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environmental water marketing - interview with brandon scarborough

The following summarizes an interview with environmental water market prodigy, Brandon Scarborough. Yes, I just called Brandon a prodigy. Included is interesting observations on market development, transactions, the regulatory process, water banking, and the future. Granted a longer post than normal, but it is well worth the read.

Brandon Scarborough is a research fellow at PERC currently focused on the use of water markets in the West to restore stream flows for wildlife, fish and other environmental amenities. He is the co-author of Saving Our Streams: Harnessing Water Markets and is currently revising the book Water Markets: Priming the Invisible Pump. Brandon is one of the leading minds on Conservation Water Markets in the West and was willing to provide insight on the topic:

1. Where are the most active conservation water markets today, and what factors drive transactions?

Oregon has been the clear pioneer of instream flow marketing. The state’s 1987 Instream Water Rights Act provided for new appropriations as well as the voluntary transfer of existing offstream water rights to instream uses. The Act, coupled with growing demands for environmental and recreational flows, has since inspired the formation of a number of private conservation organizations, such as Deschutes River Conservancy, the Oregon Water Trust, and Klamath Basin Rangeland Trust. Each of which has adopted a market based approach to restoring dewatered streams for fish while encouraging responsible land and riparian stewardship. Together with federal and state agencies, more than 1,300 transactions have occurred in the last 15 years restoring more than 1.2 million acre-feet to streams.

Similar to Oregon, Washington and Montana have adopted legislation favorable to water markets, creating opportunities for both governmental and private entities to re-allocate water to instream through voluntary agreements with right holders. Washington’s Department of Ecology has been actively acquiring water to restore and protect flows for threatened and endangered species throughout the state. In addition, Washington Water Trust, a private, non-profit organization works closely with landowners to restore flows and provide market incentives for conservation, while preserving agricultural production. In Montana, Trout Unlimited and Montana Water Trust have been instrumental in restoring stream flows; from direct water right acquisitions to on-the-ground restoration projects and working with state agencies and policy makers to streamline the transfer process, which can be slow and complicated.

In other parts of the West opportunities for conservation markets are primarily limited to state and federal agencies. However this is beginning to change. Utah just recently adopted a 10-year pilot leasing program that will permit private conservation groups such as Trout Unlimited to temporarily lease water from farmers to improve flows for fish. A similar program was used in Montana, and because of its success, has since been made permanent.

2. Which transactions (1-year less, long-term lease, sale) represent the greatest volume in the west?

By far, short term leases have been the most popular type of instream transaction. In the past twenty years roughly 80% of all trades were for 5 or fewer years, with more than half of all transactions being one-year contracts. Despite a preference by acquiring entities for longer term transactions including outright purchases, the average term length hasn’t changed much over the last decade. There are however an increasing number of both short and longer term transactions, though no real trend toward longer terms.

Short term trades are still quite valuable. Throughout the West there is still much reluctance on the part of landowners about entering into contracts for non-traditional water uses. Short term leases are a way to ‘experiment’ with instream flows, without giving up their water rights in perpetuity. There is a benefit to the buyer as well. Outright sales of water rights can be expensive, taking money away from other efforts. If there is any doubt of the effectiveness of restoring flows along a specific stream reach, shorter term contracts can provide a means to test its effectiveness. And it is not too uncommon for landowners that have entered into a series of shorter term contracts to eventually sell all or a portion of their water rights for instream use.

3. In some states the administrative change processes appear to create a bottleneck for deal flow, which states have the most efficient markets with regards to reallocation of water rights and what makes these systems work?

Irrespective of state, the change or transfer process can be quite cumbersome and lengthy to complete. The reason for this is part economic and part administrative.

In many parts of the West water rights are not that well defined. After more than a century of appropriations, changing hydrological conditions, improved delivery systems, and a lack of accurate water right records, there is a lot of uncertainty about just how much water one is entitled to or eligible for transfer. Imagine trying to buy or sell a car, for which the only information you have is that it is a “car” and you can’t see all of it, no history of mileage, repairs, problems, if it has 4 wheels or an engine, or whether or not the title holder is the actual owner. This is not too unlike some water rights. Historic use amounts, ongoing disputes, amounts eligible for transfer, etc. may not be clear by just looking at the water right certificate. As a consequence there is often a lot of research needed to clarify rights and ensure a transfer will not adversely affect other users (the no-injury rule). The states’ ongoing adjudications are helping, but many are still decades away from completion.

Before a transfer or change can occur, the state water administrator or court (Colorado) must have sufficient evidence to show historic use amounts and feel confident the change will not injure third parties. The approval process can be quite lengthy (more than a year is not uncommon). Ambiguities in whether or not the water will be put to beneficial use, questions about historic use, and disputes from third parties, whether legit or not, further complicate the process.

When rights are well defined transfers can be reasonably quick – from a matter of weeks to just a few months. Short term leases and donations in Oregon may be completed in as little as four to eight weeks, with renewals processed more quickly. Similarly Colorado permits farmers to temporarily loan water (up to 120 days) to the state Water Conservation Board for use instream. The transfer requires only approval from the state engineer and eliminates the often lengthy process of going through a state water court. Temporary loans may be approved in as little as a month, while longer term leases and purchases generally take more than six months to process. In California and Idaho state and federal agencies can lease water from rental pools or federal water projects on relatively short notice, providing flows for fish species when needed.

As rights become more clearly defined and state agencies, buyers and sellers, all gain experience in conservation trades, the transfer process will continue to improve. Moreover as the value of water in other uses continues to increase, the gains from trade create incentives for improving and streamlining the process. At the same time states are allocating more money to water agencies to reduce the backlog of applications and speed the adjudication process – both of which should speed water right transfers and expand marketing opportunities.

5. What is the future for the conservation water markets?

The driving force behind conservation markets is basic supply and demand. As we have become more prosperous our demand for environmental and recreational amenities has increased. When existing supplies are insufficient to meet those demands there is a need to reallocate more water instream. This situation is epitomized in the American West.

With the population of the West expected to grow by nearly 40% over the next 25 years, the pressure on already scarce water resources will continue to increase. As it does, competition among offstream and instream water uses will intensify, bringing to light the importance of improved water use efficiencies, incentives for conservation, and the institutional setting that provides for an efficient allocation of water among various demands. Water markets have for more than a century provided a means to meet changing and growing needs among offstream users. And with the expansion of instream flow markets, albeit gradual in some states, increasing environmental and recreational demands can (and have been), similarly, be met through voluntary trades.

With so little unappropriated water left in the West, there are really no other options but to acquire water from existing offstream users and leave it instream. As interest in protecting the environmental and recreational amenities provided by stream flows continues to increase, markets will inevitably play a greater role. That said however there is still the need for legislative reform and the removal of restrictions that limit private interests from acquiring or holding water rights for instream uses.

6. What role do you see water banking playing in the conservation water market?

Water banks have been a valuable tool in reallocating water among offstream uses, and they are now, increasingly, becoming a source of water for environmental purposes. In Idaho, for example the states rental pools are the primary source of water to meet flow requirements for endangered salmon species. Other banks in California, Texas, Oregon, and New Mexico provide leasing options for environmental flows. In other states, however, there are often restrictions (designed to prohibit speculation) that preclude instream flow trades. Hopefully this will change as policy makers realized the economic and environmental benefits to improving stream flows and the value of using banks as a readily available supply of water.

Water banking can be particularly useful for conservation markets for a number of reasons. First, instream flow needs are not always foreseeable. Excessive summer drought can deplete flows and cut off migration routes for fish. A readily available supply of rental water could restore flows as needed, especially in states where the transfer or change process is quite lengthy. Second, water banks can reduce transactions costs by cutting search and information costs to potential buyers and sellers. One of the key barriers to instream flow markets is locating potential sellers. Water banks essentially pool sellers in one place, improving trading efficiency and can reduce acquisition costs. And thirdly, water banks provide incentives for conservation and improved water use efficiency. Expanding the pool of potential buyers to instream flow uses, in effect expands the market and incentives for improve water allocation.

thirst

THIRST

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I don't think this post needs a description.

lotic stickers have arrived

We just received our first batch of Lotic stickers: 1,000 to be exact. They measure 2" X 4" and are printed on outdoor vinyl with UV resistant inks. More importantly, they look great on vehicles, refrigerators, binders, tables, foreheads, and just about any other smooth, flat surface. If you want some stickers (free of charge) send me an email at chris@loticwater.com

answer: average price of water?

OK, so my little experiment didn't work out exactly as planned. If you remember, two posts ago, I mentioned I was conducting a Wisdom of Crowds experiment at the water law conference I was sponsoring. Frankly, I didn't get enough participation for the experiment to present any meaningful data. Regardless, here is the average price of water in Montana between 2003 -2009 based on Lotic's transaction database. Drum roll please.

1. $21.52 an acre-foot for leases; and
2. $1,176.30 an acre-foot for sales.

Needless to say these numbers need some additional explanation.

• This represents an average over 6 years.
• The price variation of transaction prices exceeded $6,000 dollars.
• The Montana Water Market is young and a limited number of comparable sales exist.
• Water right parameters (flow rate, volume, priority date, etc) greatly influence price.
  
  And lastly, my favorite
  

• No matter what comparable sales exist, your water is actually worth what someone is willing to pay for it.
  

making beer from rain?

Since my love for guerrilla marketing started in the beer industry at Big Sky Brewing Company, I thought this video was too good to pass up. Of course, my first question is how will the use of rainwater impact the water market? This question is beginning to arise in the arid western states, although, I have a feeling the rain heavy east isn't far away.