JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

OCTOBER AMERICAN WATER RESOURCES ASSOCIATION 2003

WATER TRANSFERS AND THEIR IMPACTS: LESSONS FROM THREE COLORADO WATER MARKETS1

Charles W. Howe and Christopher Goemans2

ABSTRACT: This paper presents an analysis of the effects of different institutional arrangements and economic environments on water markets. Characteristics of water rights transfers in the South Platte Basin of Colorado and transfers of shares of the Northern Colorado Water Conservancy District (NCWCD) are compared to show how different institutional arrangements can affect the types and size distributions of transfers. The characteristics of water rights transfers in the prosperous South Platte are then compared with water rights transfer characteristics in the economically marginal Arkansas River basin of Colorado to identify the effects of different economic environments. Finally, the economic losses from reductions in irrigated acreage resulting from water transfers are estimated for the South Platte and Arkansas and compared with purchase prices by municipalities. Transfers in the South Platte were to new uses in the same basin, while more recent transfers in the Arkansas were to out of basin users. Transfers of South Platte rights and especially NCWCD shares were small and continuous over time, while transfers in the Arkansas were dominated by a few very large transfers. The negative impacts are judged to be more severe in the Arkansas basin than in the South Platte. Purchase prices paid by municipalities substantially exceeded capitalized transitional losses in the selling areas. In the South Platte, gains and losses were in the same basin, while the Arkansas absorbed the losses, with the benefits going to the purchasing basin. (KEY TERMS: water markets; transaction costs; economic efficiency; economic impacts; compensation.) Howe, Charles W. and Christopher Goemans, 2003. Water Transfers and Their Impacts: Lessons From three Colorado Water Markets. Journal of the American Water Resources Association (JAWRA) 39(5):1055-1065.

OBJECTIVES AND STRATEGY. In the western United States, the development of new water supplies has become costly in economic and environmental terms. New dams and reservoirs generate strong opposition, while some rivers are

already so highly regulated that added storage would decrease yields. Thus it is important that water be transferable from older, lower valued uses to newer, higher valued uses, especially because roughly 85 percent of the consumptive use of water takes place in irrigated agriculture, much of it in the production of low valued crops (USGS, 1995). In numerous studies, researchers have argued that water markets are important in increasing this flexibility (Howe et al., 1986a, 1986b; Wahl, 1989; Anderson and Hill, 1997; Easter et al., 1998). Changes in water ownership in the western United States occur largely through informal water markets in which buyers and sellers search for one another in ways varying from phone calls and local bulletin boards to water brokers and regional computer networks such as that found in the Westlands Irrigation District of California (Howitt, 1998). These ownership transfers involve either state water rights or shares in water distribution organizations such as ditch companies and conservancy districts whose supplies are underlain by water rights. An obvious condition of a transfer is that infrastructure must exist through which the water can be transferred to the new use, although exchange arrangements can be agreed upon to effect transfers indirectly. The objectives of this study are (1) to observe how different institutional arrangements for water markets, regional economic conditions, and property right definitions in water affect the functioning of water markets in terms of the types, size, and frequency of transfers that occur; and (2) to determine how the economic and social conditions of a river basin affect the economic impacts of agricultural to urban

No. 02065 of the Journal of the American Water Resources Association. Discussions are open until April 1, 2004. Professor Emeritus of Economics and Ph.D. Candidate in Economics, University of Colorado-Boulder, Campus Box 468, Boulder, Colorado 80309 (E-Mail/Howe: Charles.Howe@Colorado.edu).
2Respectively,

1Paper

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

1055

JAWRA

HOWE AND GOEMANS transfers on the areas of origin. The study initially contrasts the transfers of state water rights (native water) that pass through the Colorado water court system with transfers of shares in the NCWCD that are able to bypass review by the water courts. Transfers of state water rights in the South Platte are then compared with such transfers in the Arkansas. The direct and indirect economic impacts are then estimated of agricultural to urban water rights transfers in those two basins. Only a few studies have quantified the impacts that water transfers have had on areas of origin (e.g., Vaux and Howitt, 1984; Howe et al., 1990; Taylor and Young, 1995). The study is based on all traditional water rights transfers and all transfers of shares in the NCWCD from 1979 through 1995, and these transfers were characterized by type (for example, agricultural to urban), size in acre feet, and date of the transfer. In addition to permanent transfers of water ownership, it is possible under some conditions for water owners to rent or lease water temporarily to other users for periods of a year or more, greatly facilitating adjustments to short term climate events, especially droughts. In nondrought years, towns frequently rent some of the excess water held for drought protection or future growth to nearby agriculture, subject to recall in drought years (regarding rental markets in the Northern Colorado Water Conservancy District see Howe et al., 1986a, pp. 189-192). Cities are increasingly contracting with agricultural interests for agricultural to urban leases on a climate contingency basis to firm up their supplies during drought.

COMPARISON OF THE TWO STUDY BASINS: THE SOUTH PLATTE AND ARKANSAS BASINS IN COLORADO Table 1 provides comparative economic, land use, and demographic data for the two regions. It is immediately seen that the Arkansas is much more specialized in agriculture and that population density is much lower. The South Platte Valley is a prosperous, diversified, and highly integrated region. Land use changes are occurring in part for reasons unrelated to water availability, especially rapidly expanding urbanization and commercial development. Agriculture is increasingly specializing in horticulture and livestock with resultant net income per farm acre ($73) much higher than in the Arkansas Valley ($26). The Front Range cities in the South Platte like Fort Collins, Greeley, Boulder, and Denver have experienced rapid growth in the food processing, telecommunications, biotechnology, and energy sectors. A unique form of water market is found in the NCWCD that provides about 30 percent of the water available in the South Platte by importing supplemental water from the western side of the Rockies through the federal Colorado-Big Thompson Project. NCWCD shares have unique characteristics that make them particularly attractive to water users and particularly conducive to market activity: (1) they are homogeneous units (each share gets the same amount of water and there are no priorities); (2) there is no responsibility for the protection of return flows, a quirk of Colorado water law concerning water imported from another major basin; and (3) transfers do not have to pass through the water court but require only the approval of the NCWCD board. These features suggest that transaction costs of transfers should be much lower than for transfers of traditional water rights. NCWCD water cannot, however, be transferred outside the Northern District boundaries 1056
JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

WATER OWNERSHIP IN THE WESTERN UNITED STATES The predominant legal system relating to water in the western United States is the appropriations or priority system that, in contrast to the older riparian system of water law of the eastern states, treats the use of water as personal property separate from the land and subject to transfer or sale (Radosevich et al., 1976; Getches, 1997). Under this system, all water withdrawn from the natural setting is represented by a water right or by a ground water pumping permit. These rights and permits may be owned by individuals or water distribution organizations such as irrigation ditch companies, conservancy districts, municipalities, or firms. The shares of these organizations, in turn, can be bought or sold. In Colorado, the transfers of state water rights and out of ditch share sales are overseen by a system of water courts, while in other western states similar transfers are overseen by the office of the state engineer or other competent water agencies. This oversight is intended to protect property rights in water and to protect third parties from externalities that might be generated by transfers. In Colorado, this protection is extended only to other water users, not to public values such as water quality, ecosystems, and community values. Other western states use broader sets of criteria in the water transfer approval process (for Idaho see IDWR, 1985, 1986; for Wyoming see Dobbs et al., 1971; MacDonnell and Rice, 1994). More will be said about these criteria in the section on economic impacts. Water rights and water shares can be modified by the oversight agency as a condition of transfer approval. JAWRA

WATER TRANSFERS AND THEIR IMPACTS: LESSONS FROM THREE COLORADO WATER MARKETS
TABLE 1. Characteristics of the South Platte and Arkansas Basins. Totals South Platte Land In Farms (1,000 Acres1992)* Total Land (1,000 Acres 1992)* Farm Land as a Percent of Total Land (1992)* Farm Net Income (1,000 $,1990)** Total Personal Income (1,000 $,1990)** Farm Income as a Percentage of Total (1990)** Population (1990)* Total Land Square Miles (1990)* Population Per Square Mile (1990)* **U.S. Bureau of the Census (1996). **U.S. Bureau of the Census (1994). 2,887 5,151 56 209,550 13,768,637 1.5 984,846 8,108.9 121.5 Arkansas Valley 3,629 4,934 74 94,046 1,345,787 7 153,809 7,725.8 19.9 Without City of Pueblo 2,732 3,414 80 72,702 278,587 26 30,751 5,337 5.8

because of financial obligations of the District to the U.S. Bureau of Reclamation. Unlike northeastern Colorado, the agricultural economy of the Arkansas Valley in Colorado has been depressed for decades. Climatic extremes and highly variable water supplies have made much of agriculture economically marginal. The beet sugar industry, on which the early hopes for settlement in the valley were pinned in the late 1800s, has closed down completely. The city of Pueblo has experienced cycles of growth and contraction. Assessed values and property taxes have failed to grow. Demographic data show young people leaving the region (Weber, 1989), although there has been a small population increase since 1996. The valley has long had small acreages of high-valued horticultural crops like flower seeds, melons, and tomatoes, but these crops are severely market-limited so cannot significantly be expanded. In the early post-World War II period, water sales in the valley were from agricultural interests to the local cities of Pueblo and Pueblo West and to thermal electric generating plants. By the 1980s, transfers increased in size and were to the larger cities in the Denver metropolitan area. This change occurred partly because of the rapid growth of those cities and their need for water and partly because of the persistence of depressed economic conditions in the Arkansas. The out of basin transfers were facilitated by existing diversion facilities in the upper Arkansas that permitted diversions into the South Platte River, which serves the metro area. Like the South Platte, the Arkansas has two types of water: the native water represented by traditional water rights and supplemental water imported from the western side of the Rockies through the federal
JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

Frying Pan-Arkansas Project. The Frying PanArkansas Project was initiated in the 1960s to supplement the highly variable native supplies in the Arkansas. This supplemental water is administered by the Southeastern Colorado Water Conservancy District, in many ways the counterpart of the NCWCD. The major difference between the two districts, however, is that the Fry-Ark water is allocated annually by an elected committee and is not subject to trade or sale. As with NCWCD water, this water cannot be transferred outside the Southeastern District.

THE TWO WATER MARKETS OF THE SOUTH PLATTE BASIN The first market to be characterized is that for water rights representing water native to the basin. All such transfers in the South Platte Basin were identified in the records of the Division 1 (South Platte) Water Court for 1979 through 1995. These transfers frequently take the form of shares in ditch companies that own the underlying water rights. Amounts transferred annually were compiled, and the transfers were classified by size in acre feet (1 acre foot = 1,230 cubic meters) and nature of buyer and seller (agricultural to agricultural, agricultural to urban, nonagricultural to nonagricultural). The tables and graphs below characterize the transfers of state water rights in the South Platte Basin from 1979 through 1995. Figure 1 shows the acre feet of native water transferred by year. The 1987 peak followed several years of high population 1057 JAWRA

HOWE AND GOEMANS

Figure 1. Quantity of Native South Platte Water Transferred by Year.

growth and the resultant municipal purchases of water from agriculture. The 1992 peak represents large purchases by the City of Fort Collins for much the same reason. Of all the transfers, 87 percent were from agricultural to urban use. Figure 2 shows the frequency distribution of these water transfers by size. The median transfer size of 367 acre feet is small compared with some large transfers that have recently attracted the publics attention (e.g., the City of Thorntons transfer of 20,000 acre feet in the South Platte in 1987). The mean value of 3,425 acre feet results from unusually large purchases by Thornton and Fort Collins. The small median size suggests a relatively smooth working water market in which transaction costs are not high enough to preclude frequent smaller purchases when added supplies are needed. Price data are not recorded by the water court or the division engineer s office nor by the NCWCD, so prices are somewhat difficult to uncover

and vary from sale to sale as affected by the seniority of the right, proximity to buyer, water quality, costs of physical transfer, and level of legal opposition by other water users. However, data on city purchases indicate recent prices in the $2,000 to $2,500 per acre foot range for permanent transfers (CSUWC, 2001, 2002). The second market in the South Platte is that for shares in the NCWCD, which was established in 1937 to contract with the Bureau of Reclamation for water from the federally sponsored Colorado-Big Thompson Project. This project was initiated in 1937 in response to the drought conditions of the 1930s (see Tyler, 1992). The project brings an average of 270,000 acre feet of water into the Platte Basin from the headwaters of the Colorado River on the western slope of the Rocky Mountains and represents about 30 percent of the total supply in the South Platte. The establishment of a market for this water in the form of shares in NCWCD is greatly facilitated by the characteristics

Figure 2. Distribution of Native South Platte Transfers by Size. (Median: 367.17; Mean: 3,425.31)

JAWRA

1058

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

WATER TRANSFERS AND THEIR IMPACTS: LESSONS FROM THREE COLORADO WATER MARKETS cited earlier: the shares are homogeneous, deliverable almost anyplace in the district because of well developed infrastructure, and not subject to the water court review process (Radosevich et al., 1976, Chapter 6). A very active water market has developed within the district (Howe et al., 1986a, 1986b; Michelsen, 1994). Figure 3 shows both the changing pattern of ownership and actual use of Northern District water. Cities and industry are increasing their share of ownership, but the share in actual use is not increasing as rapidly because towns typically rent some of their water back to agriculture on an annual basis, subject to recall in drought years. In this respect, the water courts have allowed towns wide latitude in defining what constitutes beneficial use. Figure 4 shows the volume of NCWCD water transferred by year. These transfers have accelerated in recent years because of the highly desirable characteristics of the shares (as described earlier) and rapid population growth in northeastern Colorado. Share prices have followed the growth pattern, too, as shown in Figure 5. The patterns of prices and volume of transfers show cycles that relate in part to varying business and demographic conditions and in part to varying climatic conditions. Statistical analyses of these relationships are continuing. Figure 6 shows the distribution of NCWCD transfers by size. Transfers were predominantly agricultural to urban (64 percent), but 26 percent were agricultural to agricultural. The persistence of agricultural to agricultural transfers in the Northern District suggests that there is a large potential for beneficial agricultural to agricultural transfers when transaction costs are low. The median size of transfer of 16.8 acre feet is much smaller than that of state water rights transfers, suggesting an efficient and continuous market with low transaction costs that allow buyers and sellers to undertake small transactions as the need arises rather than occasional larger transfers. Comparison of the results of these two markets suggests the following conclusions: (1) the homogeneous nature of the NCWCD shares greatly facilitates trading; (2) the avoidance of water court review greatly reduces transaction costs and decreases the uncertainty of outcome introduced by that process; and (3)

Figure 3. (a) Colorado-Big Thompson Water Deliveries (1957 to 1999) and (b) Colorado-Big Thompson Shares Owned (1957 to 1999).

Figure 4. Quantity of NCWCD Water Transferred by Year.

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

1059

JAWRA

HOWE AND GOEMANS

Figure 5. Colorado-Big Thompson Price data. Data from The Water Strategist indicated by WS data.

Figure 6. Distribution of NCWCD Transfers by Size (1979 to 1999). (Median: 16.8; Mean: 34.00)

the ease of trading and the small size of the shares result in continuous trading over time so that water users do not have to buy ahead as is the case with buying traditional water rights.

COMPARISON OF TRANSFERS OF TRADITIONAL WATER RIGHTS IN THE ARKANSAS VALLEY AND THE SOUTH PLATTE The strategy of this section is to compare the characteristics of water transfers in the Arkansas Valley with those of the South Platte. Thus, water rights transfer data were collected for the period 1979 through 1995 from the Division 2 (Arkansas) Water JAWRA 1060

Court. Nearly all water rights transfers were from agricultural to urban uses. As a result, the region lost approximately 68,000 irrigated acres during the data period. Transfers over time were again quantified in acre-feet and are shown in Figure 7. This shows a discontinuous pattern of transactions with a bulge in the 1983 through 1984 period when most of the water of the Colorado Canal was sold to the City of Aurora. The distribution by size of transfer (Figure 8) is also discontinuous, consisting of some small transfers but dominated by two very large transfers: the Colorado Canal sale of 100,000 acre feet in 1985 and the Rocky Ford majority of 11,890 acre feet, also in 1985. It seems clear that limited demand for new water supplies within the basin and high transaction costs associated with transbasin transfers caused water
JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

WATER TRANSFERS AND THEIR IMPACTS: LESSONS FROM THREE COLORADO WATER MARKETS

Figure 7. Quantity of Arkansas Valley Water Transferred by Year.

Figure 8. Distribution of Native Arkansas Valley Transfers by Size. (Median: 366.82; Mean: 6,199.09)

market activity to be dominated by a small number of large transfers. Transbasin transfers always attract protests that increase the time and cost of the court review process. Transaction costs do not increase in proportion to the size of transfer, so metropolitan buyers prefer to buy in large amounts when negotiating transbasin transfers, i.e., there are economies of scale for the buyer. In comparing water rights transfers in the two basins, the greatest difference is that all the transfers in the South Platte were to other uses in the same basin (and hence generally in the same economic area) while out of basin transfers in the Arkansas totaled 114,320 acre feet (88 percent) compared to 15,568 of in basin transfers. The median size of transfer of 367 acre feet is identical to that of the South Platte, while the mean sizes are quite different: 6,199 in the Arkansas versus 3,425 in the South Platte because of the very large Colorado Canal transfer.
JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

The pattern of Arkansas transfers over time and the distribution of transactions by size are both discontinuous.

THE COMPARATIVE REGIONAL ECONOMIC IMPACTS OF WATER RIGHTS TRANSFERS IN THE SOUTH PLATTE AND ARKANSAS BASINS OF COLORADO The economic and social impacts of a sale of agricultural water on the area of origin are hypothesized to depend on (1) the size and seniority of the transfer, (2) the vitality of the regional economy, and (3) whether the transfer is to a new use in the same or a different economic region. When agricultural water rights (typically senior) are sold in Colorado, the land that had been irrigated by that water is usually 1061 JAWRA

HOWE AND GOEMANS required by the water court to be dried up in perpetuity (a requirement that makes little economic sense if junior rights might be substituted for those sold to support production of alternative lower valued crops). When agricultural production falls, activities linked to agriculture are negatively affected: suppliers of agricultural inputs lose business; processors of agricultural outputs lose supply sources; financial institutions lose the demand for loans, etc. While the selling farmer is presumably better off, the surrounding community suffers losses of income and social displacements as people must move and change jobs while the community loses some of its ability to support community services. Naturally, similar consequences occur whenever any activity shuts down, so the question is whether unique consequences result from irrigated agricultural acreage. If the economic region is economically diversified and buoyant, alternative employment opportunities are close at hand and the selling farmer can find local investment opportunities for his or her money. The secondary impacts in such a setting are likely to be short lived. If the new use of the water supports more profitable activities in the same economic region, the region as a whole will be better off economically from the water sale. The South Platte basin is such a region. We have seen above that the majority of transfers in the South Platte basin are from agricultural to urban and industrial uses and all were to uses in the same basin. Thus while agricultural and linked activities are diminished over time, other activities are stimulated by the efficient acquisition of water and unemployed resources are likely to quickly find alternative opportunities. In the Arkansas Valley, the economy has historically been depressed and new local demands for water supply have been limited. Eighty-eight percent of the water transferred in the 1979 through 1995 study period was to out of basin buyers. The water use benefits were, therefore, outside of the region, while limited opportunity existed for the proceeds from the sale of the water to be invested in the local economy. Most of the water sale proceeds have been used to reduce farm debt (Weber, 1988, unpublished paper, 1989, unpublished paper). In such cases, the regional impacts of a permanent transfer of water rights can be quite severe. It can be argued that the farms would eventually have failed anyway, so the water market simply allowed the farmers to choose the optimal time to leave the business. What the public sees, however, is the sale of water followed by sharp declines in the agriculture related sectors. What economic analysis usually omits are the real human and resource costs that occur during this transition. To estimate the direct and indirect personal income, employment, and tax losses occasioned by water sales in the two regions, input/output models of the Minnesota IMPLAN Group, Inc. (IMPLAN, 1999) have been used. Input/output models show the patterns of provision of inputs and the uses of outputs by the different regional sectors (SIC groups) in the production of goods and services to satisfy final demands demands that do not depend on local production levels (Pleeter, 1980). The IMPLAN system was designed by the U.S. Forest Service to permit estimates of the input-output structure of regional economies down to the county level for policy analysis purposes. Datasets are now commercially available that permit the construction of the input/output structure of multicounty groups such as the five-county area used for the South Platte (Boulder, Adams, Jefferson, Larimer, and Weld) and the six counties of the Arkansas Valley (Pueblo, Otero, Crowley, Bent, Kiowa, and Las Animas). These sets of counties account for most of the agricultural activity of the two regions. The procedure for utilizing the models involves the following steps: (1) to determine the cropping pattern, crop yields, and crop prices for the lands dried up by the transfer; (2) to determine (from trade flow data from IMPLAN) how much of the lost output had been sold outside the subject areas; and (3) treating these lost out of area sales as reductions in final demands, to run the input/output model to determine the changes in payments to households, taxes, and employment that result directly and indirectly. Table 2 provides estimates of the annual direct plus indirect impacts per acre foot of water transferred on the regional economies of the South Platte and Arkansas basins. These estimates were based on samples of large agricultural to urban transfers for which detailed cropping data were available and that occurred in the two basins during the study period. For the South Platte, direct and indirect personal income losses (including wages, salaries, income from business and investments) amount to $22 per acre foot sold. Direct plus indirect employment losses per thousand acre feet of water sold amount to approximately 1.8 jobs. Tax losses represent a reduction in ability to provide public services and come to about $9 per acre foot transferred. The regional losses on a per capita basis are nearly negligible. These losses represent what occurs in the short run when there is limited ability to react to the reduction in agricultural output. Over time, human resources and fungible capital will migrate to other employment, although this migration will be lower out of agriculture than would be the case with other sectors because of the culture of an agricultural way of life,

JAWRA

1062

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

WATER TRANSFERS AND THEIR IMPACTS: LESSONS FROM THREE COLORADO WATER MARKETS
TABLE 2. Direct and Indirect Negative Impacts of Selected Water Transfers on Basins of Origin: South Platte and Arkansas Basins, Colorado. Direct Impacts South Platte Arkansas Output (per acre-foot) Tax Impact (per acre-foot) Personal Income (per acre-foot) Employees (per 1,000 acre feet) Output (per capita) Tax Impact (per capita) Personal Income (per capita) Employees (per 100,000 people) 0.21 3.92 2.63 35.26 8.52 1.29 1.61 17.89 2.02 14.11 65.08 88.99 Direct + Indirect South Plate Arkansas 104.06 8.83 21.6 1.78 2.56 0.22 0.53 5.63 117.02 12.24 28.48 2.57 18.51 1.72 4.27 43.49

the older average ages of farmers, and their more isolated locations. The present value of the personal income and tax losses over some transition period during which human resources and fungible capital are finding new employment summarizes the regions costs stemming from displaced labor and capital. In a prosperous region like the South Platte, displaced labor, capital, and land are likely to be reemployed in other productive activities within a relatively short period. We assume a period of five years. If we use the first-year personal income loss per acre foot plus the loss of taxes to public authorities totaling $31 and assume that the annual loss per acre foot drops linearly to zero by the end of year five, the present value of these losses is $83 per acre foot using a discount rate of 5 percent. The losses in the Arkansas are likely to persist over a longer period than in the prosperous South Platte, perhaps dissipating over ten years rather than the five we assumed for the South Platte. If it is assumed that the annual loss per acre foot drops linearly to zero over ten years, then the initial loss of personal income plus tax losses of $41 per acre foot has a present value of $187 per acre foot (using a 5 percent discount rate). This is more than twice the capitalized losses in the South Platte. Even if the transition periods were the same, the capitalized losses would be greater for the Arkansas. While marginal benefits of additional water to municipalities are difficult to estimate because of the delayed and uncertain nature of its uses, the purchase price can be used as a lower bound estimate of the present value of net benefits perceived by town officials. Prices being paid for water rights by towns in the South Platte Valley have been increasing steadily, as was seen in Figure 5 for NCWCD shares. Fort Collins has paid from $175 per acre foot in 1973 to $1,890 per acre foot in 1998 (in nominal terms). Thus this lower bound on benefits substantially 1063

exceeds the direct and indirect costs imposed by the reduction of agricultural activities in the South Platte. In sum, the basin appears to have gained handsomely overall in economic terms from the process of transferring water from agricultural to urban uses. At the same time, most equity issues concerning the incidence of benefits and costs have probably been largely avoided due to the mobility of resources and alternative employment opportunities. Purchase prices for Arkansas River water rights have been in the neighborhood of $2,000 per acre foot (e.g., for the second half of the Rocky Ford Ditch), indicating a net gain for the basin of origin by the simple comparison of capitalized losses and purchase payments. However, a significant fraction of the losses is imposed on parties other than the seller. We know from Webers earlier study (1989, unpublished paper) that most farmers in the Arkansas who earlier sold their water used the money to pay off longstanding debts. While the reduction in indebtedness is a financial gain to the farmer, it creates no new jobs in the absence of local investment opportunities. Comparison of the direct plus indirect loss figures for the two basins indicates that the losses per acrefoot incurred from the phase out of agriculture are noticeably more for the Arkansas. Because of the much lower population density in the Arkansas Valley, the per capita losses are about eight times greater. We argue that the per capita losses are more relevant measures of the welfare impacts.

CONCLUSIONS In comparing the patterns of transfers of traditional water rights in the South Platte basin with transfers of shares in the NCWCD, it becomes clear that the differences in the nature of the property rights JAWRA

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

HOWE AND GOEMANS involved and the differences in the types of social oversight used have very different results: the homogeneous nature of NCWCD shares make them easier to trade, while the avoidance of water court review contributes to a continuous market in small transactions. Traditional water rights have not only different priorities but different consumptive fractions and seasonal patterns of use. A prospective buyer must search for rights that have the right combination of characteristics. The higher transaction costs of water court review result in economies of scale in the transfer process, resulting in much larger transfers on the average. The comparisons of transfer characteristics between the South Platte and the Arkansas (both of which involve traditional water rights and are subject to water court review) suggest that out of basin transfers (the Arkansas) involve much larger transaction costs and thus, because of scale economies in transfer costs, result in a distribution of transfer sizes dominated by a few large, occasional transfers. The comparative impact analysis indicates that more severe economic and social impacts are likely in specialized, marginal agricultural regions like the Arkansas: the direct and indirect losses of income, tax receipts, and employment per acre foot are likely to be significantly higher than those in a prosperous basin, while the losses on a per capita basis are much greater and are likely to persist over a longer time span. The results suggest grounds for extra market assistance to basins of origin when conditions in the basin approximate those found in the Arkansas. The set of criteria to be considered by the transfer agencies in approving, modifying, or disapproving water transfers should be expanded to include consideration of the secondary economic and social costs imposed on the basin of origin (as is the practice in Utah, Wyoming, and Idaho). When it is determined that serious costs will be imposed on the basin of origin, one or both of two policies might be followed: (1) a transfer fee per acre foot could be imposed on the buyer and transferred to a unit of general government (including school districts) in the area of origin to support social services during the period of transition; and (2) a more gradual transfer of the water over several years as is done currently with revegetation requirements could be specified, allowing more time for adjustments to take place.
ACKNOWLEDGMENTS The authors would like to acknowledge the guidance provided by four persistent referees over several revisions of this paper. Their suggestions greatly improved the paper. The study was sponsored by the General Service Foundation, Aspen, Colorado, Grant DS-11-99.

LITERATURE CITED Anderson, Terry L. and Peter J. Hill (Editors), 1997. Water Marketing: The Next Generation. Rowman and Littlefield Publishers, Inc., Boulder, Colorado, and New York, New York. CSUWC (Colorado State University Water Center), 2001. Water News Digest Colorado Water. Newsletter of the Water Center of Colorado State University (October issue). CSUWC (Colorado State University Water Center), 2001. Water News Digest Colorado Water. Newsletter of the Water Center of Colorado State University (February issue). Dobbs, Thomas L., Orman Paananen, and Paul A. Rechard, 1971. Criteria and Methods for State Water Resource Planning. Water Resources Series No. 22, Water Resources Research Institute, University of Wyoming, Laramie, Wyoming. Easter, William K., Mark W. Rosegrant, and Ariel Dinar (Editors), 1998. Markets for Water: Potential and Performance. Kluwer Academic Publishers, Boston, Massachusetts. Getches, David H., 1997. Water Law in a Nutshell. West Publishing Co., St. Paul, Minnesota. Howe, Charles W., Jeffrey K. Lazo, and Kenneth R. Weber, 1990. The Economic Impacts of Agriculture-to-Urban Water Transfers on the Area of Origin: A Case Study of the Arkansas River Valley in Colorado. Amer. J. Agr. Econ., pp. 1200-1204. Howe, Charles W., Dennis R. Schurmeier, and William D. Shaw, Jr., 1986a. Innovations in Water Management: Lessons from the Colorado-Big Thompson Project and Northern Colorado Water Conservancy District. In: Scarce Water and Institutional Change, Kenneth C. Frederick and Diana C. Gibbons (Editors). Resources for the Future, Inc., Washington, D.C., Chap. 6. Howe, Charles W., Dennis R. Schurmeier, and W. Douglas Shaw, Jr., 1986b, Innovative Approaches to Water Allocation: The Potential for Water Markets. Water Resources Research 22(4):439-445. Howitt, Richard E., 1998. Spot Prices, Option Prices, and Water Markets: An Analysis of Emerging Markets in California. In: Markets for Water: Potential and Performance, K. William Easter, Mark W. Rosegrant, and Ariel Dinar (Editors). Kluwer Academic Publishers, Boston, Massachusetts, Chap. 8, pp 119-138. IDWR (Idaho Department of Water Resources), 1985. Currents: A Publication of Energy and Water Information: Special Water Allocation Rules Edition. Statehouse Mail, Boise, Idaho. IDWR (Idaho Department of Water Resources), 1986. Rules and Regulations for Water Appropriation. Statehouse Mail, Boise, Idaho. Michelsen, Ari M., 1994. Administrative, Institutional and Structural Characteristics of an Active Water Market. Water Resources Bulletin 30(6):971-982. IMPLAN (Minnesota IMPLAN Group, Inc.), 1999. Users Guide, IMPLAN Pro, Version 2.0. Stillwater, Minnesota. MacDonnell, Lawrence J. and Teresa A. Rice, 1994. Moving Agricultural Water to Cities: The Search for Smarter Approaches. Hastings West-Northwest Journal of Environmental Law and Policy 2(1):27-55. Pleeter, Saul (Editor), 1980. Economic Impact Analysis: Methodology and Applications. Nijhoff Publishing, Boston, Massachusetts.

JAWRA

1064

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

WATER TRANSFERS AND THEIR IMPACTS: LESSONS FROM THREE COLORADO WATER MARKETS
Radosevich, G. E., K. C. Nobe, D. Allardice and C. Kirkwood, 1976. Evolution and Administration of Colorado Water Law: 18761976. Water Resources Publications, Fort Collins, Colorado. Taylor, R. G. and R. A. Young, 1995. Rural-to-Urban Water Transfers: Measuring Direct Foregone Benefits of Irrigation Water under Uncertain Supplies. Journal of Agricultural and Resource Economics 20(2):247-262. Tyler, Daniel, 1992. The Last Water Hole in the West: The Colorado-Big Thompson Project and the Northern Colorado Water Conservancy District. University Press of Colorado, Niwot, Colorado. U.S. Bureau of the Census, 1994. County and City Data Book: 1994. U.S. Government Printing Office, Washington, D.C. U.S. Bureau of the Census, 1996. USA Counties: 1996. U.S. Government Printing Office, Washington, D.C. USGS (U.S. Geological Survey), 1995. Estimated Use of Water in the United States in 1990. Circular 1081, Books and Open-File Reports Sales, USGS, Federal Center, Box 25286, Denver, Colorado. Vaux, Jr., H. J. and Richard E. Howitt, 1984. Managing Water Scarcity: An Evaluation of Interregional Transfers. Water Resources Research20(7):785-792. Wahl, Richard W., 1989. Markets for Federal Water: Subsidies, Property Rights and the Bureau of Reclamation. Resources for the Future, Inc., Washington, D.C. Weber, Kenneth R., 1989. Otero County: A Demographic History of a Colorado High Plains County, 1889-1987. The Social Science Journal 26(3):265-275.

JOURNAL OF THE AMERICAN WATER RESOURCES ASSOCIATION

1065

JAWRA