Here’s an in-depth look at current water transfers in the Colorado River Basin Ben Ryder Howe that’s running in The New York Times. Click through to read the whole article. Here’s an excerpt:
Investor interest in the river could redefine century-old rules for who controls one of the most valuable economic resources in the United States.
There is a myth about water in the Western United States, which is that there is not enough of it. But those who deal closely with water will tell you this is false. There is plenty. It is just in the wrong places.
Cibola, Ariz., is one of the wrong places. Home to about 300 people, depending on what time of year you’re counting, the town sits on the California border, in a stretch of the Sonoran Desert encircled by fanglike mountains and seemingly dead rocky terrain. Driving across the expanse, where the temperature often hovers near 115 degrees, I found myself comforted by the sight of an oncoming eighteen-wheeler carrying bales of hay, which at least implied the existence of something living where I was headed.
Thanks to the Colorado River, which meanders through town, Cibola is a verdant oasis that chatters at dusk with swooping birds. Along both banks, a few hundred acres produce lush alfalfa and cotton, amid one of the more arid and menacing environments in North America.
This scene is unlikely to last, though. A few years ago a firm called Greenstone, a subsidiary of a subsidiary of the financial-services conglomerate MassMutual, quietly bought the rights to most of Cibola’s water. Greenstone then moved to sell the water to one of the right places: Queen Creek, a fast-growing suburb of Phoenix 175 miles away, full of tract houses and backyard pools.
Transferring water from agricultural communities to cities, though often contentious, is not a new practice. Much of the West, including Los Angeles and Las Vegas, was made by moving water. What is new is for private investors — in this case an investment fund in Phoenix, with owners on the East Coast — to exert that power.
When I reached Holly Irwin, a county supervisor who lives in Cibola, by phone a couple of weeks after my visit, she was angry.
“They’re going to make big bucks off the water, and who’s going to suffer?” she said. “It’s the rural counties going up against big money.”
Grady Gammage Jr., a spokesman for Greenstone, said, “In my view there is enough water both to sustain a significant agricultural economy on the river and to support urban growth in central Arizona.”
In the West, few issues carry the political charge of water. Access to it can make or break both cities and rural communities. It can decide the fate of every part of the economy, from almond orchards to ski resorts to semiconductor factories. And with the worst drought in 1,500 years parching the region, water anxiety is at an all-time high.
In the last few years, a new force has emerged: From the Western Slope of the Rockies to Southern California, a proliferation of private investors like Greenstone have descended upon isolated communities, scouring the driest terrain in the United States to buy coveted water rights.
The most valuable of these rights were grandfathered in decades before the population explosion in desert cities like Phoenix and Las Vegas, and privilege water access to small, often family-owned farms in stressed communities. Rechanneling water from rural areas to thirsty growth spots like Queen Creek has long been handled by municipal water managers and utilities, but investors adept at sniffing out undervalued assets sense an opportunity.
As investor interest mounts, leaders of Southwestern states are gathering this month to decide the future of the Colorado River. The negotiations have the potential to redefine rules that for the last century have governed one of the most valuable economic resources in the United States…
Increasingly, the river is threatened by drought, with flows down 20 percent over the last 20 years. As a result, the talks starting in January will be a vehicle for urgent attempts to manage the water, including replenishing downstream reservoirs. By design, the five-year process is ponderous and built to be consensus-driven, with an eye toward shared sacrifice.
Most of the water in the 1,450-mile-long river comes from Colorado, and as that state’s top water official from 2013 to 2017, James Eklund directed the creation of a comprehensive long-term plan to address climate change, the first by a state in the West. He believes that the last best hope against the drought is a market-based solution, one that allows private investors seeking a profit a significant hand in redrawing the map of water distribution in the West.
“I have seen time and again the wisdom of using incentives that attract private sector investment and innovation,” Mr. Eklund said. “Dealing with the threat of climate change to our water requires all sectors, public and private, working together.”
To proponents of open markets, water is underpriced and consequently overused. In theory, a market-based approach discourages wasteful low-value water uses, especially in agriculture, which consumes more than 70 percent of the water in the Southwest, and creates incentives for private enterprise to become involved. Investors and the environment may benefit, but water will almost certainly be more expensive…
The interested players range from financial firms to university endowments to investor groups, including at least two in Colorado led by former governors. T. Boone Pickens, the Texas oilman who died in 2019, was an early evangelist of water buys. Another supporter is Michael Burry, the hedge fund manager portrayed by Christian Bale in “The Big Short,” who made more than $800 million shorting the subprime mortgage market in the mid-2000s.
Matthew Diserio, the president and co-founder of the hedge fund Water Asset Management, has called the U.S. water business “the biggest emerging market on earth” and “a trillion-dollar market opportunity.”
WAM, based in New York and San Francisco, invests broadly in water-related ventures, and one of its core businesses is collecting water rights in arid states like Arizona and Colorado. Since leaving government, Mr. Eklund has become WAM’s legal counsel and public face.
“They’re making water a commodity,” said Regina Cobb, the Arizona assemblywoman who represents Cibola. “That’s not what water is meant to be.”
Private investors would like to bring in or amplify existing elements of Wall Street for the water industry, such as futures markets and trading that occurs in milliseconds. Most would like to see the price of water, long set in quiet by utilities and governments, rise precipitously.
Traders could exploit volatility, whether due to drought, failing infrastructure or government restrictions. Water markets have been called a “paradise for arbitrage,” an approach in which professionals use trading speed and access to information for profit. The situation has been compared to the energy markets of the late 1990s, in which firms like Enron made money from shortages (some of which, it turned out, traders engineered themselves).
Many see the compact as a safeguard isolating the river from the market.
The negotiating states will be focused on restoring the flow of the Colorado River, which has been so diminished by use that from 1998 to 2014 it did not even reach its natural terminus in the Gulf of California. But they will also be looking at rebalancing water levels in Lake Powell and Lake Mead, two federally owned reservoirs that hold water to use in case of extreme drought…
“The reality is we have an overallocated river,” said Jeffrey Kightlinger, general manager of the Metropolitan Water District of Southern California, the largest water supplier in the country. “You’ve got two drivers exacerbating the problem. One, moving very rapidly, is climate change. And you’re still seeing continued growth. So you’re going to see a very important negotiation.”
The emergence of open markets could outpace the negotiations. If states, cities, big farms and utilities were able to buy water freely, especially across state lines, the allocations of the compact could be obviated and the governmental power to manage the fate of the river eroded.
“The Western model is a sort of comprehensive, consensus-based public discussion, and it’s worked very well,” said Bruce Babbitt, a former governor of Arizona and secretary of the interior during the Clinton administration. “My fear is that the speculators are going to break it. They’re going to try to break up the system.”
‘A Pool Within the Pool’
In the last few years, Colorado has been debating a water policy approach that has further piqued the interest of private investors: paying farmers not to use the river at all.
Demand management, as the policy is known, is an attempt to solve the so-called wrong places problem and free up water from agriculture and reroute it to urban uses and conservation.
“The idea is, if you pay the farmers enough, they’ll go away,” said Brad Udall, a water and climate researcher at Colorado State University whose family have been lawmakers in the region for 60 years…
It’s not necessarily a new concept — in parts of Southern California, farmers have been paid for more than a decade to fallow land. Nor is it official policy yet. But Mr. Eklund would like it to be.
As Colorado’s water commissioner, he piloted a demand-management program and was known for crisscrossing Colorado’s back roads to convince skeptical farmers of the benefits of the approach. Later, as the state’s negotiator on the Colorado River, he helped make it an official goal of the compact states.
Mr. Eklund secured an “account” in Lake Powell. In theory, water saved by demand management could flow to the account, often called “a pool within the pool,” and be drawn upon if the current drought continues to realize worst-case scenarios.
However, the same water could also flow where water often flows: toward the highest bidder. WAM and other investors could theoretically create their own reservoir “accounts” and let the water sit until its value was maximized.
Andy Mueller, general manager of the Colorado River District, is skeptical. “They’d have to have a storage account of their own in a federal reservoir, and from my perspective that’s a nonstarter,” Mr. Mueller said. “Right now, we have legal and political mechanisms in place to prevent that from happening.”
He added, though, that the pressure of the drought could shift the terrain. “Is that something that can change? Yeah. And crisis drives change.”
The proponents of water markets say they are not in it just for the money. They believe that the West has an outdated and overregulated system governing access to water, which has encouraged the cultivation of crops in the desert.
“Agriculture all over the West required the development of irrigation infrastructure, such as dams and ditches,” Mr. Libecap said. “Often, the best land in the West is not along rivers, so you needed to move water.”
The system worked as long as there was enough to go around, said Mr. Libecap, who recently advised the State of Colorado on its growing water problems…
Mr. Mueller believes that the demand management pilot program triggered a land rush in rural western Colorado, with investors snapping up farms and flipping their water rights.
WAM has become one of the largest landholders in the Grand Valley, a high-mountain desert on the Western Slope of the Rockies, 250 miles west of Denver. But Mr. Eklund denies that the firm is flipping water rights…
Of course, not everyone has been displeased by the arrival of hedge funds reportedly paying millions in cash for old farms. Marc Catlin, a third-generation farmer who represents western Colorado in the General Assembly, said, “A farmer’s property is their 401(k).”
The Enron Fear
Where water investors have historically gotten involved in markets is through agriculture, with mixed results.
In 2015, California got just 5 percent of its average annual snowpack, the lowest in 500 years. Utilities, which in previous dry years bought water from farmers, found they could no longer afford it. The price had risen tenfold in a matter of months.
It wasn’t just the drought: California’s crops had shifted from low-value seasonal vegetables like lettuce and bell peppers to permanent non-staples, like almonds, that were so valuable that it was no longer economical for farmers to sell water to cities, even as prices spiked.
Mr. Kightlinger, of the Metropolitan Water District of Southern California, traces the recent private-investor interest in water to the 2015 crisis. “When you have pistachio and almond farmers willing to pay 10 times the average price, people sit up and say, ‘How can I own some of this?’” he said…
California’s agricultural water markets — a mosaic of online exchanges connecting farmers and water brokers — are considered a potential model for the West: fast, flexible and responsive to extreme weather. In September, Nasdaq and CME Group, the world’s largest derivatives marketplace, announced plans to open a futures market for California water, joining it with commodities like Brent crude oil and soybeans.
The market in the Colorado-Big Thompson Project is also nimble and responsive. An engineering marvel from the heyday of federal water construction, the project is a vast network or reservoirs filled by a tunnel that pipes water from the Colorado River 13 miles under the Continental Divide. The high-tech market there services Denver and other cities, fueling development in some of the fastest-growing housing markets in the country. In the last 10 years, the price of water there has gone up more than eightfold.
In Australia, however, water markets have had unintended consequences. Valued at $2 billion after 14 years in existence, Australia’s markets primarily facilitate trades in agricultural areas. When started, they were hailed as a fast, flexible way of redistributing water on the driest inhabited continent, with little regulation attached.
“We went harder and faster than anyone and let the market rip,” said Stuart Kells, a professor at La Trobe Business School in Melbourne. “We let anyone come play.”
This led to domination by professional investors with no ownership of farmland, Mr. Kells said. As a result, “water has turned into a financialized product like what happened to energy in the late 1990s,” he said.
Last year, Australia’s devastating wildfires and drought spiked water prices. Subsequently, the government’s antitrust department started an inquiry. Though it stopped short of calling for a shutdown, an interim report last summer recommended comprehensive changes in water markets, citing inadequate regulation and market exploitation by professional traders.
“Here water is very scarce, and in periods of shortage traders essentially cheer on the drought,” Mr. Kells said. “The markets have become a paradise for arbitrage.” He compared the dynamic to “California in the 1990s, where fires and outages were beneficial for traders because of price spikes and you saw Enron traders cheering on fires.”
Australia has also seen the advent of a market in complex financial products, such as derivatives, based on water.
“What has happened in Australia should be a cautionary tale for America,” Mr. Kells said. “The way the markets were set up left them open to being gamed.”