WSW Issue #1686 Staff Analysis and Special Report September 8 2006

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Pagel of 3 WSW Issue #1686 Staff Analysis & Special Report 9/8/2006 CONGRESSIONAL UPDATEIWATER RESOURCES Congressional Budget Office/Water Allocation The Congressional Budget Office (CBO) has released a report, "How Federal Policies Affect the Allocation of Water," prepared at the request of Rep. Grace Napolitano (D -CA), the ranking minority member of the House Resources Committee's Water and Power Subcommittee. The August 2006 report was prepared by CBO's Microeconomic Studies Division. It makes no recommendations, and is intended to provide an objective, impartial analysis, but has already raised objections from the Family Farm Alliance (FFA). In an August 31 letter, FFA states that the report "fails to recognize the real issues," while presenting "ill- conceived changes in federal water policy," that might be adopted to "reallocate water to `maximize potential benefits to society was a whole. "' FFA adds the report does not attempt to address "enhancing Western water supplies." The CBO credits many people for contributing to the analysis, providing useful information, comments and an external review of the final product, while noting only CBO is responsible for its contents. CBO addresses a number of questions: What are this country's water sources? How is the water used? What determines the underlying allocation? Does that allocation maximize water's potential benefits to society as a whole? and What policies might the federal government consider toward that end? The report notes agriculture accounts for most of )he wateX�use in the West (74% of withdrawals), and implies that such water is generally undervalued. "WateiRs isttypically reflect the expense associated with physically accessing and delivering it. Such prices do n ey the opportunity costs — the economic benefit foregone when water is dedicated to a particular use — do not allocate the resource to its highest -value use." Further, it suggests, "Market transfers of water — by sale, lease, or exchange — are constrained by the way states define property rights in water use.... The state laws governing property rights and the pricing mechanisms that conceal opportunity costs make the current allocation of water relatively inflexible...." The report also finds that markets in "water -use rights ... are not widespread." It suggests: "Broader use of markets in deciding how scarce water resources are allocated could improve on the current system of administrative allocation that has emerged under state law. Because markets offer flexibility in balancing supply and demand — by providing incentives to reallocate water among users, to use less water, and to provide more water — they could mitigate society's costs of adjusting to changing conditions." The report concludes: "The federal government could facilitate market transfers of water by clarifying the potential for broader water marketing using its jurisdiction under the commerce clause of the Constitution and federally reserved water rights. The commerce clause gives the Congress the authority to allocate interstate waters to serve the national interest — even if doing so means overriding state laws." It also states: "The Congress could clarify legal uncertainties regarding the rights of Indian tribes to lease water to different intrastate and interstate users. The government could also increase its efforts to promote water banks.... To facilitate efficient water use, policymakers could reconsider subsidies that support the use of water at prices that do not reflect opportunity costs, as well as subsidies for agricultural production that encourage additional planting and excess irrigation. The government could also assess the impact of ... using approaches such as cost sharing for improvements to irrigation systems and conservation plans for irrigators who get water from federal infrastructure projects." The report also says that "policymakers could reexamine the level of federal support for research and development (R &D) ... in desalination and water - purification technologies or for the collection of water resources data to refine water management as a public investment that might provide a positive return." It says that state and local governments and private- sector entities "...tend to invest too little in R &D because each balances the potential cost against only its own expected benefits, rather than the benefits that can accrue to the economy as a whole." http:// www .westgov.org/wswc /1686spc.html 10/24/2006