THE COMMODITIZATION AND MARKETING OF WATER
Distributed at the Annual Meeting of the Council of Canadians
Dr. William M. Turner, Trustee
UPDATED APRIL 1, 2004
NEWCOMERS TO ESTABLISHED PRACTICES
The commoditization and marketing of water and the rights to water is presently being examined and implemented in the United Kingdom and Australia. Intense controversy exists in Canada over the exportation of bulk water. Those who are beginning to create policy and a regulatory framework should look to the American West for leadership in marketing of water rights.
Water and water-rights marketing is a long-standing and well-developed activity in the arid American West where water rights are real property rights recognized by state regulatory authorities. Marketing has been going on for over 100 years. No one to my knowledge has been damaged by the sale and transfer of water rights because it is the duty of government to ensure that transfers do not impair the legal rights of others.
By way of explanation, a water right is the legal right to capture and use the physical supply. Water rights are usually considered mineral interests in land and are therefore a kind of realty. Water, after it is captured by diversion from a surface or ground-water source, is a merchantable good. There is no difference in law between the vessel into which the water is placed be it a pond, tank, pipeline, or bottle.
SCARCITY AND THE DEVELOPMENT OF MARKETS
Regulatory frameworks for the diversion and use of water are put into place by government when scarcity develops. Scarcity usually develops when access to the resource is limited by government policy or the resource is over-exploited or environmental damage may result. In Canada today, I know of no over-exploited aquifers or shortages of water to meet environmental, municipal, agricultural and industrial needs of the country. Canada has 20 percent of the fresh water resources of the planet Earth and 50 million citizens. Canada is simply absent from the worldwide news on the subject of water scarcity unlike Iran, for example, which is making headlines today and Russia which was making headlines last year.
In Texas, a riparian rights state, water management districts are developing regulations that will require the permitting of water abstraction because of aquifer over-exploitation. The riparian rights on fully appropriated rivers like the lower Rio Grande have been quantified and adjudicated. In New Jersey, permits in Critical Areas regulate the abstraction of water because over-exploitation has caused sea water intrusion in to the Patomac-Raritan-Magothy aquifer. In Florida, a permitting system exists because of over-exploitation of the great Floridian aquifer and surface waters needed for environmental protection of Florida's great swamps. In Arizona water allocation in Critical Management Areas is governed by regulation. In England and Wales, the Environment Agency issues abstraction licenses and the government is trying to develop environmentally sensitive methods to improve the marketing of these licences because failure to do so is hurting the economy. In Australia, water on the rivers can be shifted between states and a marketplace exists for river trading.
WHO IS SMART ENOUGH TO ALLOCATE WATER
The collective wisdom of all of the water planners and legislators is insufficient to know where water should be used and for what purpose and the timing of any uses. Demand for water may arise anywhere and at any time. Water has a low elasticity of demand and water is not fungible, unlike other natural resources such as oil and copper.
The marketplace is the most efficient allocator of the resource within a regulatory framework. The marketplace is the most efficient method of establishing prices. Because water is a finite resource within small geographic regions the market allocation from one use to another means that one party to the transaction gains the water while the other party gains a monetary reward.
Government intervention in the marketplace and regulations can and do create artificial shortages that drive up prices and create economic hardship for individuals, regions, and nations.
I remember, the Middle Rio Grande Council of Governments some years ago developed the water plan for the Middle Rio Grande. They published it after great effort. Next day, INTEL came to Albuquerque to make computer chips and applied to move 4,000 acre feet of water rights to their facility. Out went that plan and 10 years later; hydrosages are still trying to put one together. And, when it is finished, it will be out of date.
I remember too the ETSI proposal in the 1970's to slurry coal from Wyoming to Texas. A hue and cry went up because the project would export Wyoming water. The Wyoming legislature blocked the plan and tried to figure out how water should be allocated among competing users. It was a fruitless exercise and much ado about nothing. When I put a pencil to it, I calculated that the total volume of water to be used by the project from the Madison Limestone aquifer in 30 years was within the margin of error of calculation of the total water stored in the Madison Limestone.
In 1906, the Provinces of Alberta and Saskatchewan vested the right to use water in the Crown, and only such riparian rights as existed prior to 1898 and had been registered were preserved. Today in Alberta, for example, permits are required for the diversion and use of water and the beneficial use of water earns the appropriator no vested title to the water. Water used for an agricultural purpose, for example is tied to that use forever. In 1909, British Columbia followed suite and vested all unrecorded and unappropriated waters, as of 1892 in the Crown. Without the ability to transfer sweat into property, those who use water will do something else to provide for their future and the future of their families and children.
HIDDEN AGENDAS AS BARS TO MARKET DEVELOPMENT
Those who propose that no water markets should be instituted until the conditions necessary to protect the public's environmental resources have been established and all challenges to those conditions have been fully litigated have a clear agenda of obstructing the efforts of entrepreneurs to satisfy demand for water and grow economies. The degree of obstruction is seen by the adjudication of the water rights in the Nambe, Poquaque, Tesuque watersheds in New Mexico which has been in the courts for more than 50 years. If anyone were to seriously contemplate freezing the water in place, economies will come to a screaming halt. Again, no one can know what all of the potential beneficial uses are. So, beware of the hidden agendas of those who espouse this course of action.
We begin to see the real agenda of those who would prevent marketing of water and water rights when they call for funding to develop alternative sources of water. They need money for the Earthjustice Legal Defense Fund and the Institute of Ecology and other non-for-profit charitable entities. Face it folks, we know where most of the water is. There is no alternative when 78 percent of your body is water. The sources of water have been known in some parts of the world since the days of Herodotos who speculated on the source of the Nile. In Alberta, the magnitude of the Great Artesian Basin has been known in detail since the work of Josef Tóth of the Alberta Research Council begun in the mid-1950's.
THE CASE FOR PUBLIC PRIVATE PARTNERSHIPS
If government can't get water to the people, who do you think will? Municipal water supply agencies worldwide are finally admitting that they can't meet the challenge. They are reaching out daily to build public - private partnerships. The Metropolitan Water District of Southern California has shifted its views 180 degrees. In recent year, the Met, as it is called, has been running out of water during the summer. In January 2000 the Met issued a request for a proposal seeking 100,000 acre feet of supplemental water supply. By the end of February they had proposals from private enterprise that would make 1.6 million acre feet available. They are now negotiating to purchase a 100,000 acre-foot supplemental water supply for a fee. Private enterprise made all of that water available almost instantly because the Met was going to pay for it. Water has a value in and of itself as a natural resource.
The City of Laredo, Texas is working with private enterprise to secure a 25 MGD supplemental source of water. The City of Amarillo has paid $10 million for water rights to some ranches north of Amarillo that they will not need for 25 years. San Antonio, Texas is partnering with private landowners to provide additional supplies for a fee. Entrepreneurs are leasing water rights across Texas today and plan to supply water to Houston and other cities for a fee. Entrepreneurs plan to pipe water 65 miles from Dell City, Texas to El Paso. WaterBank.Com is willing to locate and arrange all manner of water acquisition and transfer schemes from pipelines to tankering bulk water provided it can be done economically.
Water is like oil. The U.S. Supreme Court has defined it as a mineral resource and it has a wellhead value. Municipalities realize that it is either partner with private enterprise or begin condemnation proceedings for well fields, and rights-of-way. It is politically more palatable to partner than condemn a constituents property.
Companies like Suez, Vivendi, Severn Trent, Anglian Water, Thames Water, and others have the capital, the expertise, and the experience to design, build, operate or own water systems and do it in a business like manner. Suez alone provides water to 90 million people in 120 countries and has its own university in which it educates its operators and conducts research.
Water and permits to divert and capture water only have a value if a market exists. That is, there must be a willing buyer and a willing seller for a market to exist. Water rights that are committed to a water utility have no value because they are stranded and cannot be sold.
The value of a permit to abstract water where the permit is defeasable will be based on the remaining duration of the permit. If a permit has but one year to run, the marketplace won't even consider it. If the permit is renewable upon review that water is being placed to beneficial use, then the permit is like a water right and almost perpetual and the market will attribute full value to it.
In England and Wales, the Parliament has recognized that the limitation on the alienation of abstraction licenses is a serious hindrance to the economic prosperity of the country. If licenses can't be transferred, no market exists. Today, all applications to move abstraction permits require Environment Agency permission and the EA is trying to develop a regulatory framework to facilitate these transfers. In many cases, the buyer knows full well that he will have to surrender some of the water back to the environment. This is all factored in to the market value for the abstraction licence.
NAFTA , GATT AND THE HYDROHEGEMONS
It is even questionable whether national policies and provincial, state and national laws can prevent the private export of water from one country to another for a fee. Such prohibitions are likely contrary to the General Agreement on Trade and Tarrifs (GATT and the North American Free Trade Agreement (NAFTA) and will be struck down by the World Trade Organization. (See Newsletter 15 and Newsletter 18)
The U.S. Supreme Court has held that water is an article of interstate commerce. Transfer of water across state lines for a fee cannot be prevented unless a state can show a reasonable water plan that requires the water. Water is recognized as a "good" by the European Court. Water is sold as a "good" by Lesotho to South Africa at the rate of 88 cubic meters per second. Iran has just inked a $2billion deal with Kuwait (June 2001) to pipe water from northern Iran to Kuwait. Israel is negotiating the price of water to be tankered from Manavgat in Turkey to Ashkelon. International tankering of water takes place in the Caribbean and the Philippines. Canada cannot now say that water is not a good under NAFTA and the GATT. The cat has been out of the bag for years.
Can Canada change the provisions of NAFTA. Not likely. Any change requires the ratification of the United States and Mexico. Why would either of those countries want to preclude the possibility of obtaining water from Canada.
Organizations and institutions that oppose the free marketplace within a simple regulatory framework are not simply stakeholders. They are, what I have defined as hydrohegemons: those who seek to extend their power and authority over the finite resource to the exclusions of all other legitimate users but for their beneficence and good grace.
In New Mexico, you can only operate an aquifer storage and retrieval project if you are a publicly-owned, water supply company. New Mexico's short-sighted legislation has shut the door to private enterprise to come in with vision and capital to provide future water security for our cash-strapped communities. There is always a price whether paid as taxes or user fees. New Mexico legislation allows for the State Engineer to forfeit water rights owned by private water utilities in rapidly growing areas while exempting publicly owned water utilities.
In the face of political wrangling and bureaucratic haggling and inaction over water issues, only the free marketplace is capable of meeting the challenges of allocating scarce resources and financing the infrastructure. If you doubt that, look at the oil and gas industry. All free enterprise. When was the last time you had to wait at the pump. Even countries that control oil and gas can't explore for, develop, refine, market and distribute the oil and gas. Would you want to rely on the Canadian Government to put the Tiger in Your Tank.
At the World Water Council meeting in Marseilles in October, I made the observation that only free enterprise could ensure that the water needs of the world's population can be met.
The coffers of the world do not have nor will politicians and governments supply the $10 billion per year needed to bring safe drinking water supplies to everyone. It is a sad fact, that international funding agencies walk hand in hand with powerful non-governmental organizations. Commonly, NGO's seem more interested in providing funding for their organizations than in delivering real value to their proclaimed constituents. Many NGOs need thirsty people to stay in business. Funding organizations need the NGOs because they are not executing agencies. Visions of graft and corruption will appear should public funding agencies rely on the private, for-profit sector to help meet the water needs of people. So, everyone needs thirsty people to keep their high paying jobs. Small, Grameen Bank type loans to Third World entrepreneurs could unleash those local entrepreneurs to make a reasonable living by providing and ensuring reliable water supplies to their villages. In fact, in the ancient Tunisian city of Kairuoan a single family has been earning a fair living for more than 1,300 years by providing water to residents from a very deep hand dug well inside the walls of the city.
AN UNFOUNDED FEAR
Take a look at the realities of Canadian bulk water sales around the world today. Waterbank.Com has bulk water available in New Zealand, Alaska, Eastern United States, Greenland, the Caribbean, the Mediterranean and elsewhere. There are no takers because transportation costs are too high and this water must compete with desalinated sea water that presently costs from $2.10 per 1000 gallons in Tampa, Florida to $3.14 per 1000 gallons in Larnaca, Cyprus.
Even the water from Manavgat in southern Turkey cannot be transported to Israel because of cost and because no shipping company is going to guarantee water quality unless they can treat it. Treatment costs more money. Again, the marketplace is controlling this transaction. At Manavgat, the loading facility cost the Turkish Government $120 million alone.
On July 3, 2001 Shell Tankers announced a 3 year charter of a 101,000 dwt Aframax tanker at $45,000 per day. The larger ULCC charter rates are presently in the $35,000 to $45,000 per day range for single hull tankers 10 to 14 years old. If the ULCC tankers were to transport 325 acre feet of water per load from Canada to the Persian Gulf and assuming a three week voyage, the delivered price would be about $8.95 per 1000 gallons.
The World Bank has determined that no market for tankered bulk water exists where the per capita annual income of a country is less than $1,000. This severely limits the market for bulk water from Canada and elsewhere.
Recently, Aquasonics International, Inc., a company represented by WaterBank.Com, announced a breakthrough in desalination technology that could drop the price of desalinated sea water to $1.25 per 1000 gallons.
Long distance bulk transport of water simply is not economically feasible. However, if anyone wants it, WaterBank has sources.
Furthermore, from the viewpoint of national security, no country wants to be dependent on another for its basic water supply.
THE MARKETPLACE MOVES WATER TO ITS HIGHEST AND BEST USE
Water will seek its own best use based on its value. Farmers in the Cortaro-Marano Irrigation District north of Tucson, Arizona years ago knew that as their profit margin decreased because pumping costs increased, the highest and best value for the water would be domestic supply to subdivisions that would grow on their land rather than heavily subsidized irrigation. And, it has come to pass.
As with the export of oil and gas, which are non-renewable mineral resources, the economic benefit of the export of water will flow to the source of the resource. Or, as we say in the American West, the water flows downhill and the money flows uphill.
In my view, public officials and NGOs should step aside. Pass legislation that facilitates the free marketplace. Let the marketplace take over under a permissive regulatory scheme that ensures non-wasteful beneficial use and that ensures that the legal right to abstract water is matched by the physical supply. Water must be withdrawn from use by purchase or through reduction in permitted appropriations to preserve the environment and endangered species. The laws, rules and regulations of states in the American Southwest are a good place to begin.
DR. WILLIAM TURNER
Dr. Turner is a consulting hydrogeologist and water resources expert with 40 years of worldwide experience. He has been dealing in water and water rights and water related transactions for 36 years. He is the former Trustee for Natural Resources for the State of New Mexico and a former member of the Governor's Task Force on Water in New Mexico. Dr. Turner is also an oil and gas operator and a licensed real estate broker. He operates the WaterBank.Com website. WaterBank.Com is the largest and most active listing service and marketplace for all manner of water assets on the Internet. He is currently working on water-related transactions throughout the United States, Europe and Asia.