In November 2018, the Colorado Water Conservation Board (CWCB) established support and policy statements for a Demand Management Program requiring Colorado River water reductions under a Demand Management Program to be voluntary, temporary, compensated and proportional.
The CWCB committed to working on the feasibility of a Demand Management Program in Colorado that would contribute our share (of Upper Basin states) of a 500,000 acre-feet “insurance” pool in Lake Powell to prevent a 1922 Colorado River Compact “call” that would mandate curtailments in water usage by all water rights holders.
If this occurs, the economic damage would be devastating to all agriculture, municipal and industrial water users, threatening Colorado’s and our Upper Basin state neighbors’ way of life and economic survival.
Since then, the rhetoric from the Western Slope agriculture community has ramped up to a point where terms such as “taking cuts” and “sharing the burden” have dominated some discussions at CWCB meetings. This was predictable.
Since Colorado River water is a public resource, it’s politically managed. Little, if any of this rhetoric applies to a voluntary, temporary and compensated Demand Management Program.
It is intended to get at the heart of proportionality by targeting east slope municipalities that divert over 500,000 acre-feet annually of water from the Western Slope.
The proportionality criterion is intended to achieve an equitable distribution of reductions in consumptive use across Colorado’s affected watersheds.
Since water is a scarce resource, it needs to be treated that way, using markets. A recent example is a 12-year effort by the Colorado River Water Bank Working Group (WBWG) that was intended to demonstrate how markets can be used to conserve Colorado River water.
The WBWG’s purpose was to explore conservation efforts to prevent buy-and-dry of Western Slope agricultural water rights by east slope water users, many of whom hold junior post-Compact water rights.
The WBWG envisioned that Front Range municipalities would be willing to trade water diversion rights with Western Slope irrigators, allowing senior water rights holders to deposit their water rights into a “bank” from which junior water rights holders could lease these rights instead of curtailing their consumption.
The intent of using water banks to allocate our scarce water resource was laudable, but after 12 years and millions of federal dollars, the project came up short.
The Front Range Water Council (representing municipalities that have a very high willingness-to-pay for water), had no intention of providing the demand needed to make this water bank work, and the many logistical and technical barriers make it nearly impossible to scale-up a water bank. The idea of water banks has now been in the Colorado Revised Statutes for 20 years with no sustainable example of how to make them work.
So, what’s next?
The CWCB has not yet addressed which water rights holders will be eligible to voluntarily participate in a Demand Management Program, and how much they will be compensated.
East slope demand, where it’s worth much more by municipalities, will continue to pull water from the Western Slope, where its main use is for irrigated agriculture. And because water is a private property right, there ends up being few legislative options to mandate this transmountain diversion.
The relevant question becomes, what pricing mechanism and market institutions are best for accommodating competing agriculture, municipal and industrial demands for water to achieve Colorado’s share of the 500,000 acre-feet target, that’s fair and equitable and that minimizes total program costs while achieving low transaction costs?
There is a straight-forward, trusted and proven pricing mechanism that has not been tested for allocating water; one that uses a centuries-old pricing mechanism to bring together property rights holders and voluntary trading to discover a fair and equitable price. It’s called an auction, where trust is not questioned and the role of government is limited.
With one exception, the mechanics of this kind of auction works exactly the same as a livestock auction; by filling bids for water in order from the lowest to the highest, this type of auction is called a reverse auction, minimizing total program costs for who pays the bill.
In its Aug. 26 public workshop, the CWCB helped bring clarity to what it meant by proportionality, but still has not told us how it will be applied. The burden of deciding how the CWCB will achieve an equitable distribution of reductions in consumptive use is highly contentious, because it’s political.
That cannot be avoided. And until we know this and the CWCB’s definition of temporary, no secondary economic impact analysis (i.e. impacts on local purchases of all kinds) will be useful.
So, when you think about the possibility of using an auction to trade water, think cattle and sheep. They both bring together property rights holders with voluntary markets, providing a straight-forward and trusted method of answering the question of who gets paid and how much, in a fair and equitable way.
The time is right to test how auctions could achieve a voluntary, temporary, compensated and proportional Demand Management Program in Colorado.
Steven Ruddell is a natural resources economist and member of the Board of Directors of the Animas-La Plata Water Conservancy District in Durango, Colorado.
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