Marketing Your Water:Marketing Your Water: Tips for Selling or Leasing of Tips for Selling or Leasing of

Groundwater and Groundwater and Surface Water RightsSurface Water Rights

Lynn ShermanLynn Shermanlsherman@winstead.com

Texas Water Laws and RegulationsTexas Water Laws and RegulationsHalfMoon SeminarsHalfMoon Seminars

San Antonio, TexasSan Antonio, TexasJuly 31, 2008July 31, 2008

1950’s TODAY

De

vel

op

ed S

up

plie

s

Pe

r C

apit

a

ALMOST ON PAR WITH 50’S DROUGHT

Water Development TimelineWater Development Timeline

1950’sDROUGHT

DE

VE

LO

PE

D S

UP

PL

IES

DAM BUILDING ERA

1960’s-1980’s

“NO DEVELOPMENT” PERIOD

1980’s to Date

Number and Capacity of Large Number and Capacity of Large Reservoirs Completed by DecadeReservoirs Completed by Decade

Source: GAO, July 2003, “Freshwater Supply: States’ Views of How Federal Agencies Could Help Them Meet the Challenges of expected Shortages,” GAO-03-514.

Currently,Currently,our our ““dam builders,dam builders,””

the Bureau of Reclamation the Bureau of Reclamation and the Corps of Engineers,and the Corps of Engineers,

have have only oneonly one large water large water storage project underwaystorage project underwayin the entire country.in the entire country.

Water Development Timeline

NEEDED

SUPPLIES

1950’sDROUGHT

UNPARALLELED GROWTH

FUTURE

DE

VE

LO

PE

D S

UP

PL

IES

DAM BUILDING ERA

1960’s-1980’s

POPULATION DOUBLES

IN 2050

EXISTING SUPPLIESDECREASE BY

20%

“NO DEVELOPMENT” PERIOD

1980’s to Date

““if a drought occurs in 2050,if a drought occurs in 2050,almost half (43 percent) almost half (43 percent) of the municipal demandof the municipal demand

could not be satisfiedcould not be satisfiedby current sources.” by current sources.”

State Water PlanState Water Plan 2002200220072007

if a drought occurs in if a drought occurs in 20602060,,about about 85 percent85 percent

of the municipal demandof the municipal demandcould not be satisfiedcould not be satisfiedby current sources. by current sources.

We needWe need 3.7 million acre-feet 3.7 million acre-feet

of new waterof new water byby 2010. 2010.

That isThat is 20%20% of current of current developed supplies and developed supplies and

1/21/2 of our additional of our additional long term need.long term need.

That is almost enough That is almost enough water to flood every water to flood every city in Texas ½ foot city in Texas ½ foot

deep.deep.

And, it is needed in And, it is needed in 20102010. .

20022002 State Water PlanState Water Plan

Cost of Necessary New Cost of Necessary New Projects =Projects =

$30.7 billion$30.7 billion

20072007

approx. $18 billionapprox. $18 billion

Where will the Where will the money come money come

from?from?

since 1980, federal spending has been flat.

CBO, May 1999, “Trends in Public Infrastructure Spending”

0

10,000

20,000

30,000

40,000

50,000

60,000

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

Year

Mil

lio

ns

(no

min

al d

oll

ars)

Total Public Spending

Federal Spending

70%

FEDERAL SPENDING

In Last Twenty YearsIn Last Twenty Years

Actually, in real terms . . .

Federal Spending

State Spending

Local Spending

3 out of 103 out of 10 drinking water utilitiesdrinking water utilities

andand4 out of 10 4 out of 10

wastewater utilitieswastewater utilitiesdo not collect enough revenue do not collect enough revenue

from users and other local from users and other local sources sources

to cover the cost of service.to cover the cost of service.Source: GAO, March 2004, “Water Infrastructure: Comprehensive Asset Management HasPotential to Help Utilities Better Identify Needs and Plan Future investments” GAO-02-764.

Private CapitalPrivate Capital

Myth #1There is no There is no demand for demand for

private capital private capital or involvement of or involvement of the private sectorthe private sector

What are the benefits What are the benefits of private capital?of private capital?

risk

availability&

0

10

20

30

40

50

Propos

al

Develo

pmen

t

Constr

uction

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Project Phase (years)

Lev

el o

f R

isk

/Ret

urn

($

mil

lion

s) RiskReturnPotential Return

Operation Residual

Typical Project Risk/Return Profile

Source: The National Council for Public Private Partnerships

Compare experience Compare experience in solid wastein solid waste

• • Crisis in early ’80s due to declining Crisis in early ’80s due to declining landfill capacity and increasing costs.landfill capacity and increasing costs.

•• Congress responded by eliminating tax-Congress responded by eliminating tax-exempt private activity bond cap for exempt private activity bond cap for municipal solid waste disposal projects.municipal solid waste disposal projects.

• • As a result, over $15 billion in PABs have As a result, over $15 billion in PABs have been issued since 1986 to solve the crisis.been issued since 1986 to solve the crisis.

Source: Stephen H. Howard, Sr. V.P., Lehman Brothers, Inc., testifying to the Congressional Transportation and Infrastructure Subcommittee on Water Resources and Environment, June 14, 2005.

Source: U.S. Conference of Mayors Urban Water Council, “National City Water Survey 2005.”

Popularity of Financing Methods

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

"Pay As You Go" Revenue Bonds State Revolving

Fund

General Obligation

Bonds

Private Activity

Bonds

Myth #2Water marketing Water marketing

will result in will result in price gougingprice gouging

• • Water is not sold on a wholesale basis Water is not sold on a wholesale basis unless it is cheaper than the next best unless it is cheaper than the next best alternative.alternative.

• • There are no government granted There are no government granted monopolies for the sale and distribution monopolies for the sale and distribution of wholesale water.of wholesale water.

• • Private wholesalers have no ongoing Private wholesalers have no ongoing rate setting authority, so rate increases rate setting authority, so rate increases must be set out in the initial contract.must be set out in the initial contract.

Why “price gouging” will not occur?

Myth #3Water marketing Water marketing

will result in will result in abuse of abuse of

the right of the right of capturecapture

Source: USGS

How to How to Value Value

a Water Righta Water Right

A

C

E

D

B

F

Sr.

Sr.

G

G1

G2

G3

Source: Lieutenant General Robert B. Flowers, Chief of Engineers, U. S. Army Corps of Engineers, before the Subcommittee on Water Resources and Environment, Committee on Transportation and Infrastructure, United States House of Representatives, May 7, 2003.

County Growth from 2000 to 2025County Growth from 2000 to 2025Pricing ConsiderationsPricing Considerations(certainly not an exhaustive list)(certainly not an exhaustive list)

• Demand Growth

Percent Change in Projected Percent Change in Projected Demand in Texas by RegionDemand in Texas by Region

Pricing ConsiderationsPricing Considerations(certainly not an exhaustive list)(certainly not an exhaustive list)

• Adequacy of existing supplies

• Demand Growth

Cities surveyed nationwide that do not

have an adequate20-year water supply?

___

35%Source: U.S. Conference of Mayors Urban Water Council, National City Water Survey 2005.”

Pricing ConsiderationsPricing Considerations(certainly not an exhaustive list)(certainly not an exhaustive list)

• Adequacy of existing supplies

• Susceptibility to drought

• Demand Growth

““at least some part at least some part of the United Statesof the United States

has experienced has experienced severe or extremesevere or extremedrought conditionsdrought conditions

every year every year since 1896.”since 1896.”

Source: GAO, July 2003, “Freshwater Supply: States’ Views of How Federal Agencies Could Help Them Meet the Challenges of Expected Shortages,” GAO-03-514, p. 15.

Areas Prone to DroughtAreas Prone to Drought 1895 to 19951895 to 1995

Source: GAO, July 2003, “Freshwater Supply: States’ Views of How Federal Agencies Could Help Them Meet the Challenges of Expected Shortages,” GAO-03-514, Figure 3.

Source: S. Roy, et al., October 2005, “Evaluation of the Sustainability of Water Withdrawals in the United States, 1995 to 2025,” Journal of the American Water Resources Association, calculated using typical withdrawals and the lowest 3-year rolling average precipitation between 1934 and 2002 based on data from Solley et al. (1998) and CPC (2003).

Adequacy of Stored Supplies Adequacy of Stored Supplies During a Significant DroughtDuring a Significant Drought

Pricing ConsiderationsPricing Considerations(certainly not an exhaustive list)(certainly not an exhaustive list)

• Location

• Adequacy of existing supplies

• Susceptibility to drought

• Total Quantity

• Established Water Market

• Water Quality

• Demand Growth

According to the EPA,According to the EPA,

45%45%of assessed watersof assessed waters

nationwidenationwidedo not fully meetdo not fully meet

water quality water quality standardsstandards

Source: ASCE, et al., September 2004, “All Dried Up: How Clean Water is Threatened by Budget Cuts.”

Pricing ConsiderationsPricing Considerations(certainly not an exhaustive list)(certainly not an exhaustive list)

• Location

• Adequacy of existing supplies

• Susceptibility to drought

• Total Quantity

• Storage/Firm Supply/ Dependability

• Development Costs (e.g., infrastructure, pumping, treatment)

• Established Water Market

• Water Quality

• Interbasin Transfer (surface water)

• Instream and Other Natural Flow Needs

• Seniority/Potential Effects on Others

• Demand Growth

Source: U.S. EPA, December 2004. National Coastal Condition Report II. Office of Research and Development/Office of Water. EPA-620/R-03/002. Overall national and regional coastal condition between 1997 and 2000.

The environmental condition of our coastal areas is largely The environmental condition of our coastal areas is largely

Fair to Poor.Fair to Poor.

Pricing ConsiderationsPricing Considerations(certainly not an exhaustive list)(certainly not an exhaustive list)

• Location

• Adequacy of existing supplies

• Susceptibility to drought

• Total Quantity

• Storage/Firm Supply/ Dependability

• Development Costs (e.g., infrastructure, pumping, treatment)

• Established Water Market

• Water Quality

• Operating History

• Interbasin Transfer (surface water)

• Instream and Other Natural Flow Needs

• Applicable Rules and Regs

• Export Fees and Taxes

• Timing

• Local Considerations (e.g., economic and political)

• Indirect Reuse Potential

• Seniority/Potential Effects on Others

• Demand Growth

• Existing Rates

Cheaper Cheaper than than the the next next best best

alternativealternative

Shorthand Standard:Shorthand Standard:

― ― all things considered.all things considered.

Marginal Marginal Cost/ValueCost/Value

PricingPricing

City of Round Rock's Water Supply Options as evaluated by HDR in its "Lake Travis Raw Water Supply System," September 2005 (Draft)

Water Supply Option af/yrSum Total of Annual Costs (2005 to 2050)

Average Annual

Cost

Unit Cost (af/yr)

Unit Cost

($/1,000)

Lake Travis (Cedar Park) 19,000 $361,220,076 $8,027,113 $422.48 $1.30

Lake Belton & Lake Travis (BRA & CP) 19,000 $371,439,125 $8,254,203 $434.43 $1.33

Lake Travis (CP) & Lake Georgetown 19,000 $390,618,690 $8,680,415 $456.86 $1.40

Groundwater (WaterTexas) 19,000 $439,374,507 $9,763,878 $513.89 $1.58

Groundwater (Brozos Valley Water Alliance) 19,000 $477,745,557 $10,616,568 $558.77 $1.71

Groundwater (WaterTexas) 19,000 $481,812,672 $10,706,948 $563.52 $1.73

Lake Travis (COA) & Lake Georgetown 19,000 $520,388,026 $11,564,178 $608.64 $1.87

Lake Travis (City of Austin) 19,000 $526,081,465 $11,690,699 $615.30 $1.89

Groundwater (Southwest Water Company) 19,000 $566,096,494 $12,579,922 $662.10 $2.03

Average of all options $1.65

Example:Example:City of Round RockCity of Round Rock

PricingPricingExamplesExamples

Raw Water Rates of Certain River Authorities

$126.00

$96.00 $93.87

$74.95

$58.65$51.88 $49.65

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

LCRA GBRA LNRA SJ RA LNVA (i)

LNVA(m)

BRA

pri

ce p

er

acre

-fo

ot

City of Austin Wholesale Water Rates

$2.47 $2.64 $2.67$3.10

$4.93

$7.24

$2.21 $2.32

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Nig

ht H

aw

k W

SC

Hig

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alley

WSC

Cre

edm

oor-M

aha W

SC

Marsh

a W

SC

Anderso

n M

ill MU

D

Wells B

ranch

MU

D

Rive

rcrest W

SC

North

town M

UD

North

Austin

MU

D #

1

City o

f Sunse

t Valley

Lost C

reek

MU

DVilla

ge o

f San Le

anna

Tra

vis Co. W

CID

#10

City o

f Rollin

gw

ood

Shad

y H

ollo

w M

UD

Manville

WSC

Win

dem

ere U

tility Co.

City o

f Pflugerv

illep

rice p

er

tho

usan

d g

all

on

s

1,000

of water

gallons

$1.83 = City of Lubbock tap water

$11,280 = evian (@ 82nd and Quaker)

(Source: Wine Spectator, April 30, 2003)

$13,000 ≈ most expensive

Ag vs. UrbanAg vs. UrbanValuesValues

In California, an acre-In California, an acre-foot used in the semi-foot used in the semi-

conductor business conductor business produces $980,000 in produces $980,000 in gross state revenue, gross state revenue, while the same acre-while the same acre-foot generates only foot generates only $60 when used on $60 when used on cotton or alfalfa.cotton or alfalfa.

In the Rio Grande Valley, In the Rio Grande Valley, the average transfer the average transfer from ag to urban use from ag to urban use

produced net benefits of produced net benefits of $10,000 per acre-foot in $10,000 per acre-foot in

1992.1992.

J. Brewer, R. Glennon, A. Ker, and G. Libecap, “Water Markets: Western Water Transfers from Agriculture to Urban Uses, 1987-2005” (Sept. 1, 2006).

Western State Water Transfers:Average Price Comparison

(annual price per acre-foot)

Based on 1,836 transfers in 12 western states from Jan. 1987 to Dec. 2005.

$747

Ag-to-Urban

Ag-to-Ag

$197

Price Differentials:Price Differentials: Ag-to-Ag vs. Ag-to-Urban

1987 to 2005

The price difference between ag-to-ag and ag-to-urban

rose from $111 in 1993 to $1,362 in 2003.G. Libecap, Dept. of Economics, Univ. of Arizona, Tucson; Nat’l Bureau of Economic Research, Hoover Inst. (Nov. 29, 2005), Figure 2, p. 7.

Other ExamplesOther Examples

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

(price per acre-foot)

Edwards Aquifer Transactions

Roberts County Transactions(price per acre)

$50

$100

$150

$200

$250

$300

$350

$400

$450

1975 1996 2000 2003 2006

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