State Water Project and Federal Central Valley Water Project
From the 1950’s to 1970’s different government agencies at the State and Federal level implemented a massive water development program in California. This program was built upon the traditional supply augmentation approach to water development. Unfortunately this approach to water development is flawed. The main weakness of the traditional supply based method is that it assumes that the demand for water is perfectly inelastic and unchanging over time. An inelastic demand assumes that there is little quantitative response to changes in the price of water. Under this planning approach the quantity of water to be delivered by a water project is fixed, and the only question is how to minimize the costs of supplying it. Economic analysis is then performed to see if the total costs of the water project are less than the total benefits.
Both the State Water Project (SWP) and the Federal Central Valley Water Project (CVP) were developed using the principles of the supply-based approach to water development. The SWP was originally projected to supply an average annual quantity of 4.2 million acre-feet of water in two stages. The first stage of 2.2 million acre-feet was built and put into service in the late 1960’s and early 1970’s. However, subsequent attempts to build the remaining 2 million acre-feet capacity have met with effective opposition from environmental interests, who want to prevent any further water development, and current contractors, who know that the average cost of water delivered by the system will have to increase by up to 300 percent to finance the completion of the planned project.
In 1994 the SWP project contractors and operators met to renegotiate the conditions for water sales among contractors and the allocation of cuts in water deliveries during drought periods. The resulting Monterey agreement also enabled contractors who overlie a state operated groundwater storage project to exchange the control of the project for surface water entitlements; these entitlements could then be transferred to urban contractors. Finally, the agreement sanctioned the permanent transfer of 130 thousand acre-feet of water from agricultural to urban users.
The CVP parallels the SWP and delivers 4.6 million acre-feet of water to both
urban and agricultural contractors. Urban contractors receive 10 percent of total water deliveries while the remaining 90 percent of water is diverted to agricultural contractors. The CVP was operational in 1965, but by 1992 there was considerable political pressure to modify the operation of the project to reduce environmental damage to different fish populations in the Sacramento River Delta. The resulting Central Valley Project Improvement Act (CVPIA) reallocated water to environmental uses by cutting water deliveries by 1 million acre-feet in normal rainfall years and by 804 thousand acre-feet in critical rainfall years. The CVPIA mandated that 800 thousand acre-feet of water be re allocated to instream uses to protect the salmon runs, while 400 thousand acre-feet of water be reallocated to wildlife refuges (Hanak, 2003).
Water markets in the CVP districts are limited to local sales among agricultural contractors. These sales are short in duration and are generated by differences in the water allocations between farm regions and years. Due to institutional constraints, CVP water is still largely used for agricultural irrigation despite a three-fold difference between the value of water in nearby urban sectors and agricultural sectors.
In recent years, State and Federal law have mandated a set of modifications that affect both the state and federal water projects in California. In 1996 and 1997 California developed the 4.4 Plan that aims to reduce diversions from the Colorado River to 4.4 million acre-feet over a period of 15 years. Moreover, in 2000 the Environmental Water Account (EWA) was implemented by the state and federal governments. The purpose of the EWA is to regenerate the fisheries of the San Francisco Bay-Delta system while simultaneously securing water supplies to both urban and agricultural users. Both these developments have encouraged water trading.
http://giannini.ucop.edu/CalAgBook/Chap7.pdf
Brokering Delta water is money.
