Federal Water Policy Reform: Implications for Irrigated Farms in California

I. INTRODUCTION Increased competition for limited water supplies among agricultural, urban, and environmental uses in the western United States, combined with few prospects for developing new supplies, demands better management of existing water supplies. Due to its extensive role in water development, the federal government has both the responsibility and the capability to play an important part in addressing water conflicts throughout the West. In California, these conflicts, and the need and opportunity for reforming federal water supply policies, came together around the U.S. Bureau of Reclamation's (USBR) Central Valley Project (CVP). The Central Valley Project Improvement Act (CVPIA), signed into law October 30, 1992, dramatically reforms water supply policies for USBR's CVP operations. The CVPIA has been hailed as pathbreaking legislation with dramatic implications for water pricing and allocation in California. In addition, the act may serve as an important model for reform of USBR policies for water projects throughout the western United States. To achieve its goals, the CVPIA (i) establishes the protection of fish and wildlife as a project purpose, (ii) allocates water and creates user fees to fund activities to enhance fish and wildlife, (iii) introduces increasing block rate water prices, and (iv) allows water contractors to participate in water markets. The act thus adopts incentive-based polices (water markets, increasing prices, and environmental surcharges) long advocated by economists, as well as command and control policies (mandatory set aside of water for fish and wildlife) common in environmental regulation. Both the potential efficiency gains of incentive-based policies and the likely inefficiencies associated with command and control policies are common knowledge. However, economists typically examine each policy option in isolation; the literature on the implications of simultaneous implementation of several policy options, as is required by the CVPIA, is sparse. This paper first provides a context for the significance of the CVPIA and introduces several of its key provisions. Each of these provisions can affect crop mix, irrigation practices, total output, and revenues in agriculture, the principal user of CVP water. The impact of each provision will depend on the combination of provisions implemented. Incentives or constraints generated by one provision may render another ineffective, or they may combine to create a strong incentive that would not exist in isolation. The paper then analyzes the implications of CVPIA provisions for a subset of agricultural producers dependent on CVP water. II. PROBLEM SETTING Access to adequate water supplies is necessary for the development, sustenance, and growth of urban and rural economies throughout the arid West. However, the rivers that supply that water typically are over-allocated; annual flows are insufficient to meet competing demands (given existing prices). In addition, the value of river flows for instream uses, such as fish and wildlife habitat and recreation, typically has been neglected in water allocation decisions but is gaining increased recognition by policymakers. Historically, water shortages were mitigated by the development of large-scale projects that move water from areas or seasons of surplus to those of excess demand. However, rising economic and environmental costs associated with constructing dams and reservoirs has dampened enthusiasm for developing new projects. Instead, improved management of existing supplies and conservation by current users, primarily agriculture, is generally accepted as the least-cost solution to meeting increasing needs for "new" water supplies. The USBR is the largest supplier of irrigation water in the United States. More than 150,000 farms in the 17 western states receive water from the USBR to irrigate roughly 10 million acres, half of all surface-water irrigated acres in the West. …