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OPEN OR REGULATED MARKET? A water market provides the opportunity for willing sellers and buyers to come together and negotiate a price. One of the thornier issues is whether water should be bought and sold in a "free" or regulated market. As one commentator noted, "the heart of the problem is whether economic theory alone should dictate the use of water resources." Many argue that because 01 the nature of water and its myriad values, the resource cannot be treated as a commodity. Free market opponents point out that economic efficiency should not take precedence over other important values. For example, it is argued that a dollar amount should not determine the fate of a species - the value of which is unknown. In addition, some environ- mentalists contend that the nonprofit sector's ability to compete in a free marketplace with private interests is overestimated. Others contend that under a true free market, the price of water would change to equal the cost of its replacement. The state will likely playa role in water marketing because at a minimum, it would need to coordinate use of its reservoirs and aqueducts - a component private companies say is mandatory for a water market to exist. The Bureau also will be involved in water transfers to some extent because of its regulatory authority over the CVP and Colorado River. In addition, a free market for water transfers would require many changes to laws, regulations and water rights decisions. Thus, the real debate is over the degree of government involvement in a "regulated" market and protections to be afforded third parties and the environment due to water transfers. Several critical questions about water marketing remain unanswered, including who should determine the price of marketed water and whether farmers should profit from selling or leasing their water in the public's interest. According to businesses, includ- ing many private water marketing companies, the market should determine the price paid tor water and the quantity of water involved in a transaction. They also believe that farmers need a financial incentive to pursue water conservation, one way of providing water for marketing. LEGISLATION SUPPORTING TRANSFERS State law specifies that transferors' water rights will not be impaired and that transfer of conserved water is a beneficial use of water. Short-term transfers, in- volving post-1914 water rights, can be approved by the State Board without conducting a public hearing if they will not harm other water users or have un- reasonable impacts on fish and wildlife and other beneficial instream uses. However, short-term trans- fers are exempt from California Environmental Qual- ity Act standards. For short.term transfers, the amount of water transferred by post-1914 appropria- tors is limited to the amount that would have been consumptively used or stored in the absence of the transfer. The State Board may approve transfers that last longer than one year if they will not injure other water users or fish and wildlife, and after notice and an opportunity for a hearing have been provided. Beginning in 1986, DWR was required to establish a program to facilitate transfers, which includes producing information about transfers, prospective transferors and usable conveyance facilities. DWR also is required to coordinate its activities with other agencies - including the Bureau. Under the agree- ment the Bureau is able to use unused capacity in the SWP California Aqueduct to deliver water to state and federal contractors. Under a 1986 act, DWR and local public water districts are prohibited from denying the use of up to 70 percent of the unused conveyance capacity for water transfers. The so- called Katz bill required that the transfer not injure other water users or fish and wildlife and that the transferee pay for use of the conveyance facilities. In early 1996, a business-sponsored water market- ing group released draft water transfer legislation which, in their opinion, would facilitate and stream- line surface water transfers in the state. Proposals in the Model Transfer Act for California include increased legal protection for transferors through- out the entire transfer process; clarification of the State Board's transfer review process and time limitations for reviewing transfers; permission for local water district customers to transfer water they are entitled to but only after approval by the local agency; establishing a fund to compensate injuries caused by expedited transfers of conserved water; and establishing local water banks. The act also would not allow water dedicated by water rights holders for instream uses to be subtracted from existing instream requirements. To date. these model proposals have not been enacted. 11