California's Next Cash Crop May Soon Be...Water?

Robert H. Swanson is fuming. After cutting water use at his company by 30% in each of the past two drought years, the chief executive of Silicon Valley chipmaker Linear Technology Corp. has just been told by the city of San Jose that he may have to cut back again in 1992. And he can't see how to save another drop. His beef: Farmers get 85% of the state's water at very low prices, and there's little left for industry. Until he gets a more reliable water supply, he vows: "I will absolutely not make any further investments in California."

It's getting so bad that even some farmers are starting to hurt. On Feb. 14, the U.S. Bureau of Reclamation said that for the first time, some growers won't get any water from its Central Valley Project, California agriculture's chief source. In part, this year's temporary cutoff is intended to protect runs of winter salmon, which are nearly extinct because of the drought. That's small comfort to farmers such as Ron Metzler, a 54-year-old wine-grape grower in Huron. "Without water," he says, "we're out of business."

But as California's chronic water shortages reach a crisis point, a solution may finally be at hand: The state is on the verge of instituting the nation's first large-scale market for water. Such a market would allow farmers with excess supply--such as those in the northern part of the state--to sell it to thirsty cities and businesses or even to other farmers, such as Metzler, who grow high-value crops. If the market for water works as planned, California could solve its problems without having to build huge new dams or reservoirs.

`BALANCE.' There's increasing evidence that markets for water could work. For example, an emergency water bank created by Governor Pete Wilson last year persuaded farmers in the North to sell enough water to supply more than 1 million families, saving cities from severe cutbacks. And southern farms got enough water to avoid big losses. Moreover, preliminary studies indicate that rural areas didn't suffer greatly from land fallowing. Says economist Richard E. Howitt of the University of California at Davis: "You don't have to move massive amounts of water from ag to cities to strike a balance." He estimates that by diverting just 7% of the water farmers now use, cities would have adequate supplies for the next 20 years.

To be sure, the new market still has to overcome formidable political and practical obstacles before becoming reality. For one thing, some observers fear that cities such as Los Angeles could bid up the cost of water high enough to price farmers, small towns, and environmental needs out of the market. It could also take years to rebuild the crumbling levees of the Sacramento River delta, which would have to carry most of the water being bought by cities at both ends of the state. And if farmers sell too much water and stop growing crops, rural communities could dry up as support businesses close. Says Alexander Hildebrand, a 78-year-old farmer in the Sacramento delta: "It's a one-way street if you go too far."

POWERFUL LOBBY. Nevertheless, after years of mockery, the idea of allowing the buying and selling of water has developed broad political support among environmentalists as well as hard-nosed CEOs. Within the next month, the California legislature will consider a bill to permit farmers to sell water on a regular basis. And the Senate subcommittee on water and power, headed by Senator Bill Bradley (D-N.J.), will soon hear testimony on a bill that would ease restrictions on selling water from the federally subsidized Central Valley Project, a prerequisite for setting up markets for water in California. At least one of these bills is likely to pass, since politically potent farmers, long opposed to giving up any of their cheap water, now seem willing to accept water markets in principle.

Even with recent flooding in Southern California, the drought is entering its sixth year. And the Golden State suffers from a man-made problem as well: Many farmers have incentives to use more water than they really need. For example, farmers have exclusive rights to buy reservoir water for as little as 2 per 1,000 gallons through the Central Valley Project. That supply can be cut back only in a severe drought--and even then, many farmers can pump groundwater to make up for the loss. By contrast, cities pay up to 50 times as much because their water comes mostly from the newer, more expensive State Water Project. And conservation is discouraged: Farmers can lose their water allotment if they don't use it all.

That means consumers must skimp on showers, and businesses must cut back, while farmers plant water-intensive crops such as alfalfa and cotton. Yet the state, with its 30 million people, critically needs more water for its cities. Economists fear that further shortages could stop the economy in its tracks. A study by a San Francisco consulting firm predicts that if all California manufacturers had to cut water consumption by 30%, the state's annual economic output would fall by $20 billion. "If we don't have some kind of water market," warns Bank of America economist Frederick Cannon, "we could bankrupt California."

Details of the proposed California water market aren't set yet, but the outline is clear. To mollify farmers, they would still own the rights to most of California's water. However, as the water flows off the snowy peaks of the Sierra Nevada and into rivers and reservoirs, farmers could sell it to whomever is willing to pay the most. Individual farmers could, for example, sell their water back to their local water authority. Cities could then bid for the spare water, perhaps signing long-term contracts to guarantee their future supply. As a practical matter, actual transfer of the water could be accomplished by turning a valve in a pumping station, or it might require building new storage facilities and beefing up existing waterways.

Proponents say almost everyone would benefit from a water market. Farmers who sold water would have to fallow land or pump groundwater, but they'd be paid by cities for that water--at least as much as they'd get from growing crops. Otherwise, they wouldn't sell. Moreover, while they might have to pay higher prices for Central Valley Project water, their remaining supplies would be more certain. Cities could assure supplies without building new projects, and even the environment might gain because large-scale new construction might not be needed. During shortages, rising prices would encourage local water districts to build reservoirs to catch the higher-value water. And farmers might put extra money earned from water sales into conservation equipment that would free up more water. The result: more stable supplies.

Throughout California's history, nothing has created more contention than water. But the state's farmers and cities are coming to a rare agreement that some form of water marketing is inevitable. Without it, warns Michael McGill, executive director of the Bay Area Economic Forum, "urban California is going to rise up and say: 'We're taking that water.' " That's one kind of water transfer that farmers such as Alex Hildebrand are quite sure they don't want.

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