FAIR TRADE?

Some hail them as a panacea for water shortages. Others are more skeptical but support their wider use. Water transfers are pointing the way to a new century of increased competition for our state's limited water supply.

In California's complex attempt to find a balance between water supply and increasing demands, one fact is clear: Environmental opposition and escalating costs have caused many to turn away from new reservoirs and aqueducts to supplement supplies. The transfer of existing supplies has emerged as a major option for meeting the state's expanding needs.

Because agricultural water use is about four times that of total urban use, some proponents of increased transfers argue that the shift of only a small percentage of agricultural water could easily meet the demands of a growing population. But that view of balancing water needs isn't as simple as that. Actually, nothing about water transfers is simple.

Considering the limitations imposed by geography, law and public preconceptions about water use, establishing a smooth-running water transfer system in California may rank as a task comparable to that of building the State Water Project.

Some transfer proponents see the development of a market-based allocation system that will attract water toward more "efficient" uses. However, the experience of the Department of Water Resources in operating the Drought Water Bank and participating in many transfers for the State Water Project has shown that water transfers must be evaluated on a case-by-case basis. Each transfer is unique.

A guiding principle in the Department's evaluation of water transfer proposals is the protection of the rights of others not involved in the transfer. These are the so called "third parties" to the transfer, those such as other water users, farm supply businesses and farm laborers whose livelihoods are inextricably linked to agricultural water use. They could be harmed economically.

Water transfers have a long history in the Golden State. They were around during the Gold Rush in 1849 when many were simple agreements by handshake between farmers. As cities developed in the early 1900s, they built projects to supply their growing demands with water from the Sierras. During the 1940s-60s, the state and federal water projects--the State Water Project and the Central Valley Project- were built to alleviate the disparity between sections of the state. These large-scale projects are water transfer projects--built to transfer water from water-rich areas to water-short regions where it can be put to beneficial use.

But within the last 10 years, continued growth, cycles of drought and flood, recognition of environmental values, and restrictions on development of new water sources have combined to leave these projects struggling to fulfill the demands placed on them. This situation has created a new era for water transfers.

Water transfers received a big boost during the1987-92 drought, with water exchanged between agricultural users, and between agriculture and cities. Up to 1990, most transfers took place between customers of a specific water supplier. But with a worsening situation in 1991, Governor Wilson established the Drought Water Bank, administered by DWR. Water sources included temporary reservoir surpluses and surface water freed up by the substituted use of groundwater or the fallowing of cropland. Because fallowing has potential impacts on the economies of agricultural communities, legislative changes enacted in 1992 put a 20 percent limit on the amount of water that a water supplier can make available by land fallowing.

The State Legislature will likely be the next arena for discussion of the future of transfers. There is much interest in developing legislation so that water users who own contract rights to water, but not the actual water rights, can initiate their own transfers. Some envision a free market in water, allowing unfettered transfers and sales throughout the state.

One problem with that notion however is that water is not a simple commodity. Water is a shared public resource that is used and re-used. Water rights are use rights, not simple ownership rights. Any sound reallocation must consider potential injuries to other legal water users such as those relying on return flows, as well as the potential for harm to the environment and the local economy.

The nation's largest agricultural irrigation district, Westlands Water District in the western San Joaquin Valley, has taken a promising approach. It has established a system called WaterLink among its members. Hailed as an "electronic water market," and "the blueprint for statewide water marketing," WaterLink enables farmers to negotiate transactions by computer. The goal is to bring "extra" water from one farmer to another who needs it. During 1994-95, Westlands farmers traded 380,000 acre-feet in 3,500 transactions. The district has become a "water switchyard" for its members.

Beyond the boundary of Westlands or any other irrigation district, the situation gets more complicated.

"An effective statewide WaterLink system connecting sellers in Northern California with buyers to the south would have one big obstacle to overcome--moving the transfer water across the Sacramento-San Joaquin Delta and exporting it from there," says Scott Jercich, DWR manager for water acquisitions. "If these problems could be solved, it may then open up a market." The kind of market would be important to different water users. A short-term "spot market," similar to one that operates for oil sales and involves temporary surpluses, might work for farmers, compared to a long-term market more suitable for water districts.

What DWR has in mind for the State Water Project is different. The Department has acted as both buyer and seller (as well as conveyor) of transferred water since the 1976-77 drought, and operated emergency Drought Water Banks in 1991, 92, and 94. Water transfers are a cornerstone of the Wilson Administration's water policy.

In a proposed Supplemental Water Purchase Program designed for SWP contractors who choose to participate, the Department envisions water being transferred from willing sellers to participating SWP contractors when their annual SWP entitlement requests cannot be met. The program would involve buying options to purchase water for up to five years, and making direct purchases to increase yearly deliveries as much as 400,000 acre-feet (obtained from surface water sources and groundwater substitution but no cropland fallowing).

It would be a program similar to that established by the Water Bank in early 1995 water year when the prospect of a second consecutive dry year loomed. At that time, DWR purchased one-year options on 30,000 acre-feet for $3.50 an acre foot, a total of $105,000. But the year turned out wetter than average and the options were not exercised. In this program, farmers or water agencies would only sell water they don't need.

An option would be good for only a certain period, such as until April of a given year. If the water were not purchased, the seller kept the option payment and could then use the water or resell it. SWP service areas that could receive water from the program are located in the North and South San Francisco Bay Area, San Joaquin Valley and Southern California -- areas with a total population of more than 20 million and over a million irrigated acres of farmland.

The Supplemental Program is not meant for speculation, Jercich points out. The program's purpose is to close the gap between the amount of water each contractor is entitled to receive under its long-term water supply agreement with DWR and the amount that can be delivered by the State Water Project. In addition, water purchased for transfer must be "real," rather than "paper" water (see sidebar on "Not All Water is Wet").

Fallowing cropland is one of several ways to produce transfer water (see "Six Sources of New or Real Water"), but will not be included in the Supplemental Program because of potential impacts of fallowing to third parties dependent on the farm economy. Another major concern is the impact of transfers on the Sacramento-San Joaquin Delta. Surface water for transfers will likely continue to be from the Sacramento River and San Joaquin River tributaries, while groundwater substitution will probably be in the Sacramento Valley. Getting the water to areas south of the Delta is a major hurdle. Releases of water transferred from upstream reservoirs could be timed to reach the Delta to benefit fish and avoid harm to endangered species.

In voicing support for transfers, CALFED has adopted the tenets of the Administration's policy. CALFED endorses only voluntary transfers of real, rather than "paper," water that protect the rights of sellers, avoid environmental damage, and protect groundwater basins. In addition, purchasers must demonstrate efficient use of existing supplies and local communities and water districts must be involved in determining whether a transfer occurs.

If water transfers are to have an expanded role in California, much depends on the environmental and water supply solutions to be adopted for the Delta. Transferring water in that environmentally sensitive area will depend heavily on structural improvements. In addition, unresolved policy issues identified by the Department will need to be addressed. They include the effects of water marketing on total water use and the role of local interests in deciding which transfers will occur. Put simply, nothing about water transfers is simple.

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Not All Water is Wet

Discussions of water transfers involve knowing whether the water in question is "new," "real," or "paper." Sorting them out has proved a challenge.

New Water: Water not previously available in the system, created by reducing irrecoverable losses or flow to unusable water bodies; examples include capture of water that would otherwise run off to the ocean and water conserved by reducing agricultural drainage to salt sinks.

Real Water: Water for transfer that is not derived at the expense of any other lawful water user. Includes water saved by not planting and irrigating a crop and stored water released that would not otherwise be released. Real water is not necessarily new water, but new water must, by definition, be real.

Paper Water: Water proposed for transfer that does not create an increase in the water supply. Example: A proposal to market water the seller is legally entitled to use under a contract or water right, but has not historically used. Paper water transfers often involve an offer to sell water that someone else would otherwise use in the absence of the transfer. A section of the California Water Code prohibits transfers that would harm another legal user of the water, thereby prohibiting paper water transfers.


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Six Sources of Real Water

Basic sources for water transfers include:
1. Fallowing (not irrigating) crops
2. Shifting to lower water-using crops
3. Substitution of groundwater for surface water irrigation
4. Direct delivery of groundwater
5. Saving water that would otherwise be "lost" (e.g., agricultural drainage to a salt sink)
6. Reservoir releases (of water that would be otherwise kept in storage, absent the transfer)

(Adapted from "Water Transfers in California: Translating Concept into Reality," published by California Department of Water Resources, November 1993)