Water has become big business in Colorado. Water brokers make millions transferring water from farmers to towns, speculators skirts standard procedures for the transfer of water rights and buyers corner farmers in small-town cafes and call on town managers to cut unpublicized deals.
Has our water administration system broken down to the detriment of both farmers and towns? Or do aspects of the traditional water system stand in the way of more smoothly functioning water transfer processes?
Water insiders have been watching the system change, and a series in The Denver Post late last year gave the public some insight into the growing role of water brokers. Some have been left with the feeling that broker profits have been excessively high and that undesirable “speculation” is rampant.
What can be learned from these cases? Why can brokers continue to profit handsomely from farmer-to-town transfers? First note that, even with fees for the brokers, these transfers must have been beneficial to both farmers and towns or the two parties wouldn’t have agreed to them. Brokers provide a valuable service in identifying and identifying and connecting prospective buyers and sellers Some fee for service is justified.
Still, if the costs of arranging transfers could be reduced, both farmers and towns would benefit. A key issue is the lack of readily available information on farmers’ interests in leasing or selling water and water users’ needs. Farmers ask themselves “Who might buy my water and at what price?” and cities wonder “Where is appropriate water available and under what conditions?”
If prospective buyers and sellers could publicize their needs and interests in more transparent ways, the costs of water transfers would be lower while well-informed brokers would still have a role.
What features of the current system of water administration stand in the way of these improvements?
First, while all water rights are recorded by the State Engineer and the state water courts, the owners of the rights are not recorded, and it can be difficult to ferret out this information. Second, prices of transactions are not recorded by any agency, including the Northern Colorado Water Conservancy District, which is known for its active water markets. So, it’s unnecessarily difficult to know what the “going price” for a given type of water right is. In smoothly functioning markets like the spot and futures markets for agricultural products, transactions are frequent and prices are continuously published.
Third, transfers of water rights are required to go through the water court process where the transfer is likely to be protested, frequently requiring court hearings and the costly services of lawyers, engineers and other experts. The points of this process are to avoid third-party injury and monopolization of supplies.
While there can be no doubt that the Colorado water court system has served the state well for the past 125 years by allowing water to move to new uses in spite of high transaction costs, during much of that period there was little demand for water transfers since plenty of unappropriated water and low-cost new supplies were available.
Today, transfers are an increasingly attractive alternative as demands by industries, cities and environmental requirements expand in the face of little or no available water. The potential benefits of reducing transaction costs of all types of water transfers are quite large.
Finally, the “anti-speculation” doctrine observed by Colorado may be unduly restricting beneficial transfers. Under this doctrine, water being changed in use must be put to a clearly identified “beneficial use,” a term subject to wide interpretation. The anti-speculation doctrine has been inconsistently applied: municipalities and special districts are allowed to acquire water rights without demonstrating need and are permitted to hold “conditional water rights” without actual development for many years. A private entity is not allowed to do this.
“Speculation” may be the most misunderstood and unnecessarily feared term in the water vocabulary. In spot and futures markets for agricultural commodities, speculators play a crucial role by taking the risk that they know better than other market participants what the future holds, thus bringing new information to the market and enabling farmers to “hedge” against commodity price changes. Similarly, water “speculators” can play a useful role in identifying and anticipating valuable transfers.
Several steps could help in overcoming these problems without major modifications in water law.
First, the names of water rights owners could be recorded so that prospective buyers would know whom to contact. Secondly, prices of transactions should be made public so that “going prices” can be easily determined.
Third, the review process for proposed transfers could be simplified by tossing out the “beneficial use” doctrine. When the West was first settled, the threat of monopolization of streamflows by early claimants to water may have been a threat, justifying the need to demonstrate beneficial use as a condition of a water right. But now, with all significant streams being fully appropriated and with the increasing attractiveness of smoothly functioning water markets, the doctrine may have outlived its utility. Avoiding injury to other water users could be reviewed by the state engineer, but the need to demonstrate a beneficial use could be avoided, freeing informed investors to anticipate future needs.
Finally, the establishment of “water banks” in each of the major basins as authorized by 2003 legislation would facilitate both short-term leasing and permanent rights transfers. Water banks can take several forms, from maintaining a bulletin board for the posting of offers to buy, lease and sell to “interruptible supply contracts” by which farmers are paid over longer time periods to let cities take part of their water during droughts. Water bank activity has been increasing rapidly throughout the western U.S. and should be encouraged in Colorado.
Chuck Howe is professor emeritus of economics and a faculty research associate at the Institute of Behavioral Science, University of Colorado-Boulder.
