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U03125 tially valuable uses of that water. Such limitations unwisely reduce the options available for use of scarce water resources. A number of states engage in some form of allocation of water resources as a means of protecting the future water needs of areas of origin. The California fiction of assigning a permanent priority to the area of origin for certain categories of exported water injects a signifi- cant element of uncertainty into the system, because water users within the area of origin presumably may recall water regardless of the comparative values of water use within and outside the basin. Given the investment in the water export infrastructure and the dependence of the place of use on the water supplies, a recall of water would likely be met with vigorous resistance. Reservation of some share of water for unknown future needs of an area of origin at least permits the possible transfer of water deter- mined not to be necessary. However, it makes such water exports con- tingent on a largely speculative analysis of future development in the area of origin. Also it suggests a false dichotomy between "necessary" water and "surplus" water. The necessary water is absolutely pro- tected irrespective of the comparative values of use, while the surplus water is assumed to be without protectable value. There is some movement toward providing for a state-level evalu- ation of interbasin water transfers based on a number of criteria. The effect is to subject each proposed transfer to a general cost-benefit type of analysis. No artificial restrictions or reservations of water are in- volved. The method of evaluation, including the standard applied and the weight given to the various factors, becomes critical under such an approach. Significant transaction costs may result from the evaluation process. Permitting exports of water subject to the payment of appropriate compensation offers several important advantages. It recognizes that removal of water from an area imposes real costs and that offsetting payments may be devised that will benefit the exporting area and leave it at least as well off as before the diversion. It promotes better use of society's resources by insuring that the full costs of the transaction are known. It avoids artificial limitations on the use of water. The major problems in devising an effective compensation system center around determining an appropriate payment. The California approach under the Burns-Porter Act makes no real attempt to relate the funds that are provided to the costs of water export. Colorado's compensatory storage requirement has largely restricted compensation to the construction of dams and has caused such dams to be con-