Liquid Business

By Vanessa Casado Pérez

Vanessa Casado Pérez is Associate Professor of Law and Research Associate Professor of Agricultural Economics at Texas A&M University School of Law

This is the eighth in a series of essays from the Environmental Law Collaborative on the theme: "Environmental Law. Disrupted."

The aphorism “water is the new oil” is now truer than it has ever been. While many use the phrase to suggest that water is as scarce and valuable as oil once was, it is also true in another sense: speculation in water markets now rivals speculation in oil markets. Oddly, however, water scarcity has not translated into a higher price for water, as it has done in oil. But this anomaly may be on the verge of changing as international investors start to enter the business of climate change. From oil tycoons like T. Boone Pickens to international hedge funds,  investment in all things water is on the rise. And while many deny climate change, the market does not. Since climate change is widely expected to induce scarcity in water supplies, business investments in the water market are increasing rapidly.

The alarm has gone off. Those who believe markets should not commodify water are appalled by the role that investment moguls play: all the investments in the water business may lead to price increases for water. There is some merit in valuing water as a scarce resource so that we do not misuse it. The more expensive it is, the shorter our showers would be and the more thoughtful the choice of crops and irrigation techniques will be.

But using the market to allocate water also gives rise to two concerns: the affordability crisis for low-income populations and the inability to capture certain intangible values, such as environmental protection, in a single monetary price. The first concern is often answered by saying that the amount of water needed to satisfy our basic needs is around 1% of the total water used. We could let the market deal with the rest and figure out how to allocate the 1% cheaply. Environmental regulations, such as water quality or minimum instream flows, could address the second.

While the answers to these concerns may not be reassuring, we should take comfort in the fact that water is somewhat speculation-resistant, at least compared to oil. Unlike oil regulation, the regulation of markets for water rights has built-in mechanisms to prevent speculation. These constraints in water markets have driven investments towards related industries, like water conservation technology or reuse.

Water rights can be traded in the Western United States and in other jurisdictions such as Australia or Chile. Trade includes leases and sales of water rights that give the buyer the right to use water if it is available. A common transaction might be one between an agricultural right holder and an urban consumer, because the latter often has a higher willingness to pay and a less elastic demand curve. In the US West, these types of transactions have brought flexibility to water allocation systems, where the majority of water rights were allocated when agriculture was the main economic activity and large cities and suburban areas with luscious lawns had not developed. Those transactions should make the farmer realize the opportunity cost of using water. Transactions are subject to different levels of control.  First, transactions are subject to administrative review. Transactions cannot injure third parties or the environment. Water rights are defined across several variables, including the point of diversion and the type of use. A transaction will normally imply a change in either or both of those variables and is likely to affect third parties.

Another layer, and more relevant for the purposes of speculation, is the forfeiture provision included in all prior appropriation states and many other jurisdictions. These forfeiture provisions mandate that holders of water rights use the water. If they don’t use it for a certain period, usually around 5 years, they may lose the water right.So unlike with real estate or stocks and bonds, where owners can wait for the market to peak and then sell their assets, in water markets, owners cannot engage in this kind of wait-and-see. That said, if water becomes valuable enough, investors may find a way around these rules. One company, Water Asset Management,  is taking that route—considering land an accessory. It focuses on water itself but to get to it, it buys land and it tries to make use of the land to break even. While others have not invested in water rights, they have invested in groundwater or water reuse, which profit from water scarcity.

The question is whether there is something that water law could do to stop big players from dominating the water market broadly understood beyond the forfeiture provision and the approval requirements. It can. Furthermore, water law may be able to target the surrounding industries that investors are interested in. First, regulators could limit the number of shares a single entity could accumulate. One of the main fears is a market dominated by big players. While antitrust regulations are set up to deal with monopolistic practices that harm the consumer, water law can take a page from other natural resources markets and avoid concentration by limiting the amount of water rights that can be accumulated in the same hands. In fisheries’ “individual transferable quotas” programs, there are limits on the shares of the total allowable catch that a single ITQ owner can acquire. This should prevent the concentration of the agricultural industry in a few hands, mitigating the concerns about displacing local farmers.

Second, groundwater should be subject to a permit system like surface water is. Investment companies are keen on exploiting lax regulations and have noticed that in many places groundwater may be more readily accessible as an investment. The separate regulation of a unique resource of surface and groundwater denies the science and makes both, given their interconnection, overexploited.

Third, wastewater regulation needs to be properly designed. As it stands today, return flow belongs to the user who diverted the water. A city may have a water right and divert water from the river. The city does not consume all of it. It usually treats the wastewater and sends it back to the river, where downstream users use it. But if a city decided to reuse wastewater before bringing it back to the river, it could do so, leaving downstream users without the water they have relied on for decades. In some states, like Arizona, cities may be able to not only re-use it in their area but sell the water as a commodity because cleaned up wastewater is considered a new product. While incentives to invest in reuse are paramount, water regulations need to better address the effect on downstream users and the ecosystem needs.

An adage seems appropriate to close this essay. Mark Twain purportedly said that “Whisky is for drinking and water is for fighting.” Water scarcity will certainly cause fights as there will not be enough water for all users. Given the business of water in times of climate change, the question that lingers is whether small water right holders and the environment can put up a fight against these powerful businesses. The three water law measures stated in this essay may be able to help.