Coming back soon

I have been on hiatus, thanks to a drunk driver. She was charged with DWI and Possession of a Controlled Substance. What happened to me? Upper back, neck, and right shoulder injuries. I will get back to this blog next week.

aquadoc

Texas Groundwater Protection Committee - Recommendations to 81st Texas Legislature

The Texas Groundwater Protection Committee (TGPC) has submitted, to the 81st Legislature, its recommendations (Activities and Recommendations of the Texas Groundwater Protection Committee - Report to the 81st Legislature) to improve policies for the protection of the State's groundwater resources. Released in January 2009, the report offers recommendations covering the following categories:

1. Strengthen Groundwater Conservation and Water Quality Protection

2. Advance Groundwater Management and Protection through Enhanced Data Collection and Availability

3. Support Groundwater Research

Because I have not reviewed all of the water-related bills considered during the current legislative session, I do not know whether any of TGPC's recommendations received support by members of the House of Representatives or the Senate. I'll post a complete analysis of water bills after the Legislature adjourns.

For each of the above categories, the recommendations are listed below:

STRENGTHEN GROUNDWATER CONSERVATION AND WATER QUALITY PROTECTION

• Fund Brush-Control Projects to Increase Groundwater Yield: Continue to fund the Texas State Soil and Water Conservation Board (TSSWCB) State Brush Control Program and expand it as funds become available in areas where it is found to be effective and will increase long-term availability of groundwater by increasing recharge of aquifers.

• Encourage On-Farm Agricultural Best Management Practice Incentives through Continued Support of a Water Conservation Plan Program: Continue support of a program to implement certified water-conservation plans on irrigated agricultural lands through the TSSWCB, with cost-share to assist in implementation of on-farm best management practices (BMPs).

• Protect Groundwater Quality through Education Programs: Provide funding for new groundwater education, demonstration, and outreach efforts administered by the Texas Water Resources Institute (TWRI). The efforts would be coordinated with the TGPC and other entities. The cost of the proposal is $250,000.

• Develop Education and Training Programs for Groundwater District Management: provide $150,000 annually to TWRI to work through Texas AgriLife Extension Service to revise, expand, and implement education and training programs for groundwater management district personnel throughout Texas.

• Establish an Abandoned Water Well–Plugging and Education Fund: Provide positive incentives for landowner-initiated closure of abandoned and/or deteriorated water wells through the establishment of an abandoned well–plugging fund.

• Continue to Support the Texas High Plains Evapotranspiration Network: Provide $100,000 per year to Texas AgriLife Research for maintenance and scientific upgrading of the Texas High Plains Evapotranspiration (ET) Network.

• Protect Groundwater Resources When Permitting the Injection of Carbon Dioxide for the Purposes of Geologic Sequestration: Encourage close coordination and communication between state regulatory agencies, research institutions and groundwater planning authorities when permitting the injection of carbon dioxide for purposes of geologic sequestration, to ensure that groundwater resources are protected for future use.

• Ensure the Brackish/Saline Aquifers Having Potential for Use as Drinking Water are Protected from Contamination: Encourage state regulatory agencies to examine existing policies and rules to ensure that brackish and saline groundwater sources, identified as having potential use as drinking water, are adequately protected from contamination.

ADVANCE GROUNDWATER MANAGEMENT AND PROTECTION THROUGH ENHANCED DATA COLLECTION AND AVAILABILITY

• Expand Statewide Real-Time Groundwater-Level Monitoring System: Provide additional funding to expand the groundwater monitoring network from coverage in 65 counties to coverage in all 254 counties.

• Enhance and continue to support Data and Resources in Support of “Desired Future Conditions:" Provide additional funding to the Texas Water Development Board (TWDB) to implement House Bill 1763, 79th Legislature. (Refer to A Street Car Named Desired Future Conditions for a discussion of House Bill 1763.)

SUPPORT GROUNDWATER RESEARCH

• Evaluate Impact of Dryland Agriculture on Groundwater Resources in the Texas High Plains Aquifer: Provide funding for field studies to broadly assess the impacts of dryland agriculture on groundwater recharge.

• Study the Impact of Irrigation on Groundwater Resources in the High Plains Aquifer: Provide funding for studies in the High Plains region to determine whether irrigation return flow has reached the aquifer or if it is still within the unsaturated zone.

• Evaluate Characteristics of Concentrate and Residuals and Support Streamlined Permitting: Provide funding of $100,000 to compile existing data on the chemical composition of desalination concentrate in FY (fiscal year) 2010, which could support the general permitting process and $150,000 to complement and match federal funds currently being used by universities to develop advanced desalination technologies. Priority areas for study would be based on identified need in the State Water Plan.

• Acquire and Analyze Brackish Groundwater Data: Provide funding to the TWDB for 2.5 full time employees and $500,000 in appropriations to acquire and analyze brackish groundwater data and assess groundwater modeling techniques to predict brackish aquifer performance.

Relaxed Groundwater Restoration Standards at In-Situ Uranium Leach Mines in South Texas

The above is a diagram of an in-situ uranium leach mine.

Before you read any further, I recommend that you download THIS report.

In 2008, I was retained by the law firm of Blackburn & Carter to conduct an evaluation of the Texas Commission on Environmental Quality's record of granting relaxed standards for the restoration of groundwater at in-situ uranium mines in South Texas. Many people are not aware that Texas is a major producer of uranium. The uranium ore is not characteristically considered "high grade," but in-situ mining technology (which owes much of its development to work in Texas) has proved to be efficient enough to make medium-to-low-grade deposits profitable to exploit.

Texas' prominence as a producer of uranium is traceable to the widespread prevalence of uranium roll-front deposits in the formations of the Gulf Coastal Plain. All are exploited by in-situ mining technology. For an explanation of in-situ leach mining, read Chapter 2 of THIS report by Gavin Mudd. For a somewhat more positive description, read THIS web page by the World Nuclear Association.

Rather than describe the geology and geochemistry of roll-front deposits and the methods of in-situ leach mining, I will assume that the reader is sufficiently interested in the matter to peruse the above references carefully before proceeding with this blog post.

What did my client want to know?

My client commissioned the report to find out whether one of the principal environmental regulatory agencies of Texas was fair-minded in its consideration of requests by uranium mining companies with respect to petitions for relaxed (that is, less stringent) restoration standards of groundwater at in-situ mined sites in the uranium ore trend of South Texas.

The basis for the requested study was the client's concern that the Office of Underground Injection Control of TCEQ might be overly generous in its granting of requests for lower restoration standards.

What did I find? Try THIS web page for a reasonable summary of my report. I will let the reader make up his/her own mind, based on the report.

Allow me to point out here that I am not opposed to mining or to nuclear energy. Look around and then ask yourselves how much of what you see cannot be traced to mining? Not much, I assure you. That, however, does not give mining companies Carte Blanche to pollute groundwater, surface water, soil, air. And in this so-called " anthropogenic greenhouse world" (I have my doubts), nuclear energy can play a major role in reducing the concentration of CO2 in the atmosphere.

I know the geochemistry of uranium very well, thank you; and I am convinced that we can extract uranium from roll-front and other sandstone-hosted deposits without leaving a mess for others to clean up ... but you can't do it "on the cheap."


Best Regards,


aquadoc
Southwest Groundwater Consulting, LLC

No. 7: Rule of Capture, Economic Inefficiency, and Water Market Requirements

The above figure shows the extent and major subdivisions of the great Edwards Aquifer of Central Texas. Why is a blog post on the Rule of Capture and Economic Inefficiency preceded by a map of the Edwards? The aquifer is a prominent factor in two of three references cited below.

Recently, an attorney who specializes in environmental law wrote to inquire about an observation I have often made that the Rule of Capture (ROC) is an impediment to the development of efficient water markets in Texas. I wrote back to tell him that my observations were based on the following: (1) Documented sales and leases of southern Edwards Aquifer groundwater rights compared with sales and leases of groundwater in ROC areas of the State, and (2) economic theory. Data supporting Point No. 1 will be developed and posted within a couple of weeks. (I am putting together a PowerPoint presentation on groundwater transactions for the Texas Bar Association's April 2009 Conference on Water Rights. The presentation is intended to illustrate that the development of a robust market for Edwards water rights evolved only after the approval of legislation that made it possible for landowners with property overlying the southern Edwards Aquifer region to be granted transferable permits to groundwater by the Edwards Aquifer Authority. A second components of the presentation will be to demonstrate that market values of Edwards water rights have far outstripped the market values of groundwater transactions in areas of the State where rights to groundwater have not been recognized and assigned.) Point No. 2 (the role of economic theory) can be found in one form or another in a variety of papers, especially those dealing with water economics and water marketing. It is Point No. 2 that is the focus of this post.

In my response to the attorney, I cited a concise summary of problems underlying the ROC, as found in Chapter 9 ("Protecting the Edwards Aquifer: an Efficient and Ecological Alternative," authors - Ben F. Vaughn IV and Peter M. Emerson) of Water Marketing - the Next Generation (eds. Terry L. Anderson and Peter J. Hill; Rowman & Littlefield Publishers, Inc., Lanham, Maryland, 1997). The nine chapters of the book are designed (according to a summary on the back cover) to "demonstrate why antiquated government regulations inadvertently encourage the waste of our most vital resource by preventing the evolution of property rights to water marketing." Antiquated government regulations can mean absolute control by the State or a free-for-all system with no provisions for assigning and enforcing well-defined rights to groundwater and/or surface water. In Chapter 9, Vaughn and Emerson propose a market-based solution, rather than one based on heavy-handed regulation by the State or a continuation of the ROC to the management of one of Texas' most significant aquifers.

The Edwards Aquifer is a major source of water for cities (the largest of which is San Antonio), agriculture, springs, streams, recreation, and unique fauna and flora in Central Texas. Scarcity caused by overuse of the aquifer and drought is a matter of concern to all who rely on the Edwards.

It is the opinion of Vaughn and Emerson that any management system that fails to address the problem of scarcity is inadequate to ensure that water will be available when and where it is most needed. Landowners should be granted quantifiable, secure and transferable rights to groundwater; and the State should encourage marketing as a means of allowing groundwater to "flow" to higher valued end-uses. Regulations that prohibit transboundary transfers of groundwater or that compel landowners to restrict the use of groundwater to support "traditional" uses of water are causes of inefficiency and devaluation. In similar fashion, a system based on the English doctrine of Absolute Ownership (e.g., the ROC) promotes inefficiency and devaluation. With regard to the ROC, Vaughn and Emerson write:

The property right in Texas groundwater is the common law rule of capture. Under this law, a landowner has the right to pump an unlimited quantity of water from any aquifer underlying his land (Todd, 1992). The landowner, however, has no right to the water until it is withdrawn from the aquifer. Furthermore, he has no right to protection against well interference or aquifer depletion by any other user and he has no right to pump water for the purpose of storing it for future use. This rule applies throughout the state, with the exception of aquifers included in groundwater districts and certain protection against damage from subsidence caused by groundwater pumping. Also, in Texas groundwater may be pumped for sale to a third party whose use is not on the overlying tract.

This system works well enough when water is not scarce, but with scarcity and no social or legal limits on water use, a "tragedy of the commons" arises. Economic rent associated with water is dissipated, and overexploitation of the resources results as all pumpers race to exercise their rights. Increased pumping costs caused by a declining water level eventually impose a limit on extraction in a deep aquifer. In a shallow aquifer, however, the problems may be more serious, resulting in permanent depletion of the aquifer, the intrusion of poor quality water, and land subsidence.

The problem is that under the common law rule of capture, the property right lacks the characteristics - the rights to use, exclude, and transfer - needed for efficient allocation of resources. The right to use is secured only by contemporaneous use, but there is no right to exclude other users. Hence, the ability to transfer is constrained by one's ability to capture the good before others do. Under these conditions, a market cannot develop nor will water be used efficiently.

The failure of the ROC to form the basis of an efficient system of groundwater marketing is further explained by Kaiser and Phillips (1998):

Water markets differ from other natural resource commodity markets for a variety of reasons, including the long tradition of subsidized water, the concentration of large amounts of public water held by private entities, the equally long tradition that water must support a wide variety of collective public values and the distribution impacts on parties who are not part of the decision process. Thus, unregulated markets do not exist for water transfers, as transfers are directed and controlled by state regulatory agendas. In reality, water transfers more often resemble diplomatic negotiations than simple commodity transactions.

Water markets develop when a combination of economic, legal, institutional and technical factors converge so that buyers can obtain a more certain, consistent and predictable water supply relative to other options and sellers realize greater net benefits by transferring the water than by keeping it in an existing use. The classic economic rationale of gains from trade motivates most water transfers, however, legal, institutional and technical barriers can vitiate transfers.

Finally, R.C. Griffin cuts to the quick in his discussion of The Instruments of Water Marketing (see Chapter 7 [7.1] of Water Resource Economics - the Analysis of Scarcity, Policy, and Projects with the following:

Water markets are enabled by the full or partial adjudication of natural water resources among agents, with the crucial characteristic of transferability included. As long as individual agents possess private property in natural water, they will be able to exchange water for money or other property. Ideally, these rights are severed from the land on which they are originally used, meaning that water can be exchanged separately from land. Such water rights are necessarily quantified, so that a solid basis is established for monitoring water use and enforcing water rights. Unless enforcement is consistent and accurate, water rights can be circumvented, and the incentive to trade will be injured. People don't buy things that can be readily taken from them or that "can be had for the taking."

To be continued in Post No. 8.

Best Regards,

aquadoc
Southwest Groundwater Consulting, LLC

No. 6: Groundwater Management in Texas

It's March 6th. Remember the Alamo!

While outlining the posts to follow my discussion of negative externalities associated with the Rule of Capture and the need to protect a landowner's claim to the groundwater beneath his property through the assignment of well-defined, enforceable, and transferable groundwater rights, I received email from an acquaintance calling my attention to a new publication by the Austin office of the Environmental Defense Fund: Down to the Last Drop (2009 Update: Spotlight on Groundwater Management in Texas). The authors of the report are Laura Brock Marbury and Mary E. Kelly.

I have not read the document thoroughly (I'll get to it soon), although several topics stand out such that the authors' opinions appear to be very close to mine. The first is that surface water and groundwater are not independent of each other and that proper water-resource management should consider the interconnectivity between both sources of water. We tend to divide the field of hydrology into "surface water" and "groundwater," and - because of that division - many politicians, planners, hydrogeologists, and surface water hydrologists often don't think of the many factors that link one with the other.

Streams and lakes are fed by groundwater, and vice versa. Hence, how we choose to manage one part of the surface water/groundwater system might very well have significant implications for what happens to the other. A couple of examples:

(1) Pumping excessive volumes of groundwater might lead to diminished flow to streams or to the cessation of springflow; and

(2) Diverting or impounding surface water might cause reduced recharge of aquifers.

Suffice it to say that it is important to understand how the two are interconnected within a hydrologic basin in order to avoid unintended consequences.

The second point of interest in Down to the Last Drop is the matter of groundwater planning, especially problems associated with Groundwater Management Areas (GMAs)and the Legislature's requirement that each of the 16 GMAs identify Desired Future Conditions (DFCs) for aquifers within their respective jurisdictions. Marbury and Kelly point out that the current approach to establishing DFCs does not require that "future conditions be physically measureable either directly or through an alternative measureable metric." They go on to make a case that "The rules should also require the GMAs to establish protocols for monitoring groundwater resource conditions to ensure that present conditions are consistent with established desired future conditions. Individual groundwater district management plans should also be amended to incorporate applicable metrics for the aquifer under their jurisdiction."

I have heard enough discussion, from representatives of Groundwater Conservation Districts, about DFCs to have concluded long before now that implementing recommendations such as those suggested by Marbury and Kelly would clear up much of the confusion surrounding DFCs by making the process based less on guesswork than on a firm understanding of current conditions and the development of a system (or systems) to measure key indicators of hydrologic conditions within a GMA to determine whether the desired conditions can be achieved. Frankly, some of the DFCs with which I am familiar do not make sense. More about that later.

Suffice it to say that water planning is an evolving process in Texas. Prior to the passage of Senate Bill 1 in 1997, the State lacked an orderly program to guide the development and management of groundwater and surface water resources. Texas is now in the second decade of water planning, and I expect that it will require more time to resolve major differences of opinion and to formulate strategies to ensure that water will be available to all sectors of the State's economy over the next 50 years. If I have learned anything about the pace of water planning in Texas, it is the following: Don't expect too much too soon. Texas has embraced the Rule of Capture (ROC) for many decades; and for as much as I regard that doctrine to be one that promotes inefficiency and devaluation of groundwater, I think that Texas will eventually reach a point at which, through statewide water planning, the ROC will give way to another more sensible doctrine that embraces the role of market-based solutions in the management of water resources.

Best Regards,

aquadoc
Southwest Groundwater Consulting, LLC

No. 5: Resource Allocation and Ownership, Externalities, Water Marketing, and - the State: Initial Comments

I'm a free-marketeer ... mostly. By that, I mean that a quasi-free-market system can provide more efficient solutions to a great many problems related to the ownership, management, and conservation of natural resources than one based entirely on State ownership and heavy-handed government regulation or a system predicated on pure laissez-faire economics.

As a quasi-free-marketeer, I do not discount the role of government, as I think that government exists for many legitimate reasons, especially to "establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty," but not to be dictatorial or to guarantee the garden-variety Socialist's dream of cradle-to-grave security. I became wary, years ago, of politicians and other representatives of government who told me that they were "here to help people." Such language is usually a prelude to more regulations and subtle-to-blatant assaults on the Rights enumerated by the Constitution of the United States of America.

I also learned to be cautious of anyone who thinks that there should be no limits to what anyone can do with whatever he owns or thinks belongs to him, as I think that another's freedoms end where my nose and property boundaries begin. A maxim which I firmly embrace is: "Don't do anything on/to your land for which others will have to suffer the consequences." A FEW examples are listed below:

(1) Don't make "improvements" on your property that will promote erosion and the runoff of silt to the creek that runs across another's land and the pond to which the creek flows, or

(2) Don't diminish the flow of surface water to another landowner's property by diverting excessive amounts of water or impounding water for your own use, or

(3) Don't pump large volumes of groundwater without regard to the impact that your pumpage might have on water tables, wells, springs, and streams beyond the boundaries of your property. (Groundwater is no longer secret and occult.)

When a stream that traverses the property of Landowner A becomes polluted, laden with silt, or streamflow slows to a trickle because of Landowner B's carelessness or efforts to claim either all or an inordinately large share of water, then Landowner A incurs environmental damage and economic loss.

In economics, losses or damages sustained by Landowner A are referred to as "negative externalities." Externalities can be either negative or positive. With regard to pollution, landscape degradation, or the destruction of a commons (e.g., Comanche Spring, Post #3 of this blog), the effects are decidedly negative.

Six points that I will argue in future posts to this blog are:

(1) Individuals, corporations, cities, etc. should be held to account for negative externalities stemming from their respective uses/abuses of water.

(2) A system of clearly defined, enforceable, and transferable groundwater rights is superior to conditions under the Rule of Capture doctrine or absolute ownership and control of groundwater by the State.

(3) Water rights are essential to ensure that one's business operations or property are not damaged or diminished in value by excessive pumpage or mismanagement of groundwater by others.

(4) Water markets, with reasonable degrees of regulation by the State, can provide efficient solutions to problems of water distribution, conservation, and resource valuation.

(5) There must exist a government with the authority to recognize the need for water rights, to assign and enforce water rights and to impose sensible regulations, where necessary, in order for groundwater markets to develop and to operate efficiently.

(6) It is incumbent upon the State and stakeholders within the different sectors of a State's economy to find the appropriate balance between commerce, property rights and regulation, especially with respect to the adoption of doctrines governing the recognition, assignment, and enforcement of groundwater rights.


Best Regards,

aquadoc
Southwest Groundwater Consulting, LLC

No. 4: Basic Groundwater Economics, Texas-Style

With the advent of water planning in Texas and the expectation by many politicians, regulators, and landowners that looming water shortages will lead to efforts by cities and many areas of the State’s industrial sector to compete for secure sources of water, the interest in selling Edwards Aquifer water rights or pumping rights in areas under the Rule of Capture (ROC) or in negotiating leases or supply contracts has grown substantially in the last decade.

The marketing of groundwater in not new to Texas, as landowners have sold pumping rights or negotiated supply contracts with cities and industries for more than 50 years. What is new is the increasing degree of interest in groundwater marketing. In response to growing expectations about the potential for groundwater markets to expand in Texas, the Environmental Defense Fund published, in 2007, "Myths and Facts about Groundwater Marketing: a Guide for Landowners and Groundwater Conservation Districts."

One of the first questions many potential sellers of groundwater ask is: “What’s my water worth?” On the buyers’ side, the question is: “What’s it going to cost me to purchase that water or that landowner’s water right?”

It remains difficult to answer, with certainty, either of the above questions, especially in ROC areas, because there is not a discernible sense of order underlying most groundwater transactions. The reason for the uncertainty is that, outside of the southern Edwards Aquifer region, Texas lacks two of the most fundamental of components required for an efficient groundwater market to function: (1) a system of assigned, quantified, and transferable water rights (not the same as pumping rights under the Rule of Capture) recognized and enforced by the State, and (2) a means of making information on transactions available to all potential buyers and sellers. Information that participants need to make well-reasoned assessments of the market value of groundwater is not easily found, and there are very few consultants who follow transactions closely enough to have a clear understanding of market conditions and organization among sellers and buyers.

Each side brings its expectations to the bargaining table, hoping to negotiate the best possible deal. Unfortunately, it is not uncommon for speculation and misinformation to trump common sense. Applying economists’ standard linear supply-demand curves to groundwater transactions, one might conclude that selling groundwater in Texas is a guaranteed way to get rich. For some, that might be the case now, but for many others, the prospects might be better over the long run … the very long run ... or not at all.

Before reaching conclusions about the market value of groundwater in any area of Texas, buyers and sellers should take heed of the lack of any defined market value for groundwater in the State. There are, instead, many potential market values driven by a number of factors that influence marketability. Landowners and water entrepreneurs often don’t consider these factors when first entertaining the thought of selling water or buying/selling water rights (pumping rights with respect to aquifers other than the Edwards within the jurisdiction of the Edwards Aquifer Authority).

Furthermore, any attempt to assign a market value to groundwater in one region of Texas based on prices negotiated in other regions of the State is not advisable. Accomplishing this task requires an understanding of variable market structures, market conditions, geology/hydrology, and the relative bargaining power of parties within the different regions of the State. Texas is very large and the population is highly concentrated in major urban areas. Hydrologic conditions are often so different from one region to another that it is necessary to break the whole up into smaller parts. All of these steps are essential to developing a reasonable understanding of the factors which drive differences in market value both between and within regions.

For many years, groundwater in Texas had minimal established value, apart from its association with the overlying land. A standard practice of cities and industries was to acquire enough property to develop a well field, then to pump whatever water was needed to meet their respective requirements. This was possible under a strict interpretation and application of the ROC. The cost of groundwater was associated with the cost of the land, the well, the pump, the pipeline, and the electricity or the fuel needed to power a pump.

DETERMINANTS OF MARKETABILITY AND MARKET VALUE

With a reasonable degree of certainty, one can identify, at least eight factors which seem to be significant determinants of marketability and of the market value of groundwater in Texas. These factors are listed below, not necessarily in order of importance:

1. Number of Competitors for the Resource: Competition for groundwater should drive up the price of the resource. If there are few major users of groundwater in a region, then negotiated prices could be much lower than expected by landowners.

2. Number of Known Sources of Groundwater and Sellers of Land, Water Rights or Water: Competition among sellers, all other things being equal and assuming one major buyer or minimal competition among buyers, should act to lower price. Alternatively, if sellers are able to organize a groundwater cartel, then their bargaining position should be stronger and prices negotiated for water or water rights could be higher than under purely competitive conditions among suppliers.

3. Volume of Recoverable Water and Estimated Life of the Resource: Land with a large volume of water in storage might command a higher price than land with a small volume of recoverable groundwater. In addition, property overlying an aquifer which is recharged quickly might command a higher price than a property which lies above a “mined” aquifer. [A “mined” aquifer is for which the rate of withdrawal exceeds the rate of recharge.]

4. Proximity of the Resource to the Purchaser: Transporting water long distances can be very expensive.

5. Expected Costs of Installing Wells and Other Production and Treatment Facilities. Infrastructure can add substantially to the total cost of a project.

6. Estimated Production Costs and the Quality of Groundwater: The investment required to develop a resource and to maintain, transport, and treat groundwater might be sufficient to justify a lower offer price, in the absence of other competitors, where the quality of the groundwater is an issue for the end user.

7. Regulations Limiting the Volume of Water: Regulations which limit the volume of water that can be pumped from an aquifer or which impose spacing requirements for wells must be taken into account, as such rules have the effect of amending/modifying the ROC.

8. The Value of Agricultural Production Attributable to Irrigation: Many farmers are potentially large suppliers of groundwater. They own land over aquifers which are capable of producing large volumes of water. In such cases, the value of groundwater can be related to the market value of crops if irrigated land is involved. For a landowner, the sale of groundwater or a water right represents an opportunity cost associated with the potential loss of income from irrigation. The sale of groundwater or of a landowner’s water right (assuming no duress) should generate sufficient income to cover, at least, the income or any other income associated with the on-property use of groundwater or sale of groundwater for other uses.

It is not possible to precisely quantify the relative significance of each of the above factors in a transaction involving groundwater. Furthermore, one should not expect any factor to carry the same weight across Texas’ many regions. While economic models typically assume access to information and rational behavior by buyers and sellers, few parties to a Texas water negotiation can claim access to all relevant information. Furthermore, there is no guarantee that all participants in a transaction will behave rationally even if all have access to the same data.

OVERVIEW OF TRANSACTIONS

While writing this post, I reviewed groundwater transactions in Texas over the period 1999 – 2008, as reported by Water Strategist and as recorded in my notes of transactions for which I have offered advice to sellers or to purchasers of groundwater. Most of the groundwater transactions during these years took place in central, south, and west Texas. Leases outnumbered sales, with lease terms typically ranging from 5-to-10 years.
Nearly all groundwater transactions involved leases of groundwater or the acquisition of groundwater rights to support municipal uses. Sales to industrial or agricultural interests were less common. Most lease prices for municipal use ranged from $66 - $77 per acre-ft per year, but the San Antonio Water System acquired Edwards leases for $130 per acre-ft within the last year. Transactions involving the sale of groundwater rights (with no transfer of the surface estate) range from $270/AF (Canadian River Municipal Water District) to $250/acre (Mesa Water). In Central Texas, water rights associated with land overlying the Edwards aquifer sold for $700 per acre-ft 10 years ago, then rose to between $1,750 to $2,000 per acre-ft by 2005, and broke $5,000 per acre-ft within the last two years. There have been a few undocumented sales of Edwards Aquifer rights of $10,000 per acre-ft within the last year. If there is any doubt that a system of assigned water rights leads to higher market values for groundwater, then one need look no further than the disparity between prices paid for southern Edwards Aquifer groundwater rights and prices paid for groundwater in areas still under the ROC.

Clearly, there is no established market value for groundwater in Texas. It is necessary to consider the mix of factors outlined above before reaching any conclusion about current or future lease prices and permanent transfers of water rights. Such exercises are not trivial, especially where an outright purchase is involved transferring a water right in perpetuity. Nevertheless, many landowners are now looking at groundwater, which has, for many decades, been used to support ranching and farming operations, as a resource with potentially greater market value than associated with its traditional uses.

FINAL COMMENTS

Expect market values of groundwater in many areas of Texas to rise over the next decade. This will be in response to efforts by cities and regional water authorities to acquire secure sources of water to meet projected long-term needs. As noted above, there are many factors which influence sales prices. For the foreseeable term, it is highly probable that landowners will prefer leases with terms of 5-to- 10 years, rather than longer-term leases or sales. This strategy will be an outgrowth of expectations by landowners that market values will continue to rise as the population of the state grows and as major users try to lay claim to secure supplies to avoid shortages and economic problems stemming from supply shortfalls. Buyers and sellers of groundwater would be wise to take stock of existing resources and the number of competitors and potential suppliers of water. Other factors to consider include projections of water demand by the Texas Water Development Board and negotiated lease and sales prices, although such data can be difficult to find without the assistance of a consultant. It is advisable to assess both demand-side and supply-side structures and market conditions. By assembling reliable information, one can enter into negotiations as a well-informed participant, bargaining from the strongest position possible.

Over the next couple of weeks, I will post an analysis of pricing over time and by region of the state.

Best regards,

aquadoc
Southwest Groundwater Consulting, LLC