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| Water Use Conflicts in the West: Implications of Reforming the Bureau of Reclamation's Water Supply Policies August 1997 |
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The Bureau of Reclamation, an agency within the Department of the Interior, has spent billions of dollars over the past 90 years to develop water supplies for farmers in the western United States. Those federal water projects have "made the desert bloom," but the bureau's policies on supplying water--including subsidized prices, long-term contracts, and restrictions on the sale of water by farmers--have resulted in a rigid allocation of major water resources to agriculture. That allocation often comes at the expense of urban, environmental, and Native American water users, and at a large cost to taxpayers.
Reform of federal water policies that have their roots in the early part of the century could improve the Bureau of Reclamation's ability to meet the demands of today. Properly done, reform could improve economic efficiency in allocating water among commercial water uses, provide more water for public purposes such as the environment or Native American tribes, and could address equity concerns regarding the portion of project costs that the federal government must pay.
In California, where conflicts between agriculture, cities, and environmental
interests over scarce water resources are severe, reform has been brought
about by the 1992 Central Valley Project Improvement Act (CVPIA). In designing
and passing the CVPIA, the Congress created a potential model for reforming
federal water policy. The act contains numerous provisions that encourage
farmers who receive water from the Bureau of Reclamation's Central Valley
Project (CVP) to use less, that facilitate the movement of conserved water
to higher-valued uses, and that protect and enhance fish and wildlife populations
in California's Central Valley. However, those reforms come at a cost to
agriculture. Passage of the act creates an opportunity to analyze the magnitudes
of costs and benefits that reform imposes on the agricultural and urban
sectors in California and to explore the implications of policy reform
for the Bureau of Reclamation's projects throughout the West.
Competition for Limited Water Resources in the West
Conflicts over current and future allocations of surface water resources exist throughout the western United States. Those conflicts typically involve historical patterns of use by irrigated agriculture on the one hand and increasing (or increasingly recognized) needs for urban and environmental uses on the other hand. Many western cities--including Los Angeles, Denver, and Las Vegas--are experiencing rapid population growth that will increase pressure on water supplies that are both uncertain and limited. Fish and wildlife species that depend on river ecosystems for their survival are declining in every major river basin in the West. A total of 184 species listed as threatened or endangered or proposed for listing under the Endangered Species Act may be affected by the Bureau of Reclamation's operations. In addition, the water rights of many Native American tribes have yet to be quantified and allocated.
Historically, increased demand for water has been met by developing
additional supplies. However, rising economic costs and environmental sensitivities
are likely to preclude future construction of major water supply projects.
Instead, reallocating water from existing uses--primarily agriculture--may
be the best "new" supply of water for addressing urban, environmental,
and Native American needs.
The Role of the Bureau of Reclamation in Resolving Water Conflicts
Participation by the Bureau of Reclamation will be necessary to alleviate water conflicts in many areas of the West for two reasons. The first is the bureau's pervasive presence: reclamation projects are located in all 17 western states and in essentially every major river basin. Because of the sheer volume of water that the bureau controls, the feasibility of addressing many conflicts depends on its participation.
Second, the bureau's water supply policies, which have their roots in
the Reclamation Act of 1902 and its 1939 amendments, include below-cost
prices and restrictions that inhibit the ability of market forces to move
water to its highest-valued uses. Those provisions isolate recipients from
the true economic value of water. An inefficient allocation results from
making water available to farmers at lower rates than would prevail in
a market setting. On average, farmers use more water and for lower-valued
uses than they would if they faced higher prices. Likewise, urban users
receive less water and pay a higher price. The discrepancy between low
values associated with agricultural uses and high values associated with
urban uses implies an economically inefficient allocation of water supplies.
Thus, allowing farmers to transfer water to other uses and giving them
the incentive to do so, or simply mandating a reallocation of water supplies,
could improve net social welfare.
Options for Reforming the Bureau of Reclamation's Policies
Many objectives exist for reforming the Bureau of Reclamation's water supply policies, and many policy tools exist for achieving those objectives. Reforms can address economically inefficient water allocations, environmental problems associated with water development, tribal claims to water rights, reimbursement to the federal Treasury, or any combination of those objectives. Broadly defined, the available policy tools include facilitating water markets, directly increasing water prices, directly reallocating water, and requiring that water conservation measures be carried out. Water markets, water price reform, and conservation programs are tools that create incentives for farmers to reduce the quantity of water used in agriculture. Allowing farmers to sell water forces them to consider its value in other uses when making decisions about using water. Increases in water prices also create an incentive to use less water. Finally, encouraging farmers to adopt irrigation practices that use less water can be accomplished by creating goals for using water more efficiently or by developing a list of recommended practices from which farmers must choose. In contrast to incentive-based tools, directly reallocating water involves legislatively or administratively allocating a specific quantity of water to a specific use. With that measure, however, previous users may or may not be compensated for the water that is reallocated.
Water Markets
Water markets are an effective policy tool for improving the allocation of water among competing economic uses. Such markets are the one tool that would leave all participants better off (though some nonparticipants could be made worse off). Sellers would be better off because they would make more money from selling their water than they would from using it, and buyers would be better off because they would get water for a lower price than they would have to pay for the next-best source. The voluntary water transfers that result could alleviate conflicts between urban and agricultural water users and move water to higher-valued uses within the agricultural sector. They would generally be less effective as a tool for addressing environmental concerns.
Water Price Reform
Water price reform can be an effective tool for encouraging water conservation and increasing the return to the federal Treasury from investments in water projects. Water price reform is a broad category that includes increasing water prices, changing the structure of prices (for example, from a uniform price to one that rises as consumption increases), and imposing surcharges that target specific users or earmark funds for specific purposes. Price reform is the only option discussed in this study that would directly address concerns about charging farmers below-cost prices for water.
Many uncertainties, however, could limit the potential benefits of price reforms. First, current reclamation law and water delivery contracts between the Bureau of Reclamation and water users could restrict increases in water prices.
Second, water price reform would be effective in modifying farmers' behavior only if those reforms were passed on to farmers by the water districts holding the bureau's contracts. (Water districts are quasi-governmental entities composed of landowners within district boundaries.) The bureau's influence on the prices that farmers pay is indirect; reform would change the rates the water districts pay to the Bureau of Reclamation. Unless water districts recovered the cost of the higher rates by increasing the prices they charged farmers for water use rather than through land-based charges (for example, charges per acre or per household), the incentive to conserve water that might otherwise be expected from water price reform would not exist. Furthermore, if farmers were unable to obtain as much water as they wanted at the original price, they might not respond to changes in water prices at all.
Third, the disposition of conserved water is uncertain. Water conservation is generally a stepping stone to achieving a broader objective of policy reform and not an objective on its own. If the conserved water is not put to a higher-valued use, the conservation effort may represent a net loss to society. The final disposition of conserved water would depend on a mix of state water laws, federal policies, and rules set by water districts. The water could be left in the river, in which case the environment could benefit, or it could be diverted by other farmers, who may or may not put it to a higher-valued use. Environmental objectives also could be met if the price increase was an environmental surcharge with the receipts earmarked for spending on environmental purposes.
Allocating Water to Public Purposes
Of all policy tools, directly allocating water to public purposes such as the environment and Native Americans is the most likely to protect those uses. It would not, however, address inefficiencies resulting from restrictions on the transfer of water among farmers or from agriculture to urban uses.
Water Conservation Programs
Conservation programs may be appropriate for meeting the objectives of increasing water allocated to environmental purposes, if the conserved water remains in the river. However, as with water price reforms, the effectiveness of such programs will depend on the ultimate disposition of the conserved water.
Conservation programs generally are effective in reducing problems with water quality. For example, programs that encourage or require the use of more efficient irrigation systems could reduce the runoff of salts and chemicals into rivers, lakes, and groundwater aquifers. However, programs that rely on incentives, such as cost sharing for irrigation system improvements, could increase the cost to the Treasury of operating the Bureau of Reclamation's projects.
Combinations of Policy Tools Can Reduce or Enhance the Effectiveness of Individual Policies
Policy tools can be implemented independently or in combinations. If
one policy results in a bigger change in costs than another, the latter
could become redundant. For example, combining water markets with price
increases would render the price increase ineffective in motivating changes
in water use if the new price was lower than the market price. However,
since no one policy tool effectively addresses all possible reform objectives,
combinations of policies may be necessary to meet multiple objectives.
For example, combining a water reallocation with a water market would achieve
two objectives: increasing the water available for public purposes and
increasing the efficiency of water allocations for commercial uses. It
would also lessen potential economic inefficiencies associated with reducing
the water supply of some users in order to provide water for public uses.
Conflicts and a Solution in California
The Bureau of Reclamation's Central Valley Project, in California, provides an important example of the types of conflicts over water use that may arise and the possible effectiveness of federal reclamation legislation in helping to construct a solution. The CVP is the largest water supply project in the country, serving 2.6 million acres of farmland in the Central Valley. Between 1979 and 1991, the Bureau of Reclamation delivered an average of 5.3 million acre-feet of water to water districts serving farmers in the valley. CVP farmers produce crops worth roughly $3 billion per year. The CVP has helped transform the Central Valley into one of the most productive agricultural regions in the world, delivering roughly 95 percent of its water to agriculture. Since the CVP's inception in the 1930s, the federal government has invested a total of $3.6 billion in the project, of which water users have repaid roughly $500 million.
Conflicts in the Central Valley
Conflicts over water allocation have arisen between agricultural, urban, and environmental uses in California. The successes of the CVP have occurred, to an extent, at the expense of the Sacramento and San Joaquin Rivers and the delta ecosystem, from which the water is diverted. One indicator of poor conditions in the ecosystem is a decline in resident fish populations. The delta region (including San Francisco Bay) supports a total of 37 species of fish, birds, mammals, reptiles, amphibians, invertebrates, and plants that are listed or are candidates for listing under the Endangered Species Act. Another 83 species are declining because of the loss of their habitat in the ecosystem. Significant quantities of CVP water may be necessary to preserve those species.
The severe drought that lasted from 1987 to 1992 exacerbated the conflict between competing agricultural and urban demands. The drought demonstrated the vulnerability of California's urban and agricultural water supply systems to natural fluctuations in hydrologic conditions. Urban areas are anxious to secure supplemental water supplies, both to moderate the effects of drought and to accommodate future growth.
The Central Valley Project Improvement Act
The Central Valley Project Improvement Act, signed into law in October 1992 by President Bush, sets a new standard for operating one of the Bureau of Reclamation's projects. That legislation gives the bureau both a mandate to address environmental problems associated with project development and the ability to address economic inefficiencies in allocating water. The act incorporates each of the policy tools defined above--voluntary water transfers, price increases, direct reallocation of water, and water conservation programs. Specifically, key CVPIA provisions:
The act also requires the bureau to develop criteria for evaluating the adequacy of districts' plans for water conservation. However, the requirements of the provision are vague, and implementation of the districts' plans does not appear to be mandatory.
Effects of CVPIA Provisions
The Congressional Budget Office (CBO) examined the implications of various combinations of CVPIA provisions both conceptually and empirically. Economic principles underlying each provision suggest that each has the potential to be effective in encouraging water conservation and allocating water to urban or environmental uses, but that effectiveness will depend on both the exact levels of price changes relative to the benefits of water use and the combination of provisions enacted.
The impact of the CVPIA will include benefits to the environment, benefits to urban consumers, and costs to agriculture. CBO does not quantify benefits to the environment from the CVPIA, but some studies indicate those benefits could be large. Estimates range up to $21 million per year for increased commercial and recreational fishing from a minimal level of protection and $10 million to $25 million per year in recreational fishing alone for achieving the CVPIA's goal of doubling salmon populations. One study estimates that benefits associated with the provision that allocates approximately 250,000 acre-feet of water to wildlife refuges would be $79 million per year.
The empirical analysis estimates costs to farmers in terms of changes in agricultural revenues and benefits to urban consumers in terms of changes in consumers' welfare caused by various CVPIA provisions. CBO estimates those benefits to be $11 million, $7 million of which would be paid to farmers through the water market.
In an average water year, the CVPIA would reduce farmers' gross revenues by an estimated $100 million--less than 5 percent of average gross revenues. That amount is the change in the value of agricultural output caused by the CVPIA. If changes in input costs were proportional to changes in gross revenues, then farmers' net revenues (revenues net of the costs of variable inputs) would decline by roughly $44 million. The decline in regional economic income as a result of the CVPIA, including income losses for suppliers of agricultural inputs would be roughly $69 million.
Estimates of the economic impact of CVPIA provisions are sensitive to
assumptions about water supply conditions (quantity available and price),
the regulatory setting, and the capacity of infrastructure for conveying
and storing water. A severe drought could significantly increase both the
costs and the benefits of the act. Urban consumers would benefit more from
the CVPIA in a drought year because the ability to transfer water is more
valuable to them when a drought reduces their existing water supplies.
However, the incremental cost of environmental water allocations increases
as the quantity of water removed from the agricultural sector increases.
Consequently, the cost to agriculture of the CVPIA would increase with
drought conditions. In wet years, however, the cost of the CVPIA could
be minimal. Finally, restrictions that the Endangered Species and Clean
Water Acts place on water use could magnify both the costs and benefits
of the CVPIA.
Implications for Reform of Federal Water Policies Throughout the West
In other areas of the West, the effectiveness and appropriateness of policies for reforming the Bureau of Reclamation's water supply policies will depend on the nature of competing demands for water and the objectives of the reform action. The profitability and flexibility of the agricultural sector have implications for the cost of shifting water to other uses. Those factors vary among regions and projects.
The results of the CVPIA analysis indicate that the competing demands for water can be balanced with a complicated package of reform options at a relatively small cost to the agricultural sector as a whole in most years. But even in that case, some individual farmers could be significantly affected, and the average cost would be much higher in drought years. The predicted effectiveness of the CVPIA derives in part from the high degree of flexibility CVP farmers have in adjusting cropping patterns and irrigation practices in response to water policy reforms. Farmers in other regions would probably respond differently to CVPIA-types of reforms.
An array of policy tools may be necessary to generate the maximum benefit from reforming the Bureau of Reclamation's policies while moderating the impact on the agricultural sector. Reforming those policies could improve the economic efficiency of water use and moderate or resolve conflicts throughout the West. However, the effectiveness of individual policy tools will vary from region to region and project to project, and even among water districts in a given region. A menu of options that includes a number of policy tools from which the bureau could select would provide the flexibility to adapt the policies to the specific problems and conditions at the regional or project level. The primary provisions of the CVPIA--water markets, water price reforms, an environmental water allocation, and conservation incentives--though not necessarily appropriate in all cases, span the range of effective options for achieving likely reform objectives and reducing conflicts over water use.
