Water Exchanges Help State Through Dry Years

SACRAMENTO -- Spectacular and expensive as it was, the collapse of the state’s electricity market hasn’t hindered the buying and selling of an even more crucial commodity in California: water.

Last year, enough water to supply more than 3 million people for a year changed hands in deals cut outside the usual operations of California’s major water projects.

The sales amount to a near record, and even more water will be bought and sold in coming years as the state struggles to accommodate its vital agriculture industry and its growing population.

Even so, experts say, the water transfers in no way resemble the electricity market that soared and crashed last year at a cost of tens of billions of dollars. On the contrary, many believe that a quietly maturing water exchange makes for a more drought-resistant California, where naturally erratic supplies get smoothed with minimal cost and harm.

Some examples: Rice-growing farm districts in the Sacramento Valley are selling water to their cotton-growing brethren in the San Joaquin Valley. Southern California cities have teamed up with farm districts near Bakersfield to capture winter flood flows, percolate the water underground, then split the supply when dry years come. Some irrigation districts are selling water directly to the state to help endangered fish.

Not every deal is free of controversy. Some in Northern California--where much of the water is sold--have fears of “colonization” by the southern part of the state. But several of the more than 2,000 water districts in California are getting more skilled at shifting water, for profit or policy, without triggering an outcry.

The Oroville-Wyandotte Irrigation District in the Sierra foothills of Butte County, for example, earned $750,000 selling water last year from ditches that date to the Gold Rush.

Without that money, the district--provider of water to rural residents and gentlemen-farmers--would have had to significantly raise rates to pay for the consultants and attorneys it must hire to win federal relicensing of four hydroelectric power plants.

“Fifteen years ago, water did not have a value other than for consumptive purposes,” said district General Manager Mike Glaze. “And now it is a marketable resource.”

Therein lies a tale of two responses to the 1990s rage for deregulation.

Economists then argued that a free market--a forum in which buyers and sellers could find one another and settle on prices--would relieve the chronic California headaches of high electricity rates and erratic water supplies.

The state’s electricity industry and policymakers eventually embraced the idea. With Sacramento’s blessing, the industry cast off 80 years of government control and flung open the door to private entrepreneurs.

The staid water industry, ever aware that California’s Constitution treats water as a public resource, instead gave an entrepreneurial twist to government control. Warily, public agencies began trying to arrange water sales.

Today, the wheelers and dealers of the California water world are obscure agencies such as the Semitropic Water Storage District and the Yuba County Water Agency--not Enron Corp. or the Bass Bros.

Not that those big Texas-based companies didn’t try. Enron practically invented trading in natural gas and electricity, and the company hoped that its subsidiary Azurix would become a player in a future California water market. Its executives read World Bank and United Nations reports describing a desperate need for clean, reliable sources of water around the globe. In 1999, the company invested $30 million in a Madera County ranch capable of storing large amounts of water underground. It intended to make Madera Ranch the cornerstone of its North American operations.

“Due diligence suggested that the way the Central Valley was growing, it was a good investment,” said John “Woody” Wodraska, who led the Metropolitan Water District of Southern California from 1993 to 1998 before going to work for Azurix. “People in the company went through that and thought this had a chance for pretty remarkable payoff if they could market the water.”

But Azurix hit stiff opposition from local farmers fearful the project would drain the county’s water for sale to Southern California. It didn’t take long before the speculators abandoned the state, having failed to earn riches. Enron, once a haughty champion of free markets, filed for bankruptcy in December. Wodraska left Azurix last April.

“Like with most things, the pioneers have the arrows in their backs,” Wodraska said.

Farmers Use 80% of State’s Water

When water gets transferred in California, it’s almost always by agricultural districts. Farmers use 80% of the developed water in the state. And water is typically sold from north to south. That’s because, hydrologically speaking, California is out of whack. Three-quarters of the precipitation in the state falls in the north, but three-quarters of the demand for water is in the south.

Starting in the 1930s, California and the federal government tried to correct that imbalance. They dammed northern rivers such as the Sacramento and Feather, built giant pumps to harness rivers before they could drain to the Pacific Ocean, then channeled the water hundreds of miles south in concrete canals.

Two massive water projects, one federal and one state, have fueled the agricultural development of the San Joaquin Valley and allowed southern coastal cities to sprawl. But by the 1980s, the projects were sometimes over-tapped. California kept growing. And federal law dictated that increasing amounts of water be taken from farms and cities to protect several species of salmon and other native fish.

Pressure on the water projects increased when drought struck in 1987 and lingered for six years. In 1991, to squeeze more water into the system, the state Department of Water Resources set up an emergency “drought water bank.” The department paid farmers $68 to $175 per acre-foot to skip growing a crop for a year and instead sell the water.

That hastily constructed water market, with the state playing broker and setting prices, disbanded when the rains returned. But it helped foster a view of water as a commodity. Water districts that had for decades simply taken what they needed from a river began to consider how they might sell the water they otherwise let slip downstream. Southern districts, wary of seeing their supplies from government water projects cut back, started shopping for side deals.

Last year, a dry year, the Department of Water Resources again purchased some water for the farms and cities it serves through the State Water Project. Even more water was purchased by DWR on behalf of endangered fish through an experimental $57-million program. Several other water transfers were negotiated one-on-one between water districts.

One of the largest long-term water transfers being planned would move water from the Imperial Valley to San Diego. But the deal is hung up on a major environmental dilemma: how to transfer the water without accelerating the destruction of the Salton Sea, which is replenished by drainage from Imperial Valley farm fields.

Urban water districts eager to buy water have begun addressing such concerns directly.

MWD Signs 35-Year Deal With Palo Verde

Last July, the Metropolitan Water District of Southern California--which sells water to agencies serving 17 million people from Ventura to San Diego--announced a historic agreement with the Palo Verde Irrigation District.

Under the 35-year deal, Metropolitan would buy enough water from willing farmers within the Palo Verde district to supply half a million people a year. The farmers would get the water by fallowing as much as 29% of their land. Metropolitan would pay an upfront fee of $3,170 per acre and an annual fee of $550 for every acre not planted, a deal that could mean millions of dollars each for farmers struggling with low prices for their fruits and vegetables.

Metropolitan has also promised to give Palo Verde community leaders $6 million to offset any economic harm from fallowing.

This is an example of how the system is becoming more mature, said Jerry Johns, chief of the water transfers office of the California Resources Agency.

“People are understanding what’s easily doable and what’s not and trying to make the system work instead of fighting about things,” he said.

Despite rural wariness, the swap of water for dollars will become more prevalent, many water leaders say.

Water transfers have helped “restore reliability for Southern California,” said Tim Quinn, a Metropolitan vice president. Without water sales and joint projects with farm districts, he said, the dry year of 2001 would have triggered a major disruption in the economy.

State policymakers are also banking heavily on voluntary water sales as a tool to protect salmon and other fish listed under the Endangered Species Act. And some Northern California water districts have proposed offering a certain amount of water for sale each year to avoid challenges to their generous water rights.

Last year, more than 637,000 acre-feet of water was transferred, the equivalent of 10% of all the water delivered by the state’s two biggest water projects.

That’s more water transferred than in any year except 1991, the first year of the drought water bank, Johns said, and it doesn’t count the unknown amount of water that gets swapped informally within irrigation districts from farmer to farmer.

But don’t dare call it a “market,” said Michael George, chief executive of Western Water Co. in the San Francisco area. His struggling company tries to broker water sales across the Sacramento-San Joaquin Delta, a hydrological choke point controlled by the state Department of Water Resources and the U.S. Bureau of Reclamation.

“Let’s not kid ourselves that we’ve got a willing-buyer, willing-seller market in place when we allow the state and federal government to control the conveyance system and discriminate in terms of price,” said George.

Water Industry Not Quite a ‘Market’ Yet

Brent Haddad, an associate professor at UC Santa Cruz who studies water transfers in California, said he agrees that “market” isn’t the right word to describe what’s going on in California’s water industry.

A word hasn’t been coined yet, he said.

“Electricity wires don’t interact with society, but canals and rivers do,” Haddad said. “There’s so much public interest involved in water transfers that the way we think about markets, as individuals trading, is the wrong way to think about it. It’s too connected to the rest of our lives.”

“We’re not burning policy time trying to create a market,” Haddad said. “We’ve pushed aside theory, and now we’re just seeing what works.”