Speculating in Water : A new generation of entrepreneurs is selling a precious resource to the highest bidder, with potentially profound effects on development in the West.

Tim Griffin, vice principal of Sparks High School in Nevada, could teach a course in a venerable American tradition: how to make a quick buck.

Griffin saw the gleam of profit in a letter from the city of Sparks. The city wanted to buy an old legal right that Griffin had acquired unwittingly years before, along with a four-bedroom tract house. It allowed him to remove hundreds of thousands of gallons of agricultural water annually from the Truckee River, had the irrigation ditches to transport it still existed.

The city offered him less than $300 for the water right. To Griffin, that seemed low. And a Reno lawyer agreed.

Griffin asked whether the law allowed him to compete with the city.

“Why not?” shrugged the attorney.

And so Griffin launched a project that just years before would have been no more lucrative than corraling roadside beer bottles.

He spent evenings and weekends marching door-to-door through tree-lined neighborhoods, offering fellow residents 25% more than Sparks or Reno would pay for these small allocations of water. Then he resold bundles of these rights to local developers who, as in some other booming Western cities, must now find their own supply of water for each new building project.

He is still in the market. For in the past 10 years, the price of water rights around Reno has gone from as little as $100 an acre-foot--roughly the water used in two years by a family of four--to as much as $3,000 today.

In the twilight years of the big Western dam-building projects, with virtually every gallon of every river parceled out to cities and farms, water is becoming a high-priced commodity, attracting a new generation of speculators and investors.

Entrepreneurs are buying water ranches--land where water, not hay, is harvested. Or, like Griffin, they ferret out old, unused water rights to resell. Some farmers raise capital by selling excess water to city water districts. Environmental groups are beginning to arrange deals for water that preserve wild rivers by essentially buying them up.

And for more sophisticated private investors, there have even been some packaged investment deals.

By 1979, water rights began to move briskly in a new market in Colorado. More than $100 million has been invested in water there in the years since, according to Walraven Ketellapper, a Denver water rights investment manager.

Colorado has also been the scene of the first managed partnership investments in water. In 1985, Prudential-Bache Capital Funding and a Denver-based firm raised $35 million from various insurance companies to invest in Colorado water. The partners will sit on their investment for as long as 15 years, as Denver water prices inevitably rise.

Ketellapper himself is one of the managing partners of a second investment portfolio project, called Aqueduct I, put together with Prudential-Bache Properties. That $7-million limited partnership, the first to be aimed at individual investors, wasn’t as easy a sell. Set up to accept $30 million, the fund stopped signing up new investors last December.

Colorado has also been the scene of environmental deals in the water market. For instance, the Nature Conservancy, known as the real estate arm of the environmental movement, has taken the first steps to preserve the Black Canyon of Colorado’s Gunnison River by acquiring water rights. It hopes to apply the same technique to the Yampa River in northwest Colorado, the Little Snake River along the Wyoming-Colorado border, the San Miguel River in southwest Colorado, the Hassayampa River in central Arizona and Aravaipa Creek, just north of Tucson.

Although the market in Colorado has begun to cool somewhat, Ketellapper sees a continuing business in water there as long as the state continues to grow. Investors are now prowling Arizona and Nevada, and many observers predict that a private market could even develop in the heavily regulated California water scene.

Shortages Stirred Interest

“Investors really want to find a way to get into California,” says water policy consultant Steven Shupe.

The largest players in the water trade are still likely to be such massive public agencies as the Metropolitan Water District in Southern California. But interest in private profit got a big boost when water shortages in the West became a fixture of the nightly news just as investors reeling from the October, 1987, stock market collapse went searching for someplace else to put their money.

“When the stock market crashed, and with a big national drought in the national magazines,” recalls Shupe, “that was a turning point. . . . A lot of folks who didn’t even know what Western water was were calling me up.”

This small but growing business has helped to crystallize a new attitude toward the use and price of water: As the West enters an era in which additional water supplies are no longer being discovered, captured and divvied up, existing supplies must be redistributed from so-called lower-value to higher-value use. Water that was once looked upon as a kind of shared human right, like the air, is becoming a commodity to be traded like coal or oil, sold to the highest bidder.

Such dramatic change doesn’t come without casualties, or worry. Rural towns remain suspicious of any water sales that could turn their agricultural areas into a modern-day version of California’s Owens Valley, still shorthand in Western water circles for economic rape and pillage. Water in the Owens Valley, a once-green agricultural area north of Los Angeles, was secretly bought up and then shunted south decades ago, leaving a decimated community behind.

To a surprising extent, however, the new world of Western water often looks like a good deal to all concerned--environmentalists, investors, developers and in recent years even many of the “water buffaloes,” as the new entrepreneurs genially call the large farm interests and the old-guard public water administrators.

* Investors see money-making opportunities in a West with finite water sources and projected population growth of 45% between 1980 and 2000.

* Developers and traditional water administrators see a more open water market as the only way for urban growth to continue in many cases. Or as Shupe observes: “The alternative to developing a new supply is buying out an existing supply.”

* Some farmers are quite willing to sell water rights that are now worth more than the crops that they would nourish. Some are also coming to accept environmentalist arguments that such relatively low-value crops as alfalfa won’t make sense in a West where water is much more expensive. Meanwhile, Congress has little enthusiasm for building more expensive dams. Environmentally sound sites are rare now, for one thing. So many farm owners are increasingly concerned about the future of federally subsidized irrigation water--particularly “double-dippers,” farmers raising subsidized crops with subsidized water.

* Although some environmental groups object strongly to an unrestrained water market--in which they might find themselves bidding against private investors to keep water in a wild river--others have long argued for freer transfer of water, for having water traded at its true, higher value. They see this as encouraging city residents to use water more sparingly and farmers to conserve and plant crops that are less water-thirsty.

“When you move price up closer to its actual cost, or beyond that, up to the market rate, the users of that water use it more conservatively,” says Hal Candee, an attorney with the Natural Resources Defense Council, an environmental group. “And there’s a huge capacity for conservation in agriculture.”

Demand Tops Supply

Marc Reisner, environmental writer and author of “Cadillac Desert,” the most provocative history of Western water to be discussed among water managers in recent years, accuses the traditional water management system of ignoring the unrelenting fact that the West is a desert.

“The point is that despite heroic efforts and many billions of dollars,” Reisner contends, “all we have managed to do in the arid West is turn a Missouri-sized section green.” And now, with the rights to virtually all rivers and lakes owned by someone, underground water is in many cases being sucked out faster than it is naturally replenished--a practice termed ground water mining, and “one of the things,” Reisner recently predicted, “our grandchildren aren’t going to like about us.”

Yet any grand shift in the use of water faces a tangle of traditional legal rights and protections.

“Water law still has one foot mired in the 19th Century,” says Shupe. “And here we’re moving into the 21st, with all sorts of new forces.”

Shupe, a New Mexico-based engineer and attorney, has been called the strolling minstrel of Western water law. Steering a delicate course aimed at finding common, fair solutions among entrepreneurs, environmentalists, public water managers, farmers and Indian tribes, Shupe is one of the prominent forces for peaceful evolution in Western water policies, often simply by setting up workshops that get all factions into the same room.

Still, for the moment, as Mark Twain reportedly put it: “Whiskey is for drinking--water is for fighting over.” Century-old webs of legal barriers and mutual suspicion often make investment in the water trade a difficult and limited business.

Historically, speculation in water has been a hateful thing in the West. And this will likely be on state lawmakers’ minds as they forge future water laws. Many of these new laws and policies will be conceived to control the transfer of water for urban growth.

Some Risk in Deals

“There isn’t going to be a lot of sympathy for developers,” predicts Shupe, “especially for out-of-state developers.”

The largest risk to investors in water may be that city planners’ predictions of Western urban growth turn out to be far too high, and that water doesn’t consequently jump in price as much as expected.

Other cautionary notes for investors concern time and the special problems of supply. Unlike Griffin’s quick killing in Sparks, Nev., most water deals are long-term investments. But while investors wait it out, many important issues have yet to be decided by state Legislatures and the courts.

Five years ago, a group of investors bought the Lincoln Ranch in Arizona with plans to sell its plentiful water well before now. The site seemed auspicious, if only because it is next door to Planet Ranch, a successful water ranch owned by the city of Scottsdale. But in the “gray area” of Arizona water law, as ranch operator Roy Ross puts it, the deal has soured because the partners weren’t able to make an acceptable sale fast enough. According to Derek L. Sorenson, attorney for the bank that holds the mortgage, the partners now face foreclosure. The investors hope to form a new partnership structured to hold out for the longer haul--as long as 10 more years.

Drought can also be disastrous to investors. When water supplies are low, those who own senior rights--rights that trace from their first use, often in the mid-19th Century--get water before more junior owners. Investors with these “younger” rights could find themselves with a right, but no actual water.

Some of the most cheerful, risk-free transactions so far have involved unused rights, with no one losing water to which they have become accustomed.

For instance, Griffin’s water right was a forgotten legacy of the land’s earlier use as an irrigated farm. Water was so cheap when that housing tract was built, and city water lines went in, that the developer didn’t bother to strip off the old right and sell it himself, as would be done today.

Meanwhile, Griffin says his neighbors thought that the cash that he offered was “like Christmas.” He and his partner, as the Water Rights Group, didn’t do badly either, though they decline to be specific.

“We made a lot of money,” Griffin allows, “but not enough to retire on.”