Existing law finds and declares that voluntary water transfers between water users can result in a more efficient use of water, benefiting both the buyer and the seller. Existing law requires the Department of Water Resources to implement the various state laws that pertain to water transfers and to prepare a water transfer guide that includes, among other things, a review of existing and appropriate state and federal laws that pertain to water transfers, water markets, or water rights.

This bill would require, on or before January 1, 2025, the Legislative Analyst, in collaboration with the Department of Water Resources, the State Water Resources Control Board, and other state agencies, as described, to prepare and submit to the Legislature a report analyzing the water market, including background information regarding the sale of water and water rights, trends in the water market, barriers to entering the water market or effectively trading in the market, and proposals for improving the regulatory framework to make the water market more market friendly and to encourage growth.

Existing law finds and declares that voluntary water transfers between water users can result in a more efficient use of water, benefiting both the buyer and the seller. Existing law requires the Department of Water Resources to implement the various state laws that pertain to water transfers and to prepare a water transfer guide that includes, among other things, a review of existing and appropriate state and federal laws that pertain to water transfers, water markets, or water rights.

This bill would require, on or before January 1, 2025, the Legislative Analyst, in collaboration with the Department of Water Resources, the State Water Resources Control Board, and other state agencies, as described, to prepare and submit to the Legislature a report analyzing the water market, including background information regarding the sale of water and water rights, trends in the water market, barriers to entering the water market or effectively trading in the market, and proposals for improving the regulatory framework to make the water market more market friendly and to encourage growth.

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 550 (Grove) - Water markets

Bill Summary:

This bill would require the Legislative Analyst, in consultation with the State Water Resources Control Board (SWRCB) and Department of Water Resources (DWR), to produce a report analyzing the water market.

Fiscal Impact:

• Unknown one-time costs, likely in the hundreds of thousands of dollars (General Fund), for the Legislative Analyst’s Office (LAO) to prepare and submit the report.
• The SWRCB estimates a one-time cost of $225,000 (General Fund) to prepare and submit the parameters to be included in the report.
• Unknown but likely minor costs for DWR to consult with the LAO on the report.

Background:

Under existing law, the State Water Resources Control Board (SWRCB) administers a water rights program under which SWRCB grants permits and licenses to appropriate water (Water Code (Wat. C.) §§1200 et seq.). Under the program, a permittee or licensee is authorized to change the point of diversion, place of use, or purpose of use on a temporary (up to one year) or long-term (longer than one year) basis if certain conditions are met, including that the change would not harm any other water right holder and the change would not unreasonably affect fish, wildlife, or other instream beneficial uses (Wat. C. §§1725 et seq.). These are known as water transfers.

Each year, hundreds of water transfers occur in California, most of which involve surface water. Some groundwater trading occurs within specially managed basins; however, this is likely to increase with the implementation of the Sustainable Groundwater Management Act (SGMA). As the water transfer market has matured, buyers and sellers have begun to develop mechanisms to better respond to concerns over potential transfer effects on local water users and the environment. Water transfer proposals are generally designed to avoid injuring any legal user of water; avoid unreasonably affecting fish, wildlife, or other instream beneficial uses; and avoid unreasonably affecting the overall economy or the environment of the county from which the water is being transferred.

According to a 2021 Public Policy Institute of California report, Improving California’s Water Market, market-based approaches can provide several advantages, including providing incentives to water users who have more readily accessible water supplies and lower-value uses of that water to sell or lease the water to those with limited supplies and higher-value uses in agriculture, cities and towns, and the environment.

Recent reports. In 2016, DWR published A Resource Management Strategy of the California Water Plan, which included an overview of water transfers in California. The report discusses the oversight of water transfers in California, potential costs, and potential benefits, and identifies implementation issues, including finding a balanced approach to regulating transfers, environmental concerns, using temporary water transfers for long-term demands, economic concerns, quantifying uncertainties and effects on others, the need for more integrated management of water resources, infrastructure and operational limits, and climate change. The report concludes with various recommendations including, among others, that local government and water agencies implement monitoring programs that evaluate potential specific and cumulative impacts from transfers, provide assurances that unavoidable impacts are mitigated reasonably, and demonstrate that transfers comply with existing law; and that state and federal agencies prepare programmatic and site-specific CEQA and NEPA documents and other technical assistance for interregional transfers.

Additionally, PPIC has issued a number of reports on water markets. In August 2021, the organization published a fact sheet, California’s Water Market, which provides an overview of water marketing, a brief history of water sales/trades, who are the buyers and who are the sellers, and how water trading also supports the environment. The fact sheet concludes that the transfer approval process is complicated, but reforms could strengthen the market. As pointed out by PPIC, “the transfer approval process is fragmented and inconsistent, with different rules for different types of water rights and agencies; it could benefit from streamlining.” The fact sheet also points out that uncertainty and delays could be reduced by improving information about water availability and how much can be traded without unduly harming the environment or other legal water users and that local processes are key for well-functioning markets.

In September 2021, PPIC published its policy brief, Improving California’s Water Market: How Water Trading and Banking Can Support Groundwater Management, which explores how water users and other stakeholders can use existing, and develop new, market institutions to support groundwater sustainability while providing benefits for the economy, communities and the environment. The policy brief includes five key takeaways: (1) good market design is key; (2) markets must address impacts on third parties; (3) various stumbling blocks currently hamper water markets; and (4) addressing the challenges now will bring material benefits. According to PPIC, “[a]s groundwater sustainability agencies and others face a future of pumping reductions and subsequent land fallowing, water banking and water trading may prove important tools to help manage this transition. However, a combination of aging infrastructure and complex, conflicting regulatory structures currently hinders the expansion of banking and trading. Multiple factors can drive reforms to streamline these practices.”

The Legislative Analyst’s Office. The Joint Legislative Budget Committee (JLBC) appoints the Legislative Analyst, who oversees the LAO. The LAO provides fiscal and policy advice to the Legislature, and has done so for more than 70 years. It is known for its fiscal and programmatic expertise and nonpartisan analyses of the State Budget.

Proposed Law:

This bill would require the Legislative Analyst, by January 1, 2025, to prepare and submit to the Legislature a report analyzing the water market, including background information regarding the sale of water and water rights, trends in the water market, barriers to entering the water market or effectively trading in the market, and proposals for improving the regulatory framework to make the water market more market friendly and to encourage growth.

Related Legislation:

AB 2304 (Levine, 2016), among other things, would have established the California Water Market Exchange Clearinghouse in the California Natural Resources Agency to enhance access to voluntary water market transactions and would have required the Clearinghouse to create a centralized water market platform by December 31, 2018. AB 2304 was held in the Assembly Appropriations Committee.

AB 2909 (Levine, 2016) would have required SWRCB to develop and implement an expedited 30-day review process for approval of petitions to temporarily change the point of diversion, place of use, or purpose of use due to a transfer or exchange of water or water rights if the transfer is for a reoccurring water transfer, as defined, or an environmentally beneficial transfer, as defined. The bill also would have required DWR to develop a 30-day review process for reoccurring water transfers that utilize facilities of the State Water Project. SB 2909 was held in this committee.

AB 732 (Machado, 1999) would have required SWRCB, in consultation with DWR and the United States Bureau of Reclamation, to develop criteria for use in evaluating impacts arising from proposed water transfers. The bill would have also authorized counties to establish a county water transfer management council and to develop and implement a water transfer management plan, which would incorporate the water transfer criteria established by SWRCB. AB 732 was held in the Senate Agriculture and Water Resources Committee.

Staff Comments:

LAO may not have expertise needed. It is unclear that the LAO has the needed expertise to complete the report that would be required by this bill. This report might require specialized legal, economic, and/or water policy expertise, such as that usually found in academia and think-tank organizations. In general, the LAO provides analysis and advice to the Legislature. In-depth research projects are not the office’s primary focus. Similarly to other legislative staff, the ability of LAO staff to conduct in-depth research is often limited by time constraints and other competing demands.

LAO costs. It is unclear whether the LAO has the capacity to prepare the report that would be required by this bill. To the degree that the LAO cannot absorb the workload within existing staff resources, it might need to contract the report out. Such a contract would have likely one-time costs in the hundreds of thousands of dollars. Even if the LAO were able to complete the report with existing staff, other LAO workload would be displaced. As such, the additional workload associated with this bill would generate one-time cost pressure, likely of at least one-half of a PY or more than $100,000.

Value of an additional study unclear. There is considerable overlap between the recent reports discussed above and the report this bill proposes. According to the policy committee analysis, the sponsor says that the intent is that this report is to be more explicit than previous reports and publications – to provide specific recommendations on how to reform various water transfer scenarios, such as what is needed for in-basin transfers, and what would make the process more approachable.

Legislation might be unnecessary to obtain desired information. Any Member of the Legislature may submit requests to the LAO to conduct a study or provide information. In addition, the California Research Bureau (CRB) provides nonpartisan research services to the Governor and his staff, to both houses of the Legislature, and to other elected state officials. These services include preparation of reports and memoranda on current policy issues, which might cover topics such as the history of the issue, experiences and proposals in other states, case studies and examples, data analysis, and development of legislative proposals. This work might be confidential to the requestor, or might result in a published report. It may be possible to request the report that would be required by this bill without legislation.

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SENATE COMMITTEE ON NATURAL RESOURCES AND WATER

Senator Dave Min, Chair

2023 - 2024 Regular

Bill No: SB Hearing Date: March 28, 2023

Subject: Water markets

BACKGROUND AND EXISTING LAW

Under existing law, the State Water Resources Control Board (SWRCB) administers a water rights program under which SWRCB grants permits and licenses to appropriate water (Water Code (Wat. C.) §§1200 et seq.). Under the program, a permittee or licensee is authorized to change the point of diversion, place of use, or purpose of use on a temporary (up to one year) or long-term (longer than one year) basis if certain conditions are met, including that the change would not harm any other water right holder and the change would not unreasonably affect fish, wildlife, or other instream beneficial uses (Wat. C. §§1725 et seq.). These are known as water transfers.

Each year, hundreds of water transfers occur in California, most of which involve surface water. Some groundwater trading occurs within specially managed basins; however, this is likely to increase with the implementation of the Sustainable Groundwater Management Act (SGMA). As the water transfer market has matured, buyers and sellers have begun to develop mechanisms to better respond to concerns over potential transfer effects on local water users and the environment. Water transfer proposals are generally designed to avoid injuring any legal user of water; avoid unreasonably affecting fish, wildlife, or other instream beneficial uses; and avoid unreasonably affecting the overall economy or the environment of the county from which the water is being transferred.

According to a 2021 Public Policy Institute of California report, Improving California’s Water Market, market-based approaches can provide several advantages, including providing incentives to water users who have more readily accessible water supplies and lower-value uses of that water to sell or lease the water to those with limited supplies and higher-value uses in agriculture, cities and towns, and the environment.

PROPOSED LAW

This bill would require the Legislative Analyst, by January 1, 2025, to prepare and submit to the Legislature a report analyzing the water market, including background information regarding the sale of water and water rights, trends in the water market, barriers to entering the water market or effectively trading in the market, and proposals for improving the regulatory framework to make the water market more market friendly and to encourage growth.

ARGUMENTS IN SUPPORT

According to the author, “[g]iven the realities of climate change, which will bring about greater variations in precipitation, water cutbacks from the Colorado River and the impact of the Sustainable Groundwater Management Act (SGMA), California needs to be doing everything in its ability to assure that farms, cities and environmental projects get the water they need. A more boisterous water-trading market can help accomplish that – but the state’s convoluted regulatory system impedes the process. Before we know how to reform the system, it’s crucial to review the current system and create a blueprint for reform. After that report is complete, lawmakers will have the tools to propose targeted and appropriate regulatory reforms. Increased water trading won’t solve the state’s water-scarcity problems, but it is one tool in the toolbox – and it conforms to Gov. Gavin Newsom’s water-sustainability program that calls for an “all of the above” approach.”

ARGUMENTS IN OPPOSITION

None received

COMMENTS

It’s complicated. According to stakeholders, the regulatory framework for water transfers is complicated and time-consuming, sometimes 18 months or longer, which has deterred many users. Transfers that involve changes to the terms of the seller’s water rights permits or transfers that use public facilities for conveying the water must be reviewed by SWRCB, DWR, the United States Bureau of Reclamation (Bureau), or a combination of these three agencies. Transfers can impact not only the area from which the water is from, but also downstream users and instream flows, as well. Because these impacts can be both economic and environmental, transfers involving public agencies can be subject to either the California Environmental Quality Act (CEQA) or the National Environmental Policy Act (NEPA). Additionally, there is a lot of uncertainty and risk involved with water transfers. Despite adequate planning and regulatory approval, all or a portion of the water made available from the water transfer may not be exported and may be lost due to uncertainties related to hydrologic conditions, regulatory restrictions, or the availability of conveyance facilities.

Another one. In 2016, DWR published A Resource Management Strategy of the California Water Plan, which included an overview of water transfers in California. The report discusses the oversight of water transfers in California, potential costs, and potential benefits, and identifies implementation issues, including finding a balanced approach to regulating transfers, environmental concerns, using temporary water transfers for long-term demands, economic concerns, quantifying uncertainties and effects on others, the need for more integrated management of water resources, infrastructure and operational limits, and climate change. The report concludes with various recommendations including, among others, that local government and water agencies implement monitoring programs that evaluate potential specific and cumulative impacts from transfers, provide assurances that unavoidable impacts are mitigated reasonably, and demonstrate that transfers comply with existing law; and that state and federal agencies prepare programmatic and site-specific CEQA and NEPA documents and other technical assistance for interregional transfers.

Additionally, PPIC has issued a number of reports on water markets. In August 2021, the organization published a fact sheet, California’s Water Market, which provides an overview of water marketing, a brief history of water sales/trades, who are the buyers and who are the sellers, and how water trading also supports the environment. The fact sheet concludes that the transfer approval process is complicated, but reforms could strengthen the market. As pointed out by PPIC, “the transfer approval process is fragmented and inconsistent, with different rules for different types of water rights and agencies; it could benefit from streamlining.” The fact sheet also points out that uncertainty and delays could be reduced by improving information about water availability and how much can be traded without unduly harming the environment or other legal water users and that local processes are key for well-functioning markets.

In September 2021, PPIC published its policy brief, Improving California’s Water Market: How Water Trading and Banking Can Support Groundwater Management, which explores how water users and other stakeholders can use existing, and develop new, market institutions to support groundwater sustainability while providing benefits for the economy, communities and the environment. The policy brief includes five key takeaways: (1) good market design is key; (2) markets must address impacts on third parties; (3) various stumbling blocks currently hamper water markets; and (4) addressing the challenges now will bring material benefits. According to PPIC, “[a]s groundwater sustainability agencies and others face a future of pumping reductions and subsequent land fallowing, water banking and water trading may prove important tools to help manage this transition. However, a combination of aging infrastructure and complex, conflicting regulatory structures currently hinders the expansion of banking and trading. Multiple factors can drive reforms to streamline these practices.”

While there is overlap between these reports and the report this bill proposes, the sponsor says that the intent is that this report is to be more explicit than previous reports and publications – to provide specific recommendations on how to reform various water transfer scenarios, such as what is needed for in-basin transfers, and what would make the process more approachable.

Prior legislation.

AB 2304 (Levine, 2016), among other things, would have established the California Water Market Exchange Clearinghouse in the California Natural Resources Agency to enhance access to voluntary water market transactions and would have required the Clearinghouse to create a centralized water market platform by December 31, 2018. AB 2304 was held in the Assembly Appropriations Committee.

AB 2909 (Levine, 2016) would have required SWRCB to develop and implement an expedited 30-day review process for approval of petitions to temporarily change the point of diversion, place of use, or purpose of use due to a transfer or exchange of water or water rights if the transfer is for a reoccurring water transfer, as defined, or an environmentally beneficial transfer, as defined. The bill also would have required DWR to develop a 30-day review process for reoccurring water transfers that utilize facilities of the State Water Project. SB 2909 was held in the Senate Appropriations Committee.

AB 732 (Machado, 1999) would have required SWRCB, in consultation with DWR and the United States Bureau of Reclamation, to develop criteria for use in evaluating impacts arising from proposed water transfers. The bill would have also authorized counties to establish a county water transfer management council and to develop and implement a water transfer management plan, which would incorporate the water transfer criteria established by SWRCB. AB 732 was held in the Senate Agriculture and Water Resources Committee.

SUGGESTED AMENDMENTS

None

SUPPORT

R Street Institute (sponsor)

California Policy Center

Fieldstead and Company, INC.

2 individuals

OPPOSITION

None Received

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