Two‐Way Option Contracts That Facilitate Adaptive Water Reallocation in the Western United States
Creators: name: Gupta, Rohini S.
name: Zeff, Harrison B.
name: Characklis, Gregory W.
name: Vernon, Chris R.
name: Hirsch, Zachary M.
name: Reed, Patrick M.
Publisher: name: American Geophysical Union (AGU)
Year: 2024

description: <p>Many water markets in the western United States (U.S.) have the ability to reallocate water temporarily during drought, often as short‐term water rights leases from lower value irrigated activities to higher value urban uses. Regulatory approval of water transfers, however, typically takes time and involves high transaction costs that arise from technical and legal analyses, discouraging short‐term leasing. This leads municipalities to protect against drought‐related shortfalls by purchasing large volumes of infrequently used permanent water rights. High transaction costs also result in municipal water rights rarely being leased back to irrigators in wet or normal years, reducing agricultural productivity. This research explores the development of a multi‐year two‐way option (TWO) contract that facilitates leasing from agricultural‐to‐urban users during drought and leasing from urban‐to agricultural users during wet periods. The modeling framework developed to assess performance of the TWO contracts includes consideration of the hydrologic, engineered, and institutional systems governing the South Platte River Basin in Colorado where there is growing competition for water between municipalities (e.g., the city of Boulder) and irrigators. The modeling framework is built around StateMod, a network‐based water allocation model used by state regulators to evaluate water rights allocations and potential rights transfers. Results suggest that the TWO contracts could allow municipalities to maintain supply reliability with significantly reduced rights holdings at lower cost, while increasing agricultural productivity in wet and normal years. Additionally, the TWO contracts provide irrigators with additional revenues via net payments of option fees from municipalities.</p>
<p>Plain Language Summary The inability to quickly and inexpensively reallocate water during drought has pushed municipalities to purchase many more permanent water rights than needed to meet their demands in an average year. Leasing these rights back to agriculture during non‐drought years is similarly slow and expensive, so it is uncommon, thus reducing agricultural productivity. States in the Western U.S., including Colorado, have begun to pass laws to make short‐term water transfers less costly and time consuming, although few new transfer mechanisms have yet been developed to take advantage of these laws. This research describes a &ldquo;two‐way option&rdquo; that coordinates temporary transfers of water rights and corresponding payments between agricultural and urban users, with the direction and timing of transfer dependent on hydrologic conditions (defined by an index as wet or dry). The study uses a detailed water allocation model that considers hydrology, infrastructure, and institutional water rights in testing the effectiveness of these option contracts within the Northern Colorado Water Conservancy District. Results suggest that the two‐way option can provide municipal users substantial cost savings while still maintaining high reliability during droughts, while agricultural users benefit from payments from urban users and higher levels of productivity in wet and normal years. Key Points Cities manage drought by buying permanent water rights well in excess of average demands as transaction costs deter short‐term leasing Two‐way options facilitate rapid transfers from agricultural‐to‐urban uses during drought and in the reverse direction during wet periods Urban users can maintain high reliability with reduced holdings of expensive permanent rights, while irrigators see gains during wet years</p>