In the arid western United States, most water systems are fully allocated. Water for new uses must usually be obtained through reallocation of water that has already been claimed and assigned within prior appropriation. In Idaho, new allocations of ground water were made until approximately 1990. Since then, new uses have nearly always been met by reallocation, via prior appropriation water-rights transfers or the operation of the Idaho Water Supply Bank. Using number of allocations or reallocations per year as a proxy for the effectiveness of allocation mechanisms, it appears that transfers and the Bank have not adequately served the needs of society. This indicates that Idaho's allocation of ground water resources is inefficient; that is, that total benefit to society could be improved by mechanisms that more readily facilitate reallocation of water. It appears that improvements to ground water banking could be made within the scope of existing Idaho water-banking statutes, to improve the allocation of resources, reduce conflict and facilitate economic growth.
In the arid western United States, water systems are fully allocated or nearly so. Where new infrastructure (such as storage dams) might allow utilization of the few remaining unallocated flows, the financial and ecological cost of these is increasingly prohibitive. Therefore, water for new uses must usually be obtained through reallocation of water that has already been claimed and assigned within the prior appropriation system. The water-rights transfer is the traditional reallocation mechanism. However, economists tend to prefer market solutions because, when they work well, they provide an economically efficient allocation of goods and resources. Further, they are seen as equitable because they achieve this through voluntary exchange. Some economists criticize prior appropriation as being hostile to water markets and failing to allocate water to the highest value uses. It is even quipped that an economist is a person who “does not see anything special about water” (Gould 1988). Water banking is touted as a potential mechanism to bring some market characteristics and advantages into prior appropriation.
For a market to function, several basic factors must be substantially present:
1Property rights a. fully specified b. exclusive c. enforceable and enforced d. transferable
2Costs and benefits internal to the players
3Adherence to moral norms
4Adequate numbers of buyers and sellers
5Access to information
6Lack of market barriers a. Regulatory or market-access barriers b. Transaction costs
When one or more of these required attributes is missing or inadequate, economists say that a market failure has occurred. In that case, markets are not necessarily efficient or equitable. In asserting that market allocation of water is desirable, or that there is nothing special about water, one asserts that these market requirements are substantially present; that is, that no market failure has or will occur.
Rivalry is related to the physical characteristics of the good and the nature of uses that are made of it. Randall classifies goods as rival, nonrival, or congestible. Congestible goods are nonrival up to some capacity constraint, then become rival. In water resources, one must also consider antirival relationships, where one use provides a benefit to another.
Randall's other criterion is exclusion, which is a function of institutional and technological factors. Exclusion and nonexclusion are important in water resources, though Randall also discusses the theoretical concept of hyperexclusion.
Whether one uses traditional market-failure nomenclature or Randall's classifications, the concepts are useful to consider in assessing reallocation mechanisms. The important economic implication is that market requirements are met, and the prized advantages of markets are realized, only for goods that are both rival and exclusive. Many aspects of water use are nonrival, congestible, or antirival. Some uses are technologically nonexclusive (flowing springs are difficult to shut off) and some are institutionally nonexclusive (Idaho minimum streamflow rights cannot acquire senior priority even by purchase and transfer). There is indeed something special about water.
Water Banking in Idaho
There are two main categories of water banking in Idaho, Rental Pools and the Water Supply Bank. Space permits only discussion of the application of the Water Supply Bank to ground water reallocation. Useful discussions of Rental Pools and surface-water banking are provided by Briand et al (2008) and Slaughter and Wiener (2007). As applied to ground water rights, Idaho's Water Supply Bank is essentially a clearing house for trading of authorization to divert. It does not manage the physical storage or exchange of volumes of water stored in the aquifer, though such would appear possible within existing statutes.
Historical Water-Right Activity Levels
The goal of water-banking legislation was clearly to facilitate reallocation. Its success can be measured in part by considering levels of activity. One can use pre-moratorium activity levels to estimate the amount of activity that would be expected with an adequate reallocation process.
Figures 1 through 3 show the number of ground water rights in Idaho for each year of priority, for various water-use categories. Priority date approximates the development date of a water right. These categories comprise about 95 percent of ground water use, either by water-right count or total diversion rate.
The large increase in irrigation rights starting about 1950 is consistent with the historical timing of improved pump technology and availability of rural three-phase electric power in Idaho. There may be a slight declining trend in the number of new rights per year between 1950 and 1985, which is consistent with Gould's hypothesis that the best lands would have been developed first. As development costs increase and revenue potentials decline, reduction in activity is an expected outcome. The steeper decline between 1985 and 1990 could reflect increased protest activity that may have preceded the moratoriums. The pattern since 1990 is consistent with imposition of a moratorium followed by continued development of some previously-permitted rights that had received priority advancements for various reasons.
The time series of domestic, municipal and stock water rights appear to be consistent with a steadily increasing population, except for the 1970 - 1980 spike and the declines discussed above. These data are harder to interpret because there is only a partial record of de minimus rights, which mostly are single-family domestic water rights and small stock water rights. Recording of these is not currently required, though many were voluntarily recorded as part of the Snake River Basin Adjudication.
Expectations for Reallocation Activity
One could assume that the number of reallocations to irrigation would be relatively few, since the best lands would have been the first to be irrigated and there would be little economic justification to move water to less-productive land. A first estimate is that an adequate reallocation mechanism would allow tens to perhaps a few hundred transactions per year, in either case just a fraction of the 1,000 to 1,500 annual allocations that occurred prior to moratoriums.
The long-term domestic/municipal trend could be extended linearly into the future. Based on the historical data, it is estimated that annually 1,000 to 3,000 reallocations to domestic/municipal uses would occur with an adequate mechanism.
Two different interpretations could be applied to stock water rights. The first is that since all pastureable land is likely already in use and presumably has adequate stock water, there should be little need for reallocation of additional water to stock water use. The other interpretation is that the dairy industry in south central Idaho could be expected to grow and will require continued reallocation. A broad-brush expectation for an adequate mechanism ranges from tens to hundreds of reallocations to stock water per year.
Combining these expectations, it is estimated that an adequate reallocation mechanism should be expected to accommodate approximately 1,000 to 4,000 transactions per year.
Observed Reallocation Levels
Though the legislature intended that water banking serve as a “substitute for …. transfer proceedings” (Idaho Code 42-1764), the primary reallocation mechanism is still the water-rights transfer. The overall effectiveness of reallocation should be examined by considering both banking reallocations and transfers. The effectiveness of banking itself can be considered by comparing its annual activity with total numbers of reallocations.
In recent years, the Idaho Department of Water Resources (IDWR) has generally processed around 200 to 250 water transfers per year (Keen 2008). Many of these involve ground water rights, though the current database configuration does not allow precise delineation by source. Data provided by IDWR (Case 2008) show that there are about 520 ground water rights currently enrolled in the Idaho Water Supply Bank. Of these, 60 are rented from the bank and represent active reallocation activity. The remaining 460 are static and appear to be placed in the bank primarily as protection against water-right forfeiture. Combining transfers and Water Supply Bank transactions, the total number of actual ground water reallocations appears to be in the range of 125 to 300 transactions per year. Between 20 percent and 50 percent of these are facilitated by the Water Supply Bank.
Assessment of Ground Water Banking in Idaho
Current reallocation transactions in Idaho constitute about 3-30 percent of the transactions that would be expected in an adequate reallocation mechanism. It appears that the current mechanisms are not fully “providing a source of adequate water supplies to benefit new and supplemental water uses” nor fully encouraging “the highest beneficial use of water” (see Idaho Water Resource Board overview of water banking at http://www.idwr.idaho.gov/waterboard/water%20bank/Documents/BankOverviewFAQ.pdf). If the lower estimate is correct, the need for reallocations in Idaho exceeds the current level by an order of magnitude. Even if one were to assert that overall reallocation approaches adequacy, the bank itself does not appear to be meeting its stated purpose, since its reallocations are fewer than those accomplished by water-rights transfers.
Potential for Ground Water Banking
There is an opportunity in Idaho to improve the benefit society receives from a limited pool of water resources by allowing additional reallocation of water to higher-value uses. Modifications to ground water banking can be used to facilitate exchange while appropriately aligning exclusion and rivalry and satisfying market requirements.
Costs and benefits of trade must be internal to the players in a transaction. This requires the ability of exclusion. The prior-appropriation no-harm transfer rule is essentially a particular form of exclusion. However, it tends to generate excessive transaction costs and constitutes a market barrier. Exploring rivalry issues of reallocation of ground water will aid understanding of appropriate exclusion mechanisms for ground water banking.
The ground water to ground water relationship of reallocation is theoretically rival; a gallon of water consumptively used from one well is unavailable to be pumped from another. However, at current levels of development in the highly transmissive and productive Eastern Snake River Plain Aquifer, wells are independent in practical effect (though not nonrival by Randall's definition). Since reallocation by definition requires cessation of the former use, this practical independence can be expected to continue.
The ground water to surface water relationship of reallocation is more complex. Surface water not hydraulically connected to the aquifer is independent of ground water. When the surface water body is connected to the aquifer, ground water pumping is rival to surface water use. The Eastern Snake River Plain Aquifer in southern Idaho is hydraulically connected to some reaches of the Snake River and to springs tributary to the river. These springs are legally classified as surface water. Surface water allocation along the Snake is administered by reach, based on the hydrology and interaction of natural-flow runoff, storage releases, and gains and losses to the aquifer. The degree of rivalry that the pumping has with a particular river or spring reach depends on its location. The aquifer is large enough that there are significant differences in timing of effects to surface water. Some wells affect some reaches within weeks or months, while impacts from other wells may not affect the river or springs until decades after the time of pumping. A reallocation that moves the point of diversion changes the rivalry relationships.
To its credit, the Idaho Department of Water Resources has recognized these potential changes in rivalry, and has understood that unfettered reallocation of ground water rights would violate the market requirement of costs being internal to the players in a transaction. This explains the cumbersome analyses required for ground water rights transfers, and probably explains the lack of utilization of the Water Supply Bank as a substitute for transfer proceedings. However, while addressing the market requirement of internalized costs these procedures have violated the low-transaction-cost requirement and have rendered ground water rights a non-homogeneous commodity. Further, typical mitigation plans have produced un-reimbursed gains to non-target surface water bodies, violating the requirement of internalized benefits.
To meet market requirements and properly align rivalry and exclusion, a system of quantifying physical rivalry relationships must be incorporated with a system of tracking ownership claims. Aquifer response functions (Cosgrove and Johnson 2004), also known as algebraic technical functions (Maddock 1972), provide the mechanism for physical quantification. They have the important capability of distilling all recharge, discharge and exchange activities into time series of effects at defined surface water reaches that are hydraulically connected to the aquifer. This assures that rivalry and exclusion can be satisfied, and renders banked ground water homogeneous. Principles of double-entry financial accounting provide the capability for tracking ownership. The linkage between these two technologies is demonstrated by proof-of-concept software available at http://www.if.uidaho.edu/%7Ejohnson/hydroweb/reports.html.
With this accounting of water quantities and ownership, a ground water bank could be established where the units banked were the impacts realized at surface water bodies. This appears to be compatible with existing Idaho law. Activities that could be considered deposits include:
1Temporary cessation of pumping or permanent retirement of a ground water right. The in-priority consumptive use that otherwise would have been supported is banked as a deposit.
3Supplying in-lieu surface water supplies to replace ground water pumping that otherwise would have occurred. In-priority consumption that would otherwise have been supported by ground water, along with incidental recharge from surface water delivery which would not have otherwise occurred, are bankable deposits.
4Intentional aquifer recharge, or the storage phase of aquifer storage and recovery.
5Excess benefits created by mitigation plans.
As a hedge against technical uncertainty, a percentage of the deposited water could be deemed an uncertainty allowance, held irrevocably by the State and accruing to the benefit of the aquifer. The demonstration software includes this functionality.
Under current Idaho statutes, it appears that direct diversion of water from the aquifer could be allowed as withdrawal from the bank, along with application of credits as mitigation for otherwise out-of-priority use of ground water. As with deposits, aquifer response functions would be used to quantify the effects of a proposed withdrawal, which would be distilled into time series of effects at river reaches through the use of aquifer response functions. This restores the important market requirement of homogenous goods. Double-entry accounting and the structure of accounts automatically aligns the timing and location of impacts of withdrawals with the benefits of deposits, satisfying the prior-appropriation no-harm rule and internalizing all hydrologic impacts of the transaction.
Credit owners may also choose to retire credits without extraction, specifically to ensure a benefit to the aquifer and interconnected surface water bodies. Environmental interests and holders of water rights in springs may have such a preference. With additional legislation, credit owners could perhaps also use their credits to offset direct diversion from surface water bodies.
Prices could be set administratively as has been done in Idaho Rental Pools. Alternately, market prices could be allowed to operate, better meeting the market requirements of information and lack of barriers. This would allow banking to more closely approach the market benefits of economic efficiency and equity.
The effectiveness of such a banking system can be assessed by reviewing its ability to satisfy market requirements. Table 1 provides a summary.
Table 1. Assessment of Ability of Described Ground Water Banking to Meet Market Requirements.
Technologically, migration of stored ground water to springs and rivers cannot be excluded. Banking credits that expire unused create unpriced antirival benefits.
Enforceable and enforced
Structurally possible, though some users may assert that current enforcement is inadequate.
Costs and benefits internal to players
See exclusion comment.
Adherence to moral norms
This is the subject of debate but is structurally possible.
Adequate numbers of buyers and sellers
Access to information
If market prices are allowed.
Lack of market barriers
Low regulatory barriers
Depends on implementation details; requires market prices.
Low transaction costs
Depends on cost of operation and level of participation.
This is a consequence of using aquifer response functions to distill all transactions into time series of effects at river or spring reaches.
Prior appropriation is criticized for reallocation restrictions that appear to be market-hostile but in reality are attempts to address the lack of fundamental market requirements. This lack is due to the rivalry characteristics of water that arise from physical characteristics and the nature of use, along with exclusion characteristics that arise from technological abilities and institutional decisions. Water banking can be a mechanism to introduce some market mechanisms into prior appropriation by better aligning rivalry and exclusion, in order to better secure the market advantages of economic efficiency and equity.
Ground water banking in Idaho supplies only part of the annual reallocation of ground water to new uses, with the balance being supplied by traditional prior appropriation water-right transfers. Total reallocation activity appears to be significantly lower than the expected adequate level, based on pre-moratorium rates of issuance of new allocations. This indicates that water is not being reallocated to highest and best uses, and consequently that society as a whole is not receiving maximum benefit from the limited water resources that exist.
Activity in reallocation could be increased if the satisfaction of market requirements and the prior-appropriation no-harm rule were automatic and low cost. This could be achieved by modifying ground-water banking to use aquifer response functions to address rivalry issues and double-entry accounting to address exclusion and ownership. Actual volumes of water stored in the aquifer could be banked, and market prices could be allowed to convey the information needed to secure the market efficiencies desired. Most market requirements could be fully met by this arrangement and all could at least be partially met. The linkage of the two technologies has been demonstrated in proof-of-concept form.
Author Bio and Contact Information
Bryce A. Contor is a research hydrologist with the Idaho Water Resources Research Institute in Idaho Falls, Idaho. His background includes an undergraduate degree in Agricultural Economics and a Masters Degree in Hydrology. Before coming to the Institute he worked for a state water administrative agency and prior to that in irrigated agriculture. Bryce may be contacted at (208) 282 7846, firstname.lastname@example.org, or at 1776 Science Center Drive Suite 305, Idaho Falls ID 83402.