Tag - water markets

Water Markets - CAP Canal with mountains in distance. Photo credit wrrc.arizona.edu

Recent Water Market Activity in Arizona

Two articles published in Journal of Water reported on two recent surface water market transactions in Arizona.  Both transactions aim to transfer Colorado River surface water from less populous rural areas to the Central Arizona Water Conservation District (CAWCD).

As cities continue to grow so does their thirst for water and the need to look beyond to alternative or new sources of water.  Rising demand is often partially satisfied through groundwater mining or a heavy dependence on groundwater pumping.  When pumping becomes unsustainable or there are imposed regulatory restrictions, water transfers may be necessary for sustained growth and economic productivity.

With a significant portion of Arizona’s surface freshwater coming from the Colorado River (about 40% of total surface water withdraws; 2.8 million Acre-Feet/Year) the notion of transferring water as a long-term- strategy should raise concerns.  A 2017 study published by the USGS finds the river’s flow has diminished by about seven percent over the past 30-years due to rising temperatures and increased evaporative loss—among other factors.  To put this departure into context, this magnitude of decrease in Upper Colorado River Basin (UCRB) flow is approximately 24% of the allotment of UCRB flow to California, or 38% of the allotment to Arizona, or 353% of the allotment of UCRB flow to Nevada.

This article highlights two recent water transfers in various stages of completion.  Both aim to transfer water rights from rural western Arizona to the rapidly growing tri-county CAWCD.  The transfer destination is relevant—Arizona’s three largest cities, Phoenix, Tucson, and Mesa are all located in this region.

We take a snapshot look at the funding mechanisms behind the transfers and discuss some observations and challenges facing water market activity.

Central Arizona Water Conservation District (CAWCD) – The Town of Quartzsite

The Central Arizona Water Conservation District (CAWCD) Board of Directors has approved a 25-year renewable lease agreement to secure additional Colorado River water from the Town of Quartzsite.  Under the proposed agreement, CAWCD will lease the town’s 1,070 Acre-Feet/year 4th Priority Colorado River entitlement. Entitlement is another way of saying that there is a vested right to appropriate water of a given quantity, from a location for a beneficial use.

The water entitlement has not been used in the past due to high costs associated with constructing a pipeline that would need to span 20 miles to get water to where it’s needed. The deal will be structured this way—the CAWCD will make a one-time lease agreement payment of $30,000 and, during the initial term, will pay $1,700/AF.

 

Water Markets - Arizona Map including CAWCD Boundary and Mohave Valley

During the extension period, the price could increase to $2,470 Acre-Feet. The agreement must be approved by the Secretary of the Interior as part of the Bureau of Reclamation’s approval of the agreement.

The CAWCD was created in 1971 pursuant to state law to provide a means for Arizona to repay the federal government for the reimbursable costs of construction of the Central Arizona Project (CAP) and to manage, operate and maintain CAP.  Over time as water infrastructure, allocation and governance challenges change so have the statutory authorities and responsibilities of CAWCD.  A component of those authorities and responsibilities now includes the management of strategic and other reserves—hence sourcing additional water.

The CAWD covers a populated tri-county (Maricopa, Pinal, and Pima) in the southern region of the state and includes Phoenix, Tucson and Mesa.

Mohave Valley Irrigation and Drainage District

The Mohave Valley Irrigation and Drainage District (MVIDD) is set to purchase land and water from Water Asset Management LLC and Water Property Investor LP. The package is comprised of seven farms totaling 2,2023 and 13,929 Acre-Feet of Colorado River diversion rights.  Of the approximate 14,000 Acre-Feet, roughly 82% by volume are 4th Priority rights under subcontracts with MVIDD, while the remaining 18% are considered perfected rights.  Total cost is $34 million dollars.

As of March 6, the Mohave County Supervisors voted unanimously to approve $20,000 to file for court standing in opposition to the deal expressing concerns over asset stripping (water being removed from the county in this instance) their ability to provide for future needs.

According to a recent article in the Daily Miner the property transaction is currently in the due diligence period, which includes discussing the development of a rotational fallowing program with MVIDD, extending farm leases and reviewing the title report. Closing is contingent upon MVIDD approving the agreement.

Where Does the Funding Come From?

The funding for both market transfers will come from the Central Arizona Groundwater Replenishment District’s Water Rights and Infrastructure Account Reserves (CAGRD). The CAGRD Water Rights & Infrastructure Reserves, is governed by ARS §48‐3772(7)(d) and ARS §48‐3779(H) and includes both Committed and Restricted Funds and carried a $48 million dollar balance as of June 2017.  If you are still confused as to what exactly CAGRD does, here is the simple answer– the division of CAWCD that carries out the district’s groundwater replenishment authorities.

The real estate – water – nexus affects the timing and revenue of water supply projects. For CAWCD the housing market directly impacts the utility’s ability to generate revenue.  This revenue is important not only to carry out day-to-day activities but also to augment reserves that ultimately partially fund the CAGRD and its mission to build, operate and maintain underground storage projects.

Observations and Discussion

There are several interesting things worth noting about these two water market transactions. Foremost they underscore some of the truisms and challenges of water markets in the western US.  Water scarcity in the arid and semi-arid southwest is being exacerbated by population growth, rising temperatures and heavy reliance on groundwater. Water rights are typically transferred from rural and agricultural areas to metropolitan areas that are more densely populated.

Both transactions employ creative financing using complex institutional arrangements. Many transactions involve state or federal authorities either as direct purchasers or as regulators of transactions among other users. Water transactions are complicated and include jurisdictional externalities, including transactions costs, which are not considered into the price of water.

Water prices are localized.  When examining these two transactions the going price of Colorado River surface water diversions per acre-feet is $1700- $2440 regardless of priority status (perfected – 4th priority) with anticipated increases.

The Mohave Valley transfer highlights the fact that institutional investors are purchasing farmland as a water rights investment strategy—farmland with onsite access to water has demonstrated strong annual returns.

Public-Private Partnerships is a concern of rural communities because it brings up fears of the private sector asset stripping. In other words, strategic water resources planning and management of one geographic area may be at odds with the future needs and economic activity where the water is being transferred from. Some water transfers may be beneficial to rural communities. The Quartzsite water market transaction appears to provide the town with a path forward to generate additional revenue to improve water infrastructure including its distribution system and to address other needs. What’s still unknown are the long-term effects versus the short-term financial gains.

 

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The Value of Water

An Uncomfortable Nexus between Value and Price

I have yet to encounter a person who denies the importance of water. Instinctively we know we need water to survive and thrive. Water is essential for life and health. Water is a defining characteristic of Earth and it’s abundant in the universe.

Of all the molecules in the universe, the one most important to humanity is water.

Water is the third most abundant molecule in the universe, after hydrogen gas (H2) and carbon monoxide (CO). About 71 percent of the Earth’s surface is covered by water.

https://www.thoughtco.com/definition-of-water-in-chemistry-605946

The distribution of water is so extensive we tend to call water by its unique source, like Lake Mead, the Mississippi River, or Sierra Nevada snow pack. We appreciate water because of our personal experience. In this sense, water is implicit. It’s used in language to illustrate a description like an unspoken truth.

Water off a ducks back.

Come hell or high water.

You never miss the water until the well runs dry.

https://idioms.thefreedictionary.com/water

Essential Water

The challenge we face is recognizing the new reality of water in the 21st Century. Water molecules are abundant in the universe but clean fresh water is much rarer.

Only about 2.5 percent of the Earth’s water is fresh water. Nearly all of that water (98.8 percent) is in ice and ground water.

https://www.thoughtco.com/definition-of-water-in-chemistry-605946

The story of water being cheap and abundant in the American West was brought to you by federal government projects and state subsidy, pots of money which have all but dried up. The burden of new supply and maintenance has been localized and transferred to consumer buyers.

We shouldn’t be surprised to find property owners and enterprises of all sorts engaging in water transactions when new or additional water supplies are needed. Water is essential for our economy. The availability of water underpins property rights, food, energy, and the security of the public good. From steak to the Internet, from a farm to Silicon Valley, all depend on available water. Water is essential to our social and economic prosperity.

14% Annual Water Market Growth in Texas

Those of us fascinated by water markets are the first to admit the lack of comparable data is a problem for the future security of water. That is why we developed a data model to track and analyze water transactions. Our pilot project started in Texas because it’s one of the largest and fastest growing water markets in the country.

Wholesale water purchasing in Texas has increased markedly in the 21st century growing on average 14% a year. By 2014 the amount of water purchased grew to 4.2 million acre feet in Texas, about 29% of total state-wide water use in that year. 36 million acre feet has been purchased, about 16.5% of total state-wide water use.

Texas Water Development Board Annual Statewide Water Use

http://www.twdb.texas.gov/waterplanning/waterusesurvey/estimates/data/TexasStatewideReport_6_12_15_Revision.pdf

Water transactions include the lease or purchase of water rights, and the purchase of physical water supply.  Spot contracts are one-time and may be for temporary supply or permanent acquisition. Term contracts are long-period acquisition agreements with service periods typically 30-100 years.

Water Markets; growth in annual water buying 2000-2014

Price of Water

Wholesale transaction data is useful to evaluate the market value of water because each contract is independently negotiated. The price paid for water rights or supply is determined by arms-length negotiation, very different than retail rates.

What is the price of water? The question is a pain point, like “what price are we going to have to pay now”? Psychologically we are braced for bad news when we hear the words price and water used together. Yet, most of us have bought a bottle of water at a convenience store. We see a bottle of water priced like a Coke, $1.50 for 16.9oz, and willingly pay. The price of water matters when you are the one doing the buying.

Cities are leasing water rights to secure water permits for large scale groundwater projects. Developers are tasked to secure the water before they can get a building permit for a new real estate development. Deep pocketed investors are investing in future water supply by buying up farm land. Corporate acquisitions and mergers come with water rights that are not priced into the value of the purchase.

If the owner of a Farm and Ranch property is approached to lease their water rights how are they supposed to evaluate the offer without price data? What is the opportunity cost? If that same owner decides to sever the water rights from the surface estate, how is an appraiser supposed to evaluate the water rights? How is the sale price of the property to be determined? Water is not currently priced into real estate. It’s as if the availability of water is assumed and that is a mistake. The price of water matters because what is a property worth that has no water?

Comparable Data

Our proprietary database records the year a water contract was executed, or the last amendment. The data comes from analysis of about 5,000 water contracts. By looking at the year water contracts were executed we can see water scarcity (extreme weather insecurity) is a motivating factor for buyers. Drought isn’t the only motivation of buyers but there are clear leaps in volumes secured contractually during extreme weather events.

Water Markets; Water Buying and Drought

The Importance of Groundwater for Property Markets

The trends are clear, water is increasingly secured through wholesale transactions and groundwater is an important source for future water supply.

Overall, since 2000 there has been 140% increase in the total amount of new water guarantees based on volumes transacted. 2.3 million acre feet for the 30-year period between 1970 and 1999 increasing to 5.56 million acre feet for the 15-year period between 2000 and 2014. A formal spot market has also developed.

The most significant finding is the 1,138% increase in groundwater guarantees. Groundwater rights and supply contract volumes increased to 2.26 million acre feet between 2000 and 2014.

The water market is widespread. Many different segments within real estate are affected including commercial, industrial, farm and ranch, residential, and undeveloped land.  There are an estimated 30 million properties with water features and rights. Ownership and control of groundwater is an emerging hot spot in real estate.

344% Increase in Groundwater Prices

Volumes aren’t the only thing that’s been increasing. As groundwater markets heated up so have the prices paid for wholesale water. The average price paid has gone up 93%, from $250.95 per acre foot to $485.52 per acre foot. The price for groundwater increased 344% to $2,425.25 per acre foot. We isolate for the price paid specifically to acquire the water right or water supply in a given year, excluding other costs wherever possible.

Groundwater prices are driving the increase. Surface water prices actually declined on average between periods, falling to $99.75 per acre foot.

Water Markets; Texas Water Prices 2000-2014 all sources of supply

Note the pull-back in prices in 2014. A quick look at weather data shows the end of 2014 was the start of what would be a wet and rainy period.

[A] record-breaker for Texas, according to State Climatologist John Nielsen-Gammon.

From Sept. 1, 2014 through Wednesday, the average rainfall across Texas was 75.17 inches, topping the previous record of 74.85 inches that occurred in 1942.

http://www.star-telegram.com/news/state/texas/article99589107.html

The drop in water prices appears to be due to fewer transactions and cheaper price. When it’s raining it’s a buyer’s market for water.

 

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Water Markets; water and oil

Water and Oil Markets Don’t Mix

We’ve all heard the expression “Water is the New Oil”. It’s a cliché expression, repeated often and little understood. It’s a headline that misleads us to think oil market strategies govern the provision and supply of water. Water investing has a lot more in common with real estate than it does oil.

Water markets differ from oil markets in some pretty important ways. Oil markets are globally connected, where prices are set on exchanges. There is a national pipeline distribution system moving supply across the country and to global distribution. I’ve heard it said before, if New York City had the same water supply issues as the western US a water exchange would’ve been established when the first commodity exchanges launched.

Federal Reserve Crude Oil Prices WTI

Picture with me for a minute what water prices would be if water was in fact like oil. In this example we see a small family of 3 people using 5,000 gallons per month. Their water use is the lowest in their neighborhood because they do not have an irrigation system. If water prices were set like oil prices the water bill for this family would be billed in barrels from prices set on global exchanges. At $60 per barrel our family’s monthly water bill would be $7,143.

Our example is a little silly but it illustrates key differences between water and oil markets.

Water Markets are Hyper-local

There is no national grid moving water through trunk lines from, say, Texas to New York like you find with oil and gas. In fact some of the most difficult water delivery projects I’ve seen, the ones with the highest risk of failure, involve moving water supply between a few counties within a single state. The level of controversy caused by these projects brings up colorful images of Mary Shelly’s famous story Frankenstein, angry mobs with pitchforks and torches.

Water Price Data

Significant difference between water and oil is the availability of water price data. The price of water is not transparent, some call it down right murky.

There are a few ways to consider price and water. A common approach is to look at an urban utility bill. Take this example from Circle of Blue. This is an example comparing 30 big cities and the price paid for access to water supply.

http://www.circleofblue.org/2016/water-management/pricing/infographic-average-u-s-household-water-use-bills-2015-16/

Utility rates are often set with regulatory oversight from a public utility commission and don’t have any detail on the supply chain of water sourcing and delivery. The number of actors in this market mean a survey of even 100 retail rates for the largest cities obscures the majority of water market actors.

There are approximately 153,000 public drinking water systems, more than 80 percent of the U.S. population receives their potable water from these drinking water systems.

https://www.dhs.gov/water-and-wastewater-systems-sector

Wholesale transaction data is useful to evaluate the market value of water because each contract is independently negotiated. The price paid for water rights or supply is determined by arms-length negotiation, very different than retail rates. Water transactions include the lease or purchase of water rights, and the purchase of physical water supply.

From a case study we did on Texas water transactions we see there are wide price spreads to acquire water at lower volumes. Prices tighten above 10,000 acre feet per year. There are several reasons for the price spreads but weather, especially drought and rain cycles, can impact the sales price at the time of negotiation.

Price of water in Texas by volume purchased 2000-2014

Water markets are widespread and also appear in property transactions where water is an important motivating factor of the buyer. Water is not explicitly priced into real estate but it is a key right supporting beneficial use of a property.

Water is a Real Estate Niche

Water investing has a lot more in common with real estate than it does oil. Historically a water right, in-and-of itself, is not especially transact-able. And yet the possession of water rights is highly valued. Why is this? Water is married to real estate, the two property rights are a symbiotic fit.

Water is a buttress resource, necessary for productive use of every kind of property. In places where the supply of water cannot be taken for granted water is a real estate niche. The water market is widespread. We estimate 30 million properties with water features and rights in the United States from our work developing https://waterninja.com/sales/. Many different segments within real estate are affected including commercial, industrial, farm and ranch, residential, and undeveloped land.

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