Southern California Water Markets: Potential and Limitations

Abstract

This paper explores the potential and limitations for Southern California water markets using an economic-engineering network flow optimization model, CALVIN. CALVIN is used to estimate how a market would affect overall Southern California water use, to preliminarily assess the economic benefit of more flexible water allocation policies, and to explore the characteristics of an ideal market. Results from CALVIN suggest substantial economic and reliability benefits exist for implementing water market or other transfer mechanisms and these benefits could be achieved with relatively little reallocation of agricultural water. An ideal water market in Southern California would reduce more costly urban water shortages, reducing demand for increased imports from outside of Southern California. Additionally, substantial economic benefits could accrue from expanding some conveyance and storage facilities, particularly the Colorado River Aqueduct and conjunctive use storage capacity. Conveyance Capacity Expansion Most canal capacities in the Southern California system did not have high shadow values (>$100/af-month) under an ideal market scenario. The only facility with significant shadow values in terms of expected and present value is the Colorado River Aqueduct (CRA). CRA water is delivered to the Coachella Valley urban area and all of MWD (Central, Eastern and Western MWD, and SCDWA). Figure 10 shows the shadow values associated with the CRA operating under an ideal market. For the majority of the 72 year hydrologic period, the net benefit of expanding the CRA is $300/af. In the '87-'92 drought, however, shadow values increase to $700/af-yr. Scarcity of up to 62 taf occurs during drought, incurring residential scarcity costs throughout MWD. The economic value of increasing the capacity of the CRA has an average annual value of $398/af-yr and a present value of $13,300/af-yr, at a 3% real interest rate and very long life span. More direct conveyance between the Colorado River and the SDCWA (via the All American Canal), a "Tijuana Canal," has been contemplated as an alternative delivery route for Colorado River water to SDCWA. Since the route would divert Colorado River water at a more southern point than the CRA, this diversion's salinity will be significantly higher, with an additional water quality cost estimated at $79/af (Newlin 2000). The shadow values for a small Tijuana Canal (Figure 10) parallel CRA shadow costs, with the difference from water quality costs ($178/af for the CRA versus $257/af for a Tijuana Canal). The Tijuana canal would provide moderate marginal benefits outside of drought periods and much larger economic benefits during droughts, with an average annual benefit of $318/af. Conclusions and Future Improvements Considering the limitations of this modeling approach and water marketing, the following conclusions can be made from the CALVIN results for Southern California. In the future, more specific and reliable information can be derived with improvements to the CALVIN approach. Conclusions 1. Sub...

Economic values for conjunctive use and water banking in southern California

“…He found that the importance of perfect foresight generally decreases significantly with greater amounts of over‐year storage available and that integrated conjunctive use reduces greatly the effects of perfect foresight. Newlin et al [2002] found the effects of perfect foresight on overall performance to be small for this system, since improved performance comes predominantly from consistent operation and allocation changes that do not require hydrologic foresight.…”

“…SWP deliveries are allocated based on deliveries simulated in the CALSIM II Benchmark Study [ CDWR , 2002], according to each user's contractual entitlements. The Colorado River allocation reflects the Seven Party Agreement [ Newlin et al , 2002]. Current LAA operation is represented as a time series of deliveries to the MWD system.…”

“…[11] Three main model runs were developed to explore conjunctive use possibilities for southern California's water system; one is institutionally constrained and two are unconstrained, expanding and refining earlier studies [Newlin, 2000;Newlin et al, 2002].…”

“…Run U represents the ''unconstrained case,'' with current facilities but with, in effect, an ideal market with flexible water allocation driven only by an economic objective function, without current water rights or operating rules. Comparison of alternatives BC and U illustrates economic value of changing current institutional constraints for more flexible water exchange and conjunctive use operations, updating and refining earlier estimates [Newlin et al, 2002]. This run includes new conjunctive use facilities with zero capacity, allowing calculation of shadow values for these facilities.…”

Using Economic Loss Functions to Value urban water scarcity in California

“…Southern California urban areas always experience substantial water scarcity costs, which mount considerably in drought years. The accuracy of these Southern California projections is reflected by recent efforts of several water agencies in this region to acquire additional water through permanent purchases of water from agricultural users (Newlin et al, 2002).…”