CALIFORNIA WATER RESOURCESASSIGNMENT 21

Water Transfers: Enlightened Environmentalism orFear and Loathing of the Market?

“Owens Valley II?” “No water, no farms, no future.”

Signs along Interstate 5 in the Sacramento Valley

Reading:

California Action Network, Sales of Water in California: Some Thoughts from Agricultural Communities

Joseph L. Sax, Understanding Transfers: Community Rights and the Privatization of Water

Notes and Questions:

1. In this assignment, we will look at specific examples of water transfers and consider sev-eral of the most difficult "second generation" issues.

2. What is the relationship between water transfers and Article X, Section 2 of the Califor-nia Constitution? Are market incentives and the threat of reallocation through the loss of water rights in significant tension with one another? Or, do the IID-MWD and IID-SDCWA transfer agreements that we studied in the last assignment show the potential synergies between the two legal strategies?

3. The California Legislature has enacted a number of statutes that protect water rights be-fore, during, and after the term of water transfers. See, e.g., Water Code §§ 1011(b) & (c), 1014-1016, 1244, 1731 & 1737. Do they adequately protect the water rights of transferors? Are the protections of the rights of the transferor necessary and appropriate to a functioning water mar-ket? Why should the water rights of an arguably wasteful or unreasonable water user be pro-tected simply because the user decides to conserve water or transfer surplus water? Are these laws consistent with Article X, Section 2?

4. Should water users within a local or regional water supply agency have authority to trans-fer water to users outside the agency without the agency’s consent? Does the existence of an agency veto power deter transfers because it separates the market incentives that drive water transfers from the decisionmaking authority to engage in the transfer? Is there a way to accom-modate the interests of agency members who want to transfer water and the interests of the agency (and the other members whom the agency represents? In considering this last question, please review section 3405(a)(1) of the Central Valley Project Improvement Act, which is in-cluded in Assignment 19.

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5. Should local communities have veto power over transfers of water to another region as proposed in the California Action Network paper? Would the creation of such a veto result in the “Balkanization” of California’s water resources policy? If local veto authority were to be created, who should make the decision? Is the County Board of Supervisors the appropriate lo-cal agency?

6. Because of the attendant loss of production, farm employment, and purchases of farm supplies and equipment, should there be a presumption against land fallowing as a means of making water available for transfer? Water users in some rural communities have begun to refer to fallowing as the “F-word.”

7. Should there be a categorical prohibition against transfers of groundwater (or surface wa-ter for which groundwater is substituted) from areas with groundwater overdraft problems?

8. Should water transfers be taxed? If so, what should be the tax rate and who should re-ceive the tax revenues? Oregon requires 25 percent of all water transferred to be left in stream. In section 3407(d)(2)(A) of the Central Valley Project Improvement Act, of 1992, Congress im-posed an annual surcharge of $25 per acre foot for project water transferred to a municipal and industrial user that has not previously been a CVP contractor. The proceeds of the surcharge go to the Fish and Wildlife Restoration Fund established by the Act.

9. Should the areas that purchase water be required to demonstrate that they have made full use of local surface and ground water sources, have made full use of reclaimed wastewater, and have implemented all affordable water conservation measures? If so, who should make this evaluation?

10. Should there be a general prohibition against permanent transfers of water from rural to urban areas?

11. Conversely, why should rural areas from which water may be transferred be given any protection? Isn't the free movement of resources from lower to higher value uses an inherent and important characteristic of a capitalist economy? As the authors of the leading water law case-book have observed, “the closing of a major factory can have a severe effect on the local com-munity, but we do not give the community or state officials the right to prevent such closings. Is there any reason to treat water transfers differently?” Joseph L. Sax, Barton H. Thompson, Jr., John D. Leshy & Robert H. Abrams, Legal Control of Water Resources 249 (West 3d ed. 2000).

11. In its influential 1992 study of water transfers, the National Research Council concluded that

recognition and protection of third party interests are essential if water transfers are to achieve their potential to reallocate water to meet new demands. . . . Trans-fers can bring the benefits of the market to a system that has often subordinated efficiency to distributional concerns. But the West has never treated water as just another commodity and should not do so now. There must be a balance between

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efficiency and fairness. Each jurisdiction must devise its own laws and processes to achieve this balance.

NATIONAL RESEARCH COUNCIL, WATER TRANSFERS IN THE WEST: EFFICIENCY, EQUITY, AND THE ENVIRONMENT 8 (NATIONAL ACADEMY PRESS 1992).

Does California water transfer law adequately protect third-party interests? Does it prop-erly balance (or accommodate) the rights of third-party water users, local communities, and the environment with the state’s interest in encouraging the voluntary transfer of water to higher val-ued uses?

13. Professor Sax suggests in his article that there is a common tendency

to think of transfers as a contract, with two parties only—a buyer and a seller. I believe that a more appropriate model would be a diplomatic negotiation with a number of parties, each with important and legitimate interests that need to be ac-commodated, but without clearly defined rights. The future of water transfers will be jeopardized unless something like that broader and more inclusive model is embraced.

Does the IID-MWD-SDCWA controversy, which we studied in the last assignment, prove Sax’s point? Is it possible to write a general water transfer law that embodies this “broader and more inclusive model”? Or, is it impossible to legislate in this way, because each major water transfer proposal is unique?

14. I concluded my article on the Model Water Transfer Act with the following observation:

Although water marketing is not a panacea, water transfers are now a vital com-ponent of California’s water policy and will continue to grow in importance as the demands for water evolve and expand relative to supply.

Brian E. Gray, The Shape of Transfers to Come: A Model Water Transfer Act for California, 4 West•Northwest 23, 45 (1996). Do you agree?

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CALIFORNIA ACTION NETWORK AND THE CALIFORNIA ASSOCIATION OF FAMILY FARMERS, SALES OF WATER IN CALIFORNIA: SOME THOUGHTS

FROM AGRICULTURAL COMMUNITIES (1992)

This document is intended to assist policymakers in considering potential impacts of wa-ter transfers on agricultural communities. In it, we describe preconditions upon water transfers that are necessary to protect the rural environment and the economy of agricultural areas.

California communities are predicated on the availability of water, and as all Californians know, there is more water in the north of the state than there is in the south. Much of the agricul-ture in the Central Valley and the cities of southern California are now only possible because of a huge transfer of water from north to south, through the aqueducts of the Federal Central Valley Project and the State Water Project. The quality of life for all Californians and the health of Cali-fornia's natural environment are critically dependent upon how the benefits of this water resource are divided up among the environment, cities, industry and agriculture.

This document represents the consensus of an alliance of family farmers and environmen-talists who live in rural and urban California. For over a decade, we have worked to reform agri-cultural water policy, which typically favors large farming enterprises over rural communities and the environment.

The public "voice of agriculture" (the one quoted by the media and consulted by policy makers) reflects only the narrow interests of very large farms, even though most farms in the state are actually under 400 acres in size. Here we offer another perspective, from family farmers and rural residents. Unlike the views of California's largest farms, ours are based on our stake in the stability of rural communities and the long-term health of everybody's environment.Persistent drought and overtaxed water resources have increased tensions over water to the point that substantial new sales and transfers of water from agriculture to urban areas are being consid-ered. While we recognize the need for an adjustment in the historical distribution of water, we urge that it be made without making inequities in current policies worse. Our recommendations are based on the belief that changes in water policy can be made without adversely affecting the environment or rural communities.

Everyone should be concerned about the sustainability of California's great water re-sources. There is a direct connection between the stewardship of water-source areas and the quantity and quality of water that can be made available to water-short areas. For example, over-drafting groundwater or allowing it to become contaminated has a direct impact on the amount of surface water needed in a given watershed. If water-short areas ignore the stewardship of water-source areas, they could end up dependent on contaminated supplies that will require expensive treatment before use. Ignoring this connection will imperil the future of both rural and urban Cal-ifornia.

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Water Marketing and Transfer: Water to the highest bidder,or an equitable redistribution of resources?

Sales of water from one area to another, or water marketing, already occur in California and other western states. A few groups are now advocating a dramatic increase in this practice for California. While we acknowledge that water marketing will continue to play a role in water distribution, we are concerned that it not be perceived as a cure-all for California's basic water problems. We view water marketing as a tool that can help to adjust the distribution of Califor-nia's water resources, but which if unrestricted, could damage the environment and disrupt the economy and social structure of our communities.

When water is sold, the land where it was previously used may go fallow. The resulting decreased agricultural production in an area will result in higher unemployment, less money be-ing used productively, and a depressed economy. Such effects of water sales to the State Water Bank in 1991 have already been documented in Yolo County.

Land fallowing as a result of water sales might not be short-term. Because water is so crucial to urban development, an unrestricted water market could mean that urban water agencies and developers might purchase agricultural land solely for its water rights. The land would then go fallow, be dry-farmed, or be permanently idled, and the water used for urban and industrial development.

There are other ways that water markets could harm family farmers. In a depressed agri-cultural economy, farmers having trouble making loan payments will be pressured by banks to sell their water rather than continue to farm. While banks might view water sales as a way to achieve reliable payments on loans, the farmer may find that the water market effectively pro-vides banks with new options. Water sales may also be harmful to ground water aquifers and wildlife habitat in rural areas.

Nonetheless, we believe that properly regulated water marketing could be beneficial to farmers in some situations. For example, in a drought year, when farmers do not receive enough water to complete a crop growing cycle, they might choose to sell water.

Water transfers could also potentially be useful in recharging or supplementing over-drafted groundwater aquifers or in bringing income to economically depressed areas where there is surplus water.

In addition, we recommend the retirement of certain lands that leach selenium or other toxic salts when irrigated. Toxic drain water should not be transferred from these lands to create problems elsewhere. Instead, these lands should be retired so that water previously used to irri-gate them will become available for other uses.

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Recommendations on Water Transfers

Water sales should only occur after meeting certain conditions:

• Local regions should have veto power over water sales.

• Groundwater protections, priority for water needs of local areas, and a special tax on water sales should be imposed.

• New transfers of water from agricultural areas should not in general be the basis of a permanent water supply for distant urban areas.

(A) Local regions should have the opportunity to veto transfers of water out of their borders.

Decisions about water transfers should be made by democratically elected, regional boards, familiar with local hydrology, ecology, and economics rather than exclusively by a state bureaucracy. Although county Boards of Supervisors are subject to intense pressure from devel-opers and others who may not have long-term environmental and community values at heart, we believe that the Supervisors, with the advice of community members and experts, should be given veto power over water transfers.

We are opposed to control by water agencies governed by non-democratically elected Boards. In such water agencies, instead of one person-one vote, votes are cast on the basis of land ownership. Small, as well as large water users should be equally represented when water transfers are being negotiated.

We envision a two-step process that would retain local democratic control. First, a state agency would determine whether a proposed transfer met the following objective requirements:

Aquifer protection. A water sale should be prohibited if the aquifer is overdrafted or if it will cause an overdraft condition.

Environmental impact. The transfer must not have an adverse impact on fish, wildlife, or diversity of habitat.

Water conservation. Areas receiving transferred water must have implemented water conservation plans. Local resource conservation districts could be consulted for prepara-tion and review of these plans.

Second, if the state approves the sale, the local Board of Supervisors should have veto power and should make its decisions based on recommendations from an Advisory Committee containing seats for:

• a hydrologist or the local water agency

• a resident family farmer

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• an ecologist

• a representative of farm labor

• a representative of the general public.

The Advisory Committee should hold a public hearing to study potential impacts of pro-posed transfers. The Committee's recommendations to the Board of Supervisors should be based on the following considerations:

• The sale must not cause a significant adverse impact on the community as a whole.

• The Advisory Board will consider agricultural, economic, environmental, employment, health, and social impacts.

• The transfer will not prevent the attainment of the future needs of the county as envi-sioned in its general plan.

(B) Some specific protections must be built-in for rural communities and the environment.

1. Protection of Groundwater.

Many groundwater aquifers are being continuously depleted due to excessive pumping. This can result in concentration of contaminants, increased pumping costs and salinity intrusion. Groundwater is essential as a buffer against disruptions in surface water supply, for example those caused by earthquakes or drought. Therefore, for the welfare of all, it is imperative that groundwater supplies throughout California be restored to and maintained at healthy levels.

New transfer or sale of groundwater should be allowed only if there is a groundwater management plan for the aquifer from which the groundwater transfer is proposed. Since more people would be affected by groundwater sales than the individual seller, a groundwater manage-ment plan should take into account the needs of the whole community. Local Resource Conser-vation Districts could be consulted for preparation and review of groundwater management plans.

No surface water or groundwater transfer should be allowed if the aquifer is overdrafted or if the transfer will cause an overdraft condition.

Water users should not be allowed to sell their surface water and then irrigate with water pumped from an overdrafted aquifer.

Groundwater containing nitrates, pesticides, or other contaminants should not be trans-ferred through a common delivery system.

In prohibiting transfers from overdrafted aquifers, we do not mean to prohibit conjunctive use projects that use aquifers to store water brought in from elsewhere.

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2. Local Water Needs.

When a transfer is considered, priority should be given to existing, reasonable needs within the source watershed. Conservation requirements by local users are very important in this light. What we wish to achieve is the equitable management of water.

3. Water Transfer Tax.

All new sales of water should be taxed. The revenue generated should go into a special fund for the area of origin.

The fund should be used to compensate for social and economic costs resulting from wa-ter sales. For example, unemployed farm workers could receive training in skills that they would need to successfully apply for other work. The fund should also be used to set up a cost sharing mechanism for small-scale water harvesting projects and water conservation improvements. For example, implementation of watershed conservation plans (ditch improvements and creation of small water catchment systems, etc.) should be funded by the water transfer tax.

The transfer or sale of subsidized water presents a special case. Recipients of federally subsidized water should not be able to keep their subsidies as a profit when they sell their water at high prices. Federal legislation providing subsidized irrigation water for farmers was intended to promote a family farm system of agriculture. Allowing recipients of subsidized water to reap a windfall profit at the expense of taxpayers is unfair. If subsidized water is sold, the subsidy should be returned to local communities and become part of the special fund generated by the sales tax on water marketing.

4. Environmental Impact Report.

Any transfer of water of over 1000 acre-feet should require an Environmental Impact Re-port.

(C) New transfers of water from agricultural areas should not in general be the basis of a permanent water supply for distant urban areas.

1. New urban developments must specifically identify a permanent, total, and adequate water supply that does not on a regular basis include water purchased from distant rural areas.

It concerns us that transfers will somehow become permanent. For example, an urban de-velopment might be built based on the ability to obtain a transfer of water from a rural area and the water supplier may later need to terminate the water delivery. A court might then say that the supplier must continue to supply the water, as if the developer has a vested right. We fear that a farmer who sells one year will be pressured and then feel obligated to sell continuously.

We envision three exceptions to this prohibition upon sales from rural to urban areas:

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• A significant amount of land in Kern County and on the west side of the San Joaquin Valley should not be irrigated because it results in high levels of toxic salt in the drain water. Water made available from the fallowing of this land could be available perma-nently for use elsewhere.

• Sales from agricultural to urban areas could be permitted during a drought. Such sales should be governed by contracts agreed to in advance, which would specify the condi-tions under which the water would be transferred, the amount that could be transferred, and the price.

• If a watershed has an abundance of water and healthy groundwater aquifers, and the conditions described elsewhere in this statement have been met, transfers to urban areas would be permitted.

We are aware of the belief by some people that agriculture receives too much of Califor-nia's water. These people argue out of a desire to transfer water. from rural agricultural areas to distant urban areas. We disagree with this goal. It is our conviction that rural communities should not mortgage their future economic options to fuel urban and industrial growth elsewhere.

2. Transfers to urban areas should be allowed only when those areas have implemented adequate water conservation plans.

Water conservation plans should include practices such as installation of water meters, use of ultra-low-flush toilets, pricing structures that encourage conservation, water conserving landscaping guidelines and legalization of grey water use.

Water Conservation in Agriculture

We advocate greater efforts to conserve water in the agricultural sector. Because agricul-tural practices have a direct effect on land, soil and water resources, the health of farms is linked to the health of the overall environment.

Many, but not all farmers are good stewards of the environment. Because, in the past, the agricultural industry has caused environmental damage, the public now does not see agriculture in a positive light. In order to reclaim this historic stewardship role, a focused attempt by farmers to institute water conservation measures is necessary.

The priority use for water conserved through farmers' efforts should be to benefit wildlife and the environment.

Only when environmental needs in local watershed areas are satisfied should conserved water be sold for other uses.

All citizens should provide incentives for farmers to adopt water conserving methods. Conserved water will then be available for environmental uses and eventually for urban uses as

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well, another illustration that the health of water source environments is linked to that of water purchasing areas.

Site specific approaches can steward both land and water.

Farmers practicing sustainable agriculture should have their reasonable water require-ments met. Good land stewardship is not synonymous with minimal water use. Instead, it seeks to use water in the most appropriate way to achieve a balanced ecosystem.

For example, the use of cover crops as an alternative to chemical fertilizers may require extra water. Likewise, pre-irrigations are an important tool in weed management programs that do not include herbicides. These techniques should not be discouraged in a narrow promotion of water conservation. In fact, sustainable agriculture techniques should be fostered and protected as an avenue toward healthier agricultural communities.

With loss of irrigation water, fallowed or retired land could revert to wasteland. This hap-pened in areas of Arizona, creating severe weed and dust problems for passing motorists and neighboring farms. In the end, public money was spent attempting to solve the problem. In Col-orado, the courts require water buyers to plant grass on fallowed land. Because of this decision, the city of Aurora, which spent $46.5 million for land to secure water rights, allocated 10% of that total to revegetation. We recommend that revegetation with native plants be considered when land taken out of production is subject to wind or water erosion and growth of unwanted weeds.

Finally, we believe that a site-specific approach is usually preferable in terns of water storage facilities as well. Small-scale storage facilities should be an integral part of groundwater recharge programs and are an alternative to large expensive projects. Urban areas could benefit by promoting small-scale water storage projects because these are relatively inexpensive, could enhance water quality and wildlife habitat, and could increase water storage in water source ar-eas thus providing additional and better water for urban needs downstream.

Discussions between farmers and other environmentalists are needed.

The purpose of these discussions would be to determine how we can work together to protect and improve both the urban and rural environments. Between many family farmers and environmentalists, there should be an alliance, not antagonism.

The University of California should develop water conserving methods appropriate to small and medium-scale farms.

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Certain land in the San Joaquin Valley where irrigation results in toxic runoff or drainage due to naturally occurring minerals should be retired.

This is one of the recommendations of the San Joaquin Valley Drainage Program. Lands which cause environmental threats when irrigated should revert to dryland farming when feasible or should be permanently retired. This would free water for other uses.

We are not advocating here that all so-called "marginal" lands be retired since we believe it is difficult to define "marginal" in a useful way.

Conclusion

As California's population continues to expand, demands on our water resources will in-crease. Recommendations in this document are based on both biological realities and our desire for the continued vitality of rural California. Because there is a direct connection between the stewardship of water resources in water-source areas, and the quantity and quality of water that can be made available to water-short areas, all Californians must consider these issues. Members of the environmental community, citizens in rural and agricultural areas, and legislators must in-corporate these recommendations into any new policies if we are to live equitably within the lim-its of available resources.

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JOSEPH L. SAX, UNDERSTANDING TRANSFERS: COMMUNITY RIGHTS AND THE PRIVATIZATION OF WATER, 1 WEST•NORTHWEST 13 (1994)

In a recent report, the National Research Council observed that water markets cannot be expected to resemble more conventional markets for a variety of reasons, including the long-held tradition that water resources support a wide variety of public uses.1 Transfers can impose sig-nificant third-party effects, which must be accounted for in any reallocation. If transfers are to achieve their potential, the report said, the decision-making process should bring all relevant third parties into the deliberations. This broad participation is necessary because water is a unique resource, different from other commodities. Markets alone cannot accurately reflect all the relevant values of water. I share these conclusions.

In testifying before the study commission that wrote the report, I noted the common incli-nation to think of transfers as a contract, with two parties only—a buyer and a seller. I believe that a more appropriate model would be a diplomatic negotiation with a number of parties, each with important and legitimate interests that need to be accommodated, but without clearly de-fined rights. The future of water transfers will be jeopardized unless something like that broader and more inclusive model is embraced.

The question of who has, and who ought to have, what rights in water raises an issue that has received very little recognition in our legal system: the rights of communities. A companion issue is the limit on privatization of water as a commodity. Unlike almost every other form of property, which we allow to be entirely privatized, water has always been viewed as something in which the community has a stake and which no one can fully own. The complexity of this point is usually embraced in the phrase, "third-party effects" when talking about water transfers.

Although third-party effects exist wherever significant resources are allocated or reallo-cated, they are usually ignored. Years ago, when O'Hare Airport in Chicago was opened, Mid-way Airport - at the time the busiest airport in the world—was entirely closed down. Many of the businesses located around the airport, and dependent on it, went broke. When a theater next to a restaurant is sold and turned into a warehouse, the restaurant may go out of business. When Gen-eral Motors closes a factory in Michigan and opens one in another state of another country, workers may be left in a lurch. These are all third-party effect problems. With rare exceptions, they have no standing in our legal system. But water is and always has been different —certainly in theory, and to some extent in practice.

Reallocations of resources, such as a factory relocation, usually generate a variety of costs to the export community, such as increased welfare payments, more unemployment com-pensation and fewer public services as tax revenues decline. At worst, reallocations result in the creation of a permanently depressed Appalachian-type community. However, positive effects also occur. A new community may prosper, products may be produced more efficiently, and ob-solete industries phased out.

Legal History of the Issue

1 COMMITTEE ON WESTERN MANAGEMENT, NATIONAL RESEARCH COUNCIL, WATER TRANSFERS IN THE WEST; EFFICIENCY, EQUITY AND THE ENVIRONMENT (1992).

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 Concerns about the de-watering of the Owens Valley by Los Angeles gave rise to the

area of origin law in California legislation stating that people in the area where water arises have first claim to it.2 This is not solely a California phenomenon; the same issue has arisen else-where in the West. It has been played out between the western slope of the Rockies in Colorado and the more populous and urbanized eastern slope; the western slope people have had their rights recognized as water was removed from the area of origin.3 The same is true in the Great Lakes area, where states and Canadian provinces bordering the lakes have fought and won, through Federal law, the right to keep other states from drawing on the water there.4 The intense sense of loss was not diminished by the fact that in the Great Lakes region, water is measured not in acre-feet but in cubic miles.

Sometimes, the state itself asserts a right in water. Many years ago, a New Jersey com-pany diverted water from the Passaic River in order to transport it to New York and sell it there. The State of New Jersey prohibited the exports, and the U.S. Supreme Court sustained the state by rejecting the property claims of the putative exporter.5 The Supreme Court described water as something that could not be fully privatized, something in which there was a residual and in-alienable interest in the community of origin. In effect, the Court stated that water was a heritage resource, which the community could control and keep for itself. This may be the earliest exam-ple of court action holding that ordinary contract principles were not sufficient to govern water marketing. The Supreme Court more recently recognized a similar public right in groundwater. In that case, the State of Nebraska wanted to prevent water from being pumped there and ex-ported to Colorado. The court recognized that—at least where there was a demonstrable need for the water in the area of origin—the state could override property claims, or claims that water was simply a commodity.6

The situation involving water is very unusual, and it applies to virtually nothing else. For purposes of interstate commerce, for example, all other state resources may be privatized fully, and freely shipped away from the area of origin as ordinary commodities—even though states have often tried to keep such resources within their own boundaries to benefit their own resi-dents. Such efforts have routinely and repeatedly been held unconstitutional by the courts.7 The only other common example where things are treated like water—that is, as community re-sources and not as ordinary salable commodities—arises with cultural properties, antiquities for example, where the nation of origin often asserts a national claim on the property in order to pre-vent exports.8

Community claims on water do not arise solely in the context of interstate commerce. They are also found in state law. The area of origin protection that California and other states employ in a variety of forms already has been mentioned. California has a law that limits rights

2 California Water Code § 11460 (West 1992).3 E.g., Colo. Rev. Stat. Sec. 3745-118(b)(IV) (West 1990).4 42 U.S.C. § 1962d-20 (1988).5 Hudson Water Co. v. McCarter, 209 U.S. 349 (1908).6 Sporhase v. Nebraska, 458 U.S. 941 (1982).7 LAURENCE H. TRIBE, AMERICAN CONSTITUTIONAL LAW 409-10 (2D ED., 1988). 8 See, e.g., JEANETTE GREENFIELD, THE RETURN OF CULTURAL TREASURES (1989).

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to transfer if there are unreasonable impacts on the local economy or on natural resources.9 Some states have an even broader test of compatibility, with the public welfare as a condition of transfer, or requiring consideration of economic loss to the community, although the content of these so-called "public interest statutes" has been given very little interpretation.

As is well known, California has applied the public trust doctrine in the Mono Lake case to limit the removal of water from its natural setting.10 Of course, the traditional theory of ripar-ian law was that water must be kept for use on land riparian to its native stream and within its watershed. At least in theory, this is still the law in California.

In addition, there is a tradition, both in some Western states and also under the original federal reclamation program, to keep water appurtenant to the land on which it was first used—that is, to keep it within the community as a community resource.11 Appurtenance is a very strong tradition in other cultures, such as Hispanic water law, where community is valued far more than efficiency.12

Lack of Legal Doctrine 

Thus, to treat water purely as a commodity, and transfers as two-party transactions only, is to depart from a very deeply rooted tradition in the water field and from consistent intuitions about water as a community resource. But community right is such an unusual idea in our law that, despite its history and despite its strong intuitive power, we have little experience in giving it content. For example, we may say that in general an owner may not sell more water than his or her consumptive use; but we have no theory about whether even that should be salable. We have virtually no legal doctrine to describe the relation between an owner who wants to sell water and the community from which that water will be exported.

Nor is there any clear concept of a "community" entitled to protection against the effects of export transfers. There are all kinds of different communities whose claims could lead, de-pending on how the community is described, to very different sorts of limitations on water trans-fers.

If the state is the relevant community, then a review of transfers by a state agency might be seen as fulfilling the community claim. But if the community is the local economy, then the state may not - and to some extent almost certainly will not—fully reflect that community's inter-ests. Another relevant community may be the water institution, the water district, for example, which certainly has interests of its own. If the district is the relevant community, it may not fully overlap the local economy that may be affected by a sale of water. There also are the so-called "natural communities" or "in-stream value communities."

9 California Water Code § 386 (West 1992).10 National Audubon Society v. Superior Court, 658 P.2d 709 (1983).11 See, e.g., N.M. Stat. Ann. Sec. 72-5-23 (1990); Wyo. Stat. Sec. 41-3-104(A).12 ARTHUR MAAS & RAYMOND L. ANDERSON, AND THE DESERT SHALL REJOICE: CONFLICT, GROWTH AND JUSTICE IN ARID ENVIRONMENTS, 41 (1978).

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Because of strong desires to facilitate transfers, efforts have been primarily directed to-ward empowering individual sellers as against community claims in order to promote transfers. Almost all recent legislation dealing with transfers looks in this direction. This is understandable. If enough interests are involved and each has something like a veto power, transfers will be so weighted down that the whole enterprise is likely to collapse under its own bureaucratic weight and increased transactional costs.

Redistribution of Wealth 

My observations are based on two premises; (1) that the claim for a community state in water is legitimate and is reflected in a wide range of responses to water problems over a very long time; and (2) that legitimate community claims have been neglected in the effort to facilitate water transfers.

First, water in place is a type of wealth. That wealth accrues not only to the owner of a water right, but to many other people in the place where the water is located—in the form of em-ployment, direct and indirect; in lower prices for water because of its relative abundance; and in natural values, such as recreation and fisheries, that arise as a result of water's presence.

Second, when water is sold as a mere commodity, only the formal owner of a water right is compensated. For that individual, there is a transformation of wealth from one form to another—from water to cash. Indeed the seller is likely to be significantly enriched, particularly in agri-cultural-to-urban transfers, since water has usually been under-priced. Payments for water fre-quently exceed the profits that sellers could have obtained from using the water for irrigation.

Third, while such sales are, for the owner-sellers, transformational—wealth is trans-formed from water to cash - for everyone else who has been benefiting from the presence of that water, the sales are redistributional. That is, others in the community who have up to that point benefited from wealth in the form of water in place will be made worse off, since the water is gone and they receive nothing in return. Moreover, it is likely that the redistribution will be es-sentially adverse to (1) people who have salaried jobs that depend on the presence of the water and are likely to be the first to lose work if economic activity is reduced, and (2) poorer people in the communities, since they are often the least mobile residents; they are unlikely to move and find equivalent work and amenities elsewhere.

It may be true that aggregate losses resulting from agricultural-to-urban water transfers are relatively small because agricultural employment is a small percentage of total state employ-ment, and because the economic contribution of the low value crops that are the most likely to decline is small. Nonetheless, to those in the community who are the losers, the losses are likely to be very significant.

All this suggests to me the existence of a first order of conflict between user-sellers—that is owner of water rights who have been in a position to reap the benefits of a sale—and other in-terests, natural, economic and social, who have hitherto been enriched by the presence of water and will obtain no benefit from its sale. The relevant community is composed of those who would be made poorer by the sale of a particular amount of water.

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To avoid wealth redistribution in transfers, the following precepts would apply: first, transfers should not be redistributive to the disadvantage of those in the selling area, both in hu-man and natural terms. Second, the price of the water to those acquiring it should take into ac-count all the benefits the water has produced, not just those that have flowed to the holders of formal water rights.

Approaches to Mitigation 

There are several practical ways to promote such goals. One is to favor sales that mini-mize disadvantages to the community. The most obvious are those that free up water by applying water-saving techniques, so that the same amount of economic activity continues in the selling community.

Another device is the provision of community compensation through a transfer tax. Where sales generate a general decline in the wealth of the community, the concern ought to be for those who remain—those who are least able to leave, rather than for those who can shift and leave the community. A tax on water sales, depending on the nature of the sale and its redis-tributive impact, would be the easiest means to mitigate the redistributive tendency of export sales. A similar approach could be taken to mitigate natural losses - losses to waterfowl habitat for example.

It is true that much of the water likely to be sold does not come from the original place of origin, but rather from a place to which water has been imported. That fact should not affect the conclusion as long as a community has been established—whether it is a human settlement or a natural habitat, such as a wildlife refuge. Once such uses are established, the removal of water constitutes a disruption in that community, even if the community is only a few decades old, and thus also constitutes wealth redistribution.

The more one enlarges the interests that need to be accounted for, and the more complex or extensive the arrangements to evaluate transfers become, the more transfers will be discour-aged. This is a serious problem, but there are ways around it. The best way to deal with this issue is to adopt generally applicable formulae that are meant to approximate the losses to the commu-nity caused by various types and sizes of transfers. Formulae for taxes on transfers, compensa-tion to in-stream uses, and prioritization of favored and disfavored types of transfers can be em-ployed to assure mitigation without making transactional costs unduly burdensome. Large and pervasive impacts can be treated differently from small and ephemeral ones; and different stan-dards can be imposed for in-basin and out-of-basin transfers.

Reducing all these concerns to some kind of workable formulae can promote transfers by reducing transaction costs while taking account of the most important third-party effects: reduc-tions in existing wealth. Of course, a formulaic approach is a second-best solution, and will not produce the appropriate result in every individual case. But the alternative—extensive participa-tion and elaborate public interest hearings—while theoretically appropriate, threatens to make all but the largest water transfers uneconomic and untimely. Certainly some review process is neces-sary, but the goal should be to make it largely a fall-back device for especially hard cases. For

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the most part, some sort of formulaic approach will have to be adopted, or the whole system is likely to sink from its own weight.

  Most discussion of water transfers has been focused on what are seen as obstacles—legal, institutional and psychological. In my view, we need to encourage some transfers, but not by commodity theories that lead to reverse wealth redistribution. The solution to inadequate water transfers in California is not to ignore community interests in water, but to institutionalize them as part of the price of water, rather than letting all the benefits flow to the formal owners of water rights and to the buyers of water.

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