Western Water's Michael George On The Viability Of Water Markets Post The Colorado-IID Deal

Michael, with the gubernatorial recall over and the Schwarzenegger administration now in office, what should we expect in the way of state water policy?

Governor Schwarzenegger should be grateful that the long running political and policy battle related to California's over-reliance on the Colorado River was apparently solved through marathon negotiations led by the outgoing Davis Administration. As a result of that breakthrough, the uncertainty around Colorado River water availability for urban Southern California has been removed. On the other hand, the solution involves weaning Southern California from a portion of the water that it formerly got from the Colorado River, and there are going to be issues associated with reallocating some of that water from agriculture to urban uses.

The big picture issue for California, at least until the end of the decade, will likely be how and under what circumstances will water be conserved in the agricultural sector so that water can be made available to continue to grow California's urban economy.

Of course, as in every other policy area, Governor Schwarzenegger will also find that there are tough budget issues associated with water. Thus, the new administration will have to review water subsidies, cross-subsidies and fee issues. As one example, there is likely to be a row over a new set of fees being proposed to fund the activities of the State Water Resources Control board.

Elaborate on the challenge of California weaning itself off imported water from the Colorado at teh same time that its population grows from 35 to 50 million. Managing a water conservation effort would require what state policies?

The standard answer in California has long been that we can continue to have urban growth so long as we have commensurate and conscientious conservation. In addition, as that urban growth continues, California relies on its ability to transfer a little bit of water at a time from the agricultural sector to the municipal and industrial sectors. In large measure, California's challenge is to make that gradual transition without undue disruption. We have had some interesting experiments using market-based transfers during recent dry periods. For instance, the Metropolitan Water District arranged some water purchases from farmers in the Sacramento Valley and brought that water south to help fill the new Diamond Valley Reservoir.

In the course of these experiments, California water mangers conducted an "insiders" debate on whether to simply grab the water by forcing farmers to conserve or to create financial incentives to voluntarily induce the conservation. To put it bluntly, urban water planners resolved the debate by deciding to take the water through complex regulatory means rather than to buy the water from the farmers who hold the historic water rights. Part of that resolution also required making available sufficient water to meet the needs of the environment.

How has the Endangered Species Act changed the dynamic of water politics in the state? How does the consideration of the environment change the way water is valued in the urban and agricultural sectors?

The Endangered Species Act has become the trump card of Western water law, regulation and politics. For the most part, the municipal, industrial and agricultural sectors have had to come to grips with the need to provide sufficient water to maintain and/or restore the ecosystem and habitat in California. As a result of increased allocations of water to meet a host of environmental needs, the aquatic and riparian ecosystem throughout California is pretty clearly getting better, which is good for California's economy and quality of life.

To provide increased returns to the natural environment, however, water managers have squeezed more water from other sectors, primarily agriculture. Some of that water can clearly come, and has come, from intelligent conservation, and more conservation is possible both on the farm and in urban environments. But conservation has a cost. Thus, the value of water-both in terms of consumer perception and in terms of the prices that consumers from all sectors pay-is going up and will continue to go up.

California water users are getting the message that we have a finite supply of our most precious resource while demand for that resource is growing. Good demand management has restrained the rate of growth in water demand to a lower rate than population growth, but demand is still increasing. Increasing the price of the commodity is probably good public policy, because unless we know the value of water, we'll continue to waste it. In addition, the value of urban supply reliability is clearly high; urban users still find water a bargain.

The situation for farmers is a lot less secure. Marginal agriculture will be constrained in order to make more water available for the urban sector.