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I I I I I I I I I I I I I I I I I I I Chapter 1 WATER BANKS: AN INTRODUCI'ION A major challenge facing the western United States is the reallocation of a portion of its developed water supplies to new and changing uses. An elaborate and complex legal structure governs the entitlements to the use of the developed water, based largely on the timing by which the water uses were established. By far the largest portion of entitlements is dedicated to irrigation use-roughly 80 percent of all withdrawals and 90 percent of all consumptive uses. In many cases these irrigation uses also hold the highest priority rights to the use of available water. Substantial additional development of the limited water supplies of the West seems unlikely. Instead existing uses are likely to become more efficient, and some water will shift to new uses. Reallocation of water to new uses most often occurs when the land on which water has been used changes its use-for example, from irrigation to residential. Less common but increasingly important are purchases of water rights for USe in different locations. Such transactions generally involve total cessation of the original water-using activity so that as much water as possible can be transferred to the new USe. Economists long have noted the disparity of monetary value between water used in much of the irrigated agriculture of the West and the value of water in municipal and industrial uses. In a market system, resources are expected to move to uses in which they bring the highest economic return. Many explanations have been offered for the failure of water use to reflect this behavior-perhaps most commonly the existence of "legal impediments" to the marketability of water. Consequently, much attention has focused on the legal structure by which water rights may be changed in use. Previous analysis by the Natural Resources Law Center suggests that while there is considerable infIexJbility in the water allocation structure