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Groundwater

DROUGHT WATER BANK           
Reprint by Permission, Water Education Foundation           

The state's first foray into organized water marketing was the state Drought Water Bank established in 1991 under emergency conditions. At the beginning of the fifth year of the 1987-1992 drought, DWR bought more than 800,000 acre-feet of water for approximately $100 million from willing sellers in response to requests by water-short agencies. DWR bought water at $125 an acre-foot, which was based on estimates of what farmers would receive from growing relatively low-value crops plus an amount added as an incentive to sell water. The water came from a variety of sources, but because of time constraints, DWR did not secure prior commitments to purchase the water from those who said they needed it. Half the banked water came from growers who were paid to not irrigate their land. Approximately 170,000 acres were fallowed by both riparians and appropriators; and the riparian right holders were paid to leave the water they normally use in the stream or river. One-third of the water came from ground water substitution and the remaining amount was purchased storage water, bought pri-marily from Yuba County Water Agency.

At the beginning of 1991, precipitation in California was less than 30 percent of normal and reservoirs were just above 30 percent of capacity.

The banked water was sold for $175 an acre-foot (plus transportation costs) to agricultural and urban suppliers with critical needs. The sale price included DWR's purchase price, administrative costs, and allocating a portion of the water to satisfy Delta outflow requirements for through-Delta transfers. About 80 percent of the sales were to southern California and the San Francisco Bay Area.

DWR ended up selling slightly less than half the water purchased, partly because heavy rains in March reduced demand. Because more water was moved through the Delta, 165,000 acre-feet of the pur- chased water were used to meet water quality standards. The SWP purchased the remaining 265,000 acre-feet with the cost of carryover storage amounting to $45 million. In 1992, the stored water was delivered to SWP contractors.

DWR's water bank was considered a very effective regulated water market. According to a study, A Retrospective on California's 1991 Emergency Drought Water Bank, by Howift, Moore and Smith of the economic consequences of the 1991 water bank, urban areas supplied with banked water received a $91 million benefit. The financial gains in agricultural regions that bought banked water were estimated to exceed losses in areas that sold water and fallowed land. Another report by RAND, California's 1991 Drought Water Bank: Economic Impacts in the Selling Region, found that growers who participated in the bank reduced their operating costs by more than 1 0 percent and increased their farm investments, which included purchases of irrigation efficiency equipment. The study also found that crop sales dropped 20 percent in the areas that sold water and that the overall loss of employ- ment and income of third parties in local communities was minimal.

However, the third-party impacts were "excessively concentrated" in certain locations, in particular Solano and Yolo counties. Yolo County estimated that the third-party impacts from fallowing contracts with DWR increased unemployment and the county's social service costs by nearly $130,000. The county filed a claim against DWR but was not reimbursed for its costs because DWR officials questioned the validity of the link between the numbers of unemployed farm workers and fallowed land.

Another drawback of the bank was that all purchases of bank water were funded by beneficiaries of the water allocation. The riparian environment, which was in serious decline, was short changed, according to some environmentalists, because there were no direct water bank purchases made for its protection. Also, the fallowing of land used to grow cereal and grain crops reduced food and habitat for waterfowl and wildlife. Legislation was passed in the latter half of 1991 to fund the purchase of 28,000 acre-feet of water for the California Department of Fish and Game (DFG) for instream flow releases and wildlife refuges in the San Joaquin Valley.

In 1992, DWR operated another drought water bank but on a much smaller scale because of increased precipitation and reduced demand. It purchased 193,000 acre-feet of water at $50 an acre-foot, which was primarily ground water exchange, and sold it for $72 an acre-foot plus transportation costs. Transferred water from fallowed land was not included. Unlike the 1991 bank, DWR bought water only after a willing buyer agreed in writing to purchase it. The water bank was reestablished in 1994 (purchasing 222,000 acre-feet) and formed as a precautionary measure in 1995, but was not put into effect in the latter year because of heavy precipitation.

DWR's water bank likely will be implemented in the event of future droughts and in anticipation, DWR prepared an EIR assessing potential environmental impacts. Several recommendations were made to avoid potential negative impacts of future water banks. These include:

o Factoring in the effects on local communities and natural resources when making marketing decisions.

o Spreading water purchases over a larger geographical area to avoid concentrating fallowing in certain regions.

o Having a reliable mechanism in place to ensure that sufficient water is left instream for the protection of fish and wildlife, either through a direct purchase or tax on transferred water.

o Holding water that will be transferred through the Delta in upstream reservoirs and releasing it at designated times to maximize benefits to fisheries.