Not the way to use price to allocate Colorado River shortages

Ad hoc deals and billions of general tax dollars is a highly inefficient way of doing the right thing.

It is understood that the recent agreement amongst Arizona, California, and Nevada to voluntarily conserve an additional 3 million acre-feet in Colorado River water isn’t a long-term solution to an imbalance between demand and supply. 

However, it is worse than that. It turbocharges what was already a bad precedent of using general tax dollars to pay people to forgo water that in some sense doesn’t exist. The three-state agreement was greased by a cool $1.2 billion from dedicated funds Kyrsten Sinema and Mark Kelly inserted into the fraudulently named Inflation Reduction Act. 

This is just a massive expansion of a practice already extensively in use. The federal infrastructure law has also been used for that purpose. The state and the Central Arizona Water Conservation District have coughed up some dough. Indian tribes, cities, and others have agreed to leave water in the river … for a price.

In one case, the state agreed to pay for some farmers who were losing Central Arizona Project water to drill new groundwater wells as compensation. Your income and sales tax dollars at work.

There are several things worth noting about all of this. 

First, supply and demand for Colorado River water can be balanced. Estimates are that the three-state deal, in addition to other forbearance agreements that have been reached, will stabilize water levels in Lake Mead and Lake Powell, and perhaps even elevate them a bit. 

Second, since all these forbearance agreements have been voluntary, price is being used to allocate shortages and bring demand and supply into balance. California farmers were unwilling to negotiate away their superior rights to Colorado River water … until the price got high enough.

However, billions of dollars of general taxpayer money is a crazy way of using price to allocate a shortage and bring demand and supply into balance. 

The river is not producing enough water to fulfill all the tiers of entitlements that were created when the river flow was greater. Why should general taxpayers be on the hook to compensate people for water that doesn’t exist? Or to alter the allocation of the shortage from what would occur following the tiers of entitlement regimen? 

Basically, what is happening is that this huge pool of taxpayer money has been created and those with higher ranking entitlements are bidding, in a highly inefficient manner, for a share of it in exchange for forgoing water rather than having the shortage fall exclusively on those with lower ranking entitlements. 

If the huge pool of taxpayer money approach is going to be used, a formal auction process would produce more conservation at a lower price than the scattershot deal-making that’s been going on.

But if there were a more robust water market, the huge pool of taxpayer money would be unnecessary. Those with lower entitlements who didn’t want to be cut off could negotiate directly with those with higher entitlements willing to forbear for a price. There would be taxpayer money involved, since some of those wanting to purchase higher entitlement water would be public entities. But through direct purchase agreements, not roundabout through forbearance deals funded from the huge pool of general taxpayer money.

The huge pool of taxpayer money approach isn’t sustainable. A robust water market for direct purchases would be.

The three-state agreement is supposed to be enough to keep things afloat until 2026, when the operating agreement for the river has to be renewed and renegotiated anyway. Since there is not a robust water market currently in existence, the huge pool of taxpayer money approach may have been the only way to get from here to there without chaos and litigation. California was holding firm to its superior rights until there was enough money on the table for a shared approach.

But there should be clarity about what is going on. However clumsily and inefficiently, price is being used to allocate a shortage on the Colorado River and bring demand and supply into balance. Going forward, the goal should be to make that an ongoing process, rather than an ad hoc expedient, and to make it much more effective and efficient.     

Reach Robb at robtrobb@gmail.com.