Response to “Comment on ‘Economic and environmental tradeoffs from alternative water allocation policies in the South Saskatchewan River Basin’” by Richard J. Phillips and D. Rodney Bennett

Introduction

In 2009, the Government of Alberta undertook a review of the water allocation system to determine whether the current system for allocating water rights would serve Albertans well under the emerging pressures of population growth, industrial development and climate change. Stakeholder and expert reports disagreed on the risks and fairness associated with the prior allocation system and water transfers in the face of future water demand and supply challenges. The purpose of the paper “Economic and environmental tradeoffs from alternative water allocation policies in the South Saskatchewan River Basin” (Weber and Cutlac 2014) was to examine water allocation under an inflexible hypothetical scenario in order to compare the performance of the current allocation system to an alternative share system, and determine the need for reform. The full license build-out assessed in the study represents a departure from reality. However, the scenario was not intended to reflect a current or even realistic future but rather a fully allocated future in order to test the robustness of prior allocation under extreme conditions, as stated on p. 412 (Weber and Cutlac 2014).

The model includes a number of simplifying assumptions, and the comment by Phillips and Bennett identifies a number of important caveats that should be considered. In particular, the caveats suggest a lower disparity in economic efficiency and willingness to pay for water under the initial allocation for the prior versus share system than those illustrated in the modeled results. In spite of the caveats, however, the underlying dynamics and conclusions of the model still hold; without trading, prior allocation will be less efficient than share allocation because currently most water in the basin is allocated to lower value agricultural uses, and in a shortage more licensees will receive water under the share allocation. Water trading eliminates the inefficiencies associated with initial allocation (both initial allocations are inefficient without trading) and therefore there is no need from either an environmental or an economic perspective to change the allocation system. Specific concerns are addressed below, and the conclusions highlight areas for further research.

Interpretation of priority

Phillips and Bennett correctly point out that both diversion rates [Section 31(1) of the Water Act], and total annual diversion [Section 30(2), of the Water Act; Alberta 1996] are equally important constraints on withdrawals, and that diversion rates are often the binding constraint on water use, not the annual licensed allocation. There are many administrative and structural mechanisms for ensuring that water is not all allocated to senior licensees. For example, water is allocated to junior licenses in Calgary before senior downstream irrigation demands are filled, because municipal licenses have high return flow. In addition, during multiple years of drought, such as in 2001, government storage is used to mitigate supply constraints. In short, there are numerous ways in which government and licensees manage water allocation in order to mitigate license risk in low-supply years; it would be difficult to capture the complexities of actual water allocation in a simulation model. Nonetheless, priority has been called in the past and the threat of priority call has generated solutions such as the 2001 water-sharing agreement (Alberta Environment 2002).

Time step

Aquarius runs on a monthly time step rather than a daily time step; however, monthly resolution is reasonable for the question addressed in the paper. The monthly irrigation demands used in the study were based on 2001 monthly demands for the Taber Irrigation District provided by the District Manager of Taber Irrigation District (Cutlac and Horbulyk 2011). The use of demands during the drought year is important since water demand is a function of weather.

Water conservation objectives

Phillips and Bennett point out that water conservation objectives (WCOs) are not 45% of long-term natural flow; they are 45% of the natural rate of flow each day. This highlights an error in the write-up of the model. In fact, WCOs were actually modeled as a percentage of monthly natural flow based on the low-flow scenario modeled, and not long-term natural flow. Phillips and Bennett misinterpret the role of WCOs in the model. WCOs were not included as a license constraint. Instead, WCO demands were inserted at the top and bottom of each sub-basin in order to determine how often they were violated under the alternative scenarios. Monthly instream flow needs for fish (Alberta Environment 1984) were also included as an alternative environmental demand.

Return flows

Phillips and Bennett argue that in practice, junior Calgary licenses receive water before senior downstream irrigation licenses because of high municipal return flows. This simplification in the model almost certainly exaggerates the inefficiencies that were found under the prior allocation system. One important factor that needs to be considered, however, is the substantial variability in municipal return flows between communities and seasonally, with more water consumed during summer months due to irrigation of golf courses and lawns as well as increased evaporative losses (AMEC 2009). Furthermore, as more commercial and industrial uses locate within municipalities there may be longer term changes in municipal return flows. Finally, one of the vulnerabilities under the current Water Act is the absence of any requirement to return a certain percentage of flows to the basin – in theory, any licensee could consume the entire licensed allocation subject to instantaneous diversion rates.

Conclusions

Phillips and Bennett suggest that the study is critical of prior allocation. In fact, the conclusions support maintaining the status quo. While the initial allocation is less efficient under the prior allocation system than under the share system, this is simply because no water license gets cut off under the latter, and therefore there is less spread in the willingness to pay for licenses under the share allocation. Inefficiencies from prior allocation are eliminated with water transfers and assignments. One of the key concerns related to water transfers, that more water would be consumed, leading to increased instream flow constraints and impacts on WCOs, is shown to be unwarranted as long as municipal return flows are higher than irrigation return flows. There is a fairness issue in that older licenses, which are primarily for irrigation, would be compensated while junior licenses and new entrants have to pay to obtain water. However, additional criteria are required to evaluate the fairness of either system, and there is no reason to assume a priori that the share system is more fair. On the other hand, because irrigation districts hold large blocks of senior licenses, it is important to understand whether market power and decision-making processes within irrigation districts could result in inefficient markets.

Persistent differences between high municipal water values and lower agricultural water values have been documented throughout North America, with much speculation as to why water markets have been unable to fully close the gap (Brown 2006). In general, the water market equalizes the willingness to pay for water. There have been several permanent license trades in the South Saskatchewan River Basin, which is evidence that there are differences in the value of water under the initial allocation. The comment by Phillips and Bennett raises a number of important considerations for understanding potential responses to future drought, and highlights where future research effort should be placed – in particular, getting a better understanding of daily use and instruments to spatially target water flows, as well as the role of administrative and structural options such as banks to mitigate risk. The paper suggests that changing the prior allocation and transfer system is unwarranted.