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As Wyoming proceeds in the development of state-wide water plans, scenarios of future water demands in Wyoming's various water basins will almost certainly reveal mixed patterns of water-surplus and water-deficit basins. In its search for sources of water supplies, Wyoming will undoubtedly wish to consider possible interbasin transfers of water, intrabasin changes in patterns of water use, the development of groundwater, and "markets." While these issues take us afield from the principle thrust of this report, they are topics which ultimately will have to be dealt with.

In many ways, assessments of projects involving interbasin water transfers, intrabasin changes in use, and/or groundwater development follow the same principles outlined in other sections of this report for water project assessments. There are, however, a number of assessment issues which are peculiar to projects of this nature, and involve considerations not encountered in other water development projects. The purpose of this appendix is to consider this set of issues. Thus, in Section D.2 we consider the interbasin water transfer; groundwater development is discussed in Section D.3.

The issue will generally arise as to the desirability of allowing greater reliance on water markets as a means for promoting decentralized transfers of water from low to higher valued uses. With the recognition of the contemporary interest in water markets in western states, this topic is discussed in Section D.4.

A large part of the process of assessing benefits and costs associated with interbasin water transfers would be guided by the principles developed in other chapters of this report. There are three aspects of such projects, however, which introduce analytical problems not typically encountered in other water reclamation projects: (1) the potential "rescue operation" and it's implications, (2) a wider range of opportunity costs than those commonly encountered in water projects, and (3) timing issues, particularly relevant for interbasin water transfers intended to reduce or eliminate the mining of groundwater stocks.

The motivation for a state's interest in a transfer project has been related to what is referred to as a "rescue operation" and is defined as follows:

The situation envisioned here is a fairly large region that is almost wholly dependent on irrigated agriculture and agricultural processing industries. The physical capital structures of agriculture, related business activities, and social overhead have been established. The region is faced with the loss of some or all of its irrigation water, either because groundwater tables are falling or because of water rights adjudications . . .. Making new supplies available to such regions may be termed a 'rescue operation' (Howe and Easter [1971], p. 28).
Relatively recent examples of proposed transfer projects designed as a rescue operation are seen in the Central Arizona Project in the U.S. (Kelso et al. [1973]), and in Mexico's Northwest Project (PHLINO; see Cummings [1974]). At this time the need for rescue operations is hard to imagine in Wyoming. However, potentially extreme developments regarding the North Platte might well lead to the long term need for a "rescue operation. "

In instances where interbasin water transfers are intended to rescue established local/regional economies threatened with diminished water supplies, one has introduced into the benefit-cost study a key element peculiar to the rescue operation:

The key element in the evaluation of interbasin water transfers as rescue operations is the immobility of production factors. Labor and capital [social and private infrastructure that is already in place] may be immobile over long periods in some irrigation areas, and net benefits attributable to a water transfer are the incomes that accrue to these otherwise nonproductive resources" (Cummings [1974], p. 4; see also Howe and Easter [1971], pp. 28-30).
Thus, in assessing the benefits associated with an interbasin water transfer of a rescue operation, the following two-step process is required for calculating incomes/returns associated with otherwise displaced, immobile factors of production.

  1. Immobile labor and capital resources in importing must be identified as resources which will become unemployed or idle in the absence of the proposed transfer. Most importantly, the length of time over which these resources will remain immobile must be estimated (for examples, see Howe and Easter [1971]; Kelso et al. [1973]; and Cummings, [1974]).
  2. Values (incomes to labor resources, returns to capital) are then assigned to all immobile factors over the time during which they remain immobile, and the discounted sum of these values are included as benefits to the proposed water transfer.

There is a flip-side to the benefits associated with the maintained employment of immobile resources in the importing basin: the opportunity cost to factors of production in the exporting basin. There are few instances, where one finds water supplies for an interbasin transfer which could not be put to productive use in the exporting basin-either present uses or potential future uses. Values associated with any use of water in the exporting basin which would be foregone as a result of the water transfer must be included as a cost to the project.

The key consideration in estimating these costs is the immobility of resources. Thus, for potential future uses of water in the exporting basin, at issue is the extent to which land, labor, or capital is denied employment as a result of the water transfer having alternative employment opportunities elsewhere in the state. Land in the exporting area is obviously immobile, and values associated with well-established future uses of this resource will generally be included as a project cost. To the extent that excess capacity in private and/or social infrastructure has been put in place in anticipation of future expansions which would be affected by the proposed transfer, opportunity costs relevant for project costs will exist.

An analytical problem arises where planned future land values in the exporting region are predicated on expected expansions in infrastructure. The otherwise mobile factor "capital" may, in some instances, require treatment as if it were immobile.

Another analytical issue, unique to the interbasin water transfer, arises in cases where the primary purpose of the proposed transfer is to replace groundwater use. Thus, in agricultural areas dependant upon groundwater, long-term mining of the aquifer (annual pumping at rates which exceed recharge of the aquifer) results in falling water tables, rising pumping costs, aquifer contamination (in areas with layered aquifers, with contaminated layers, or in costal aquifers which can experience the intrusion of sea water), and, eventually, the depletion of groundwater supplies (see Kelso et al. [1973],' and Cummings [1971]). Water imported via the interbasin transfer is then used to displace groundwater use.

All else equal, the benefits and costs associated with the interbasin water transfer would be straightforward. Agricultural-related benefits and costs would be calculated and compared with project costs. Opportunity costs to the exporting basin, and values associated with otherwise displaced, immobile factors of production in the importing basin would be considered.

In closing our discussions of the interbasin water transfer, we should at least comment on the emotional climate which typically exists in regions which are considering water transfers. When the people of the exporting and the importing region are convinced that their water supplies are threatened, economic assessments which attempt to objectively measure benefits and costs are most likely to be greeted with considerable hostility. Thus, our comments concerning the limitations of benefit-cost measures of water development projects may be of particular relevance in the assessment of interbasin water transfers.

In the past, economic analyses were rarely used in evaluating whether efforts to open and/or expand groundwater development. Economists became involved in groundwater issues only after the problems associated with groundwater use arose. Presently, economists have had a great deal of experience with the kinds of problems associated with groundwater development which can arise after a number of years. Such problems can now be anticipated, and economic analyses can then provide data and information of direct relevance to alternative groundwater development.

Assessment and policy issues which are particular to groundwater development fall into two major categories which reflect the physical and political characteristics of aquifers: closed aquifers; and open, or tributary, aquifers.

D.3.1 Closed Aquifers
Closed aquifers are groundwater formations which are not linked, or associated, with streams, rivers, or other aquifers. They can simplistically be viewed as a bathtub (or, as Beatie [1981] would argue, an egg carton) full of water. Recharge to the aquifer, from rainfall at the surface and return flows from irrigation, is typically very small relative to the amount of water which would be extracted for irrigation purposes. Thus, there is essentially a fixed, and non-renewable, supply of water available for use. This raises several issues.

First, is the fact that estimates for benefits and costs associated with aquifer development must reflect the fact that pumping costs will increase as water tables are drawn down. Secondly, but related to increased pumping costs, the analyst faces the question: What level of development should be allowed? This question is tantamount to the question as to what useful, economic life of the aquifer should be established. Thus, once groundwater development has been initiated, a major policy concern (vis-a-vis the issuance of further rights to pump) must be that of protecting existing rights. For instance, Wyoming might decide water rights should be protected by allowing only one pumper. This would extend the life of the aquifer as the exhaustion of water supplies would be pushed far into the future. However, if Wyoming places a high value on the generation of incomes in the near term, an unlimited number of pumpers might be allowed to take water from the aquifer. Each pumper's "rights" are then limited to the amount of water that he/she can take from the aquifer before the supply of water is exhausted (Cummings [1969]). The exhaustion of water would then occur in a relatively short time.

Examples of the extremes exist in several of Wyoming's sister states. New Mexico has severely limited the expansion of pumping with administrative rules based on a planned aquifer "life" of 50 to 100 years. In western Colorado, limits to groundwater development were based upon a much shorter, 25 year expected aquifer life.

At issue here is the notion that Wyoming's interests may not be best served by groundwater development and management policies at either end of this management spectrum. That is, Wyoming may well wish to attempt to identify the hydrological and socioeconomic trade-offs relevant for policies which would be consistent with development strategies between these extremes. The assessment process would involve the following:

  1. identify social and economic criteria relevant to the state in present and future years (as examples, incomes, health/safety, environmental considerations, providing for future generations, etc.).
  2. for each groundwater basin, conduct hydrological studies required to determine key aquifer parameters: specific yield characteristics; recoverable storage; the identification of any perverse geochemical characteristics;
  3. conduct trade-off analyses to identify desireable time horizons for aquifer exhaustion.

A final consideration relevant for the closed aquifer relates to our discussions of "rescue operations" within the context of interbasin water transfers. Given that groundwater development serves to support the growth of an extensive economy in an area, such growth will be accompanied by large investments of state funds for social infrastructure (streets, roads, schools, utilities, etc.), as well as private infrastructure). The social costs and distortions associated with a later decline in the area's economy, which must inevitably attend the exhaustion of the groundwater supplies, can be substantial. As the aquifer nears exhaustion, strong pressures will exist for the "rescue" offered by the interbasin water transfer.

D.3.2 The Tributary Aquifer
The tributary aquifer is one which is directly related to streams and rivers in that it receives recharge from, and recharges to, the river (DuMars et al. [1986]). The key feature of the tributary aquifer as it is relevant for the assessment process is that, regardless of the amount of water in storage, each acre foot of water pumped from the aquifer will eventually reduce streamflow in the river to which it is tributary by an acre foot (Brown et al. [1989]). The length of time between pumping and reduced river flows can be quite long, and depends upon such things as aquifer characteristics and the proximity of pumping to the river. But whether within ten or fifty years, groundwater withdrawals will ultimately be reflected in reduced stream flows.

The tributary aquifer represents a planning dilemma. The value of water stored in the aquifer derives from putting such water to use. Such economic activity may extend over a period of 50 or more years before river flows begin to be affected. Eventually, declines in economic activity based on the direct use of surface water will offset the gains achieved through groundwater development. Pumpers are effectively pumping from the river. Thus, the trade-off facing the analyst is an extended period of significantly enhanced economic activity in an area, and the later (often, much later) economic decline and the legal morass of problems related to the infringement on surface users water rights by pumpers. 30

D.3.3 Intrabasin Changes in Water Use
Two issues must be confronted in any consideration of plans and programs to promote intrabasin changes in water use. The first, centers on the mechanisms to be used for facilitating such transfers in water rights. When all waters of an area are appropriated, property rights of one form or another are, of course, vested in the current users of water. Owners of water rights will then require compensation for any rights which are to be transferred to other users.

A second issue concerns water stored in federal projects. By federal statute, "appurtenance requirements" apply to water in most federal projects; i.e., such waters cannot be transferred for uses in areas or on lands which are not appurtenant to those in established irrigation districts. The result is described by DuMars and Ell is as a "two-tiered" water market (DuMars and Ellis [1978]); non-federal water is traded in a relatively open, state-wide market; federal water can be traded only within the boundaries of established irrigation districts.31 This then suggests that Wyoming may wish to consider the advisability of looking to changes in federal law concerning appurtenance requirements imposed on federal water projects. Absent such requirements, substantial quantities of water, now used in many instances for very low valued crops, could become available for other uses in the state's water basins.

The removal of appurtenance requirements would not necessarily be a panacea for Wyoming's future water problems. First, the removal of appurtenance requirements from federal project water would have the effect of substantially increasing the amount of water available for transfer in many areas, which could result in severe depressions in the prices for water rights. Individuals who had earlier purchased land with water rights would have paid land prices which included the capitalized value of included water rights. With sharp drops in the value of water, the value of their property would decline proportionally. Secondly, and related to our earlier discussions of interstate competition for water, the "new" availability of large supplies of water, resulting from the removal of appurtenance requirements, could draw strong interest by Wyoming's sister states in Wyoming's expanded "wealth" of water resources.

D.3.4 Promoting Water Markets As a Means for Achieving More Efficient Patterns of Water Use
If well functioning (perfectly competitive) markets for water rights existed, it could be argued that the state would have few problems in terms of allocations of water between low and high valued uses, or in interbasin inequities of water supplies (Anderson [1983, 1985]). Prices for water would be determined by the forces of demand and supply, and water would be allocated across the state in the most efficient manner: water would flow "uphill" to dollars. Thus, an issue which will surely gain increasing attention in Wyoming in upcoming years concerns greater reliance on markets as a means for promoting greater efficiency in Wyoming's water use.

There are many aspects of water markets which have considerable appeal such as water allocations being decentralized. However, a number of pitfalls are potentially associated with reliance on markets to achieve state goals related to water use. These pitfalls include: (1) the absence of basic prerequisites for a functioning market in water rights, (2) the existence of externalities, and (3) potential conflicts with the state's position vis-a-vis commerce clause litigations.

Basic to the competitive market paradigm is the existence of the following conditions: (1) there are many buyers and sellers (under certain conditions); (2) there exists perfect information; (3) the resource to be traded is perfectly, and costlessly, mobile; and (4) property rights to the resource are well defined. The lesser the extent to which these conditions exist, the less effective will be water markets, and less likely is the possibility that the state might achieve it's goals for water reallocations via the market mechanism.

In what follows, we comment on the existence of these conditions in Wyoming, or, indeed, in any western state. The need for many buyers and sellers for a well functioning market is obvious. The more individuals there are on each side of the market, the less market power any one individual will have. However, few areas in the west exist where such conditions hold, particularly in terms of many buyers. Growing demands for water are typically found in a city or metropolitan area. Generally, then, the city will be the principal, if not sole, buyer for water rights in a water basin. Examples in this regard are seen in Colorado (Denver), New Mexico (Albuquerque), and Arizona (Phoenix and Tucson). A move to greater reliance on markets under conditions where one or a few urban entities can effectively set the price for water can then have effects which are contrary to those sought by the water planning agency.

It is typically the case in western states that institutions do not exist which makes readily available to all potential buyers and sellers of water rights the conditions of all offers to buy and sell. This problem could be eliminated by Wyoming relatively easy, however, by the establishment of a clearinghouse for all offers to buy and/or sell rights within the state.

The "perfect mobility" condition relates to the need for a minimum of impediments to trades between individuals for markets to operate effectively. Litigation and hearings costs associated with third party challenges to proposed water rights transfers would seem to impose a substantial impediment to such transfers in most western states (Farrah [1989]). The effects of such challenges has been not only to impose large costs on water transfers, but also to increase the uncertainties surrounding successful water sales.

Related to the litigation costs associated with the mobility assumption of the competitive paradigm, the extent to which there exists "well established" property rights for water resources is questionable. This follows from the confusion which exists in many areas between rights based on diversion and rights to consumptive use. Recent court cases have held that rights holders may sell only that part of their water right which is consumed. Litigation costs, therefore, are required to establish an individual's saleable water right. The result is further impediments to well functioning markets.

The point of these discussions, of course, is that the one cannot assume out of hand that water markets will work effectively in the state. One must focus on the implications of the divergence between conditions required for well functioning markets and those which actually exist in the state for markets to achieve the ends sought.

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