Lecture: Large Water Projects1. Overview2. Some main impacts: subsidies & distributional effects3. Changing Thinking About Water4. Distributional pap ersIn Monday’s lecture Professor Hanemann began talking about the topic oflarge water projects. He mentioned that there were two large federal agencies,the Bureau of Reclamation (19 02), and the Army Corps of Engineers (1802).As well as two large state entities, the Department of Water Resources andthe State Water Project1. Overview(a) So the first question is why is the government involved in watersupply in the first place:• water projects promote economic development• Water projects provide flood control• Government financing gets aro und difficulty of raising funds(b) The Bureau of Reclamation was founded in 1902 to promote asustainable western settlement through development of the West’sirrigated agriculture.(c) Initially, limited to water project construction and financing, butlater created an additional water subsidy policy by charging irri-gators their ability to pay.(d) The key project is the central valley project which started in 1935.There were three main purposes (i) Flood control, navigation,(ii) water supply for irrigation, (iii) power generation (recreation,reduce salinity in the Delta)1(e) Stretches from Redding to Bakersfield and is the state’s primarywaterway irrigating about 3 million acres of farmland and provid-ing water to more than 2 million urban residents(f) It is somewhat complicated by the different classifications andwater rights of districts and individuals who receive water fromthe project. Exchange contractors-irrigators who had rights touse river water agreed not to exercise their water rights on theSan Joaquin river in exchange for water fro m the Delta. WaterRights Settlement Contractors-The CVP created a more reliablesource of water for farmers in the Sacramento valley (used to relyon Sacramento river) so districts and individuals contracted forwater from the project (permitted to divert a certain amount).Water service Contractors-irrigators on the west and east side ofthe San Joaquin va lley and west side of the Sacramento valleyrelied primarily on ground water. Some number of contractorssigned agreements for water delivery.(g) As of 1987 services annual irrigation water delivery to roughly 10million acres of cropland, municipal a nd industrial wa t er serviceto over 22 million people; hydroelectric generating capacity of over50 power plants, a nd 286 river and reservoir ba sed recreation areas(h) a mandate for wa t er resource management is replacing the BuRechistoric mission of water resource development. Basically, eco-nomic, political a nd environmental influences are changing howwe think about water management(i) Also the State Water Project2. Major issues raised by proj ects(a) Bad investment decision: projects have low benefit/cost ratio; fa-vor special interests, waste scarce resources(b) Subsidy-bad pricing. Wrong price signal encourages poor use ofscarce water. Who benefits? Farmers, land owner s consumers(c) Acreage limitation-social effects of large scale farming? economiceffects(d) Interaction with federal commodity programs(e) CVP contract renewal: r ole in meeting environmental goals23. Economic effects of BOR Subsidy:(a) Components of subsidy• Prices based on historic average cost• 40 year repayment period, no charge for interest• 40 year fixed price contract• power charged at costs, not market value(b) Under-pricing water encourages economically wasteful use of water(c) building projects where benefits less than costs is a waste of capitalresources(d) The CVP is selling for 10-20$ AF, wholesale, which costs $200-$500 AF to replace, and historically costs $50-100 $ AF to provide(e) Although most of the supply of these projects goes to irrigation,the amount paid by irrigation was only 3 3% 7.1 billion, half of thiswas then waived, and only .95 billion had been repaid by 1994(f) Basically pay about 10 cents on the dollar for the constructioncost to supply the water(g) Bureau accounts for only about 19% of irrigated water, the re-mainder does not have subsidies, but prices too low (based onO&M and historical construction costs(h) Compared to urban ($/AF), both zero at source, wholesale be-tween 7-75 in agriculture, 200 in urban, and retail 15-120 in agri-culture and 400-600 for urban. Some real reasons for this (treat-ment, complex distribution system)(i) Kanazawa paper• Looks at the efficiency effects of pricing policies that shieldfarmers from the true social cost of water• Critics a r gue that this encourages overuse by water because(i) it may distort a farmer’s decision regarding the mix offactor inputs used for crop production (overly water-intensiveproduction techniques), (ii) too much entry into agriculture,(iii) enhance the att r activeness of receiving irrigation waterfrom the bureau, thereby encouraging farmers to apply polit-ical pressure for additional projects3• Focuses on the first issue, distort water use decisions• Thinks may not be a huge effect, because quantity constraints.If quantity ceiling binds, then increasing a price will have noeffect on water until the constraint does not bind. If it binds,then the water’s shadow value pwequals the marginal cost ofpumping the la st unit of groundwater. If it does not bind, theshadow value equals the bureau price• Uses data fro m the Westlands water district in wester sanjoaquin valley.• Find that t he constraints are binding suggesting tha t theshadow value of water will exceed the bureau price4. Distributional Impacts(a) Most reclamation projects have provided far less net benefits thanthey cost the taxpayer and they have made a few people wealthy(b) Distributional impacts include large landowner vs. small, landownervs. renter, or ig inal owner vs. current owner, CA procedures vsUS procedures, farmers vs taxpayers(c) We will look at these in more detail in a moment5. Possible practical solutions(a) Raise price of CVP water to cover full costs, market clearing price(b) introduce new quantity restrictions(c) Let farmers own the water and then if they wish trade it in a watermarket(d) water conservation subsidies(e) decentralization(f) BOR should auction water to the highest bidder item Shortencontract length, allow bidding for new contracts(g) The Moore paper discusses with each of these would affect whocontrols the water how they affect f arm income, and what pur-poses they wo ld serve.