the

bureau if they use the water for agriculture and the price

they must pay if they transfer the water. Graphically,

that impact would result in a shift up in the market supply curve; for any given market price, farmers would be

willing to sell less than they would have without that

provision. Thus, the surcharges tend to increase water

use and decrease water transfers relative to a water

market without the surcharges. However, the magnitude of the change is smaller because of the agricultural

surcharge than it would have been if surcharges were

imposed only on M&I use.

Combination 2: Adding Tiered Water

Prices to a Water Market, an

Environmental Water Allocation, 

and Surcharges 

Combining the tiered water prices with water transfer

provisions and possible changes in the amount of water

available to contractors resulting from the reallocation

of water for fish and wildlife, as the CVPIA does, may

render the tiered prices ineffective. For example, if a

water market resulted in a price to farmers of P**, the

farmer depicted in the first panel of Figure B-4 would

sell a quantity of (A2 - W** = T**), the same quantity

that would be sold if the farmer faced a water market

without tiered water prices. As long as the price at the

top tier is below the market-clearing price, the tiered

5. The Bureau of Reclamation has interpreted that provision as implying

that the repayment rate must be the higher of the M&I cost-of-service

rate and the prevailing agricultural repayment rate. See Bureau of

Reclamation, Revised Interim Guidelines: Restoration Fund Payments and Charges (Sacramento, Calif., October 1993). 
{

S2 S

M&I

Surcharges

Pa

T T**

D D ag D' urban

W** W

TWP

P**

Pu

Contract

Rate (P )

Full-Rate

Cost

A2 A

S2'

urban

Farmer's Decisions Farmer and Cities' Combined Decisions

Quantity of Water Used Quantity of Water Transferred

Price Price

c

82 WATER USE CONFLICTS IN THE WEST August 1997

Figure B-4.

Water Prices and Quantities with CVPIA Provisions

SOURCE: Congressional Budget Office.

NOTES: The Central Valley Project Improvement Act (CVPIA) contains provisions for a water market, an allocation for fish and wildlife, surcharges

for municipal and industrial uses, a repayment rate, tiered water prices and agricultural surcharges.

TWP = tiered water price; M&I = municipal and industrial.

prices will not affect an individual farmer's decisions

about using or transferring water. Thus, the water market is unaffected by the presence of the tiered water

prices. Conversely, the tiered prices, which may encourage water conservation when implemented independently, are rendered ineffective when combined with

a water market. As illustrated in Figure B-2, the tiered

water prices alone motivate farmers to conserve 10 percent of their water allocation. With the water market, 6

however, farmers' water use is reduced more than 10

percent. The tiered water prices are redundant in that

case.

Two caveats condition the above statements. First,

some farmers may choose not to participate in water

markets for philosophical reasons; some believe very

strongly that the water belongs in agriculture or fear

that their way of life will change if water transfers become common. Tiered water prices may encourage

those farmers to conserve even in the presence of a

water market. 

Second, the manner in which the tiered prices and

the fish and wildlife allotment will be implemented in

relation to each other is unclear. Two options exist:

reduce the contract allotments by the amount of water

dedicated to fish and wildlife, or keep the contract allotments approximately where they are with the understanding that full allotments are not likely to be delivered in many years. The significance in that context is

the link between tiered water prices and the size of the

allotment. If allotments are reduced, the quantities at

which the higher prices are imposed are also reduced

(depicted as the lightest dashed line in Figure B-4). 6. As noted previously, the actual quantities involved depend on the relative values of the tiers as well as on market forces. The tiered water

prices alone could motivate conservation of zero to 20 percent. 
APPENDIX B THE ECONOMICS OF TOOLS FOR REFORMING FEDERAL WATER POLICY 83

That might imply that farmers conserve more water in

the absence of a water market. 

If water allotments are not reduced, the tiered price

schedule will have no effect on farmers—regardless of

price levels or the presence of a water market—unless

actual deliveries exceed 80 percent of allotments. Most

observers believe that in many years, deliveries to farmers south of the delta will probably not exceed that

amount, in part because of the CVPIA. Protection provided by the Endangered Species Act and the Clean

Water Act may also inhibit the bureau's ability to pump

water south of the delta.

Combination 3: Adding Higher 

Repayment Rates for Transferred 

Water to Tiered Water Prices, a Water

Market, an Environmental Water 

Allocation, and Surcharges 

Combining tiered water prices with a provision for

higher repayment rates for water transferred is the one

case in which adding tiered prices might affect the

amount of water transferred. As discussed above, the

repayment rate provision drives a wedge between the

price that farmers must pay the bureau for water used

and the price they receive for water transferred. That

price differential shifts the market supply curve up and

in (to the left). By increasing the cost for water use, the

tiered prices reduce that divergence and tend to bring

the supply curve back in line with the supply curve for

the case in which only a water market and an environmental allocation are implemented. The resulting supply curve exhibits discrete jumps associated with the

three tiers (depicted as S2' in the second panel of Figure

B-4). Thus, although the combination of a water market, water allocation, transfer rates, surcharges, and

tiered water prices can be expected to increase agricultural water use and lower water transfers relative to the

case of only transfer rates and an environmental water

allocation, those changes may be smaller than they

would have been without the tiered water prices. That

shift will be observed only for the 20 percent of water

included in the tiered price provisions, however, and so

it will influence the final result only if the volume of

water transferred is below that amount.

Combination 4: The CVPIA Package 

The final combination examined is the entire package

of CVPIA provisions considered here: a water market,

a fish and wildlife allocation, M&I surcharges, a repayment rate provision, tiered water prices, and agricultural

surcharges. That combination results in higher agricultural water use and lower water transfers to urban users

than if the CVPIA included only a water market and the

fish and wildlife allocation. The fish and wildlife allocation guarantees water for that sector. The water market allows for an efficient allocation of the remaining

water between agricultural ( in Figure B-4) and urban

( ) uses and within agriculture. The addition of surcharges and repayment rates that are higher for water

transferred than for water used in agriculture will tend

to reduce the incentive to transfer water. Those rate

differentials are depicted in Figure B-4 as leftward

shifts in both the urban demand for water (from Durban

to D' ) and the supply curves (from S2 to S2'): CVP urban 

contractors use more water and transfer less than without the additional provisions. However, those differences in the resulting water allocations are closer to

optimal than if the M&I surcharges and repayment

rates are added but the tiered water prices and the agricultural surcharge are not. 

Interaction Between the Fish and 

Wildlife Fund and Water Transfers 

The above analysis does not address the possibility that

the Bureau of Reclamation might purchase water for

environmental purposes with money from the environmental surcharges. Using those funds to purchase

water would shift the demand curve in the second panel

of Figure B-4 to the right. That action would probably

increase in-stream water use and decrease water used in

agriculture and transferred to M&I uses, relative to the

case with a water market and the fish and wildlife allocation but without the restoration fund.