Water Right Prices in the Rio Grande: Analysis and Policy Implications

1. For an earlier and more lengthy and detailed version of this study, see New Mexico Water Resources Research Institute (2010).

Abstract

Climate change, water supply limits, growing environmental values of water and worldwide population growth continue to raise the scarcity of water. These challenges have intensified the transfer of water from farms to cities. Water right transfers are an important international institution to stretch water supplies. In North America's Rio Grande Basin water right transfers are an especially important institution for meeting the growth in urban demands. Despite the importance of water right transfers as a social institution, sellers face uncertainty on the asking price, while buyers face similar uncertainty on the offer price. Weak information on water right prices stymies water transfers while limiting the future resilience of water transfers to address climate change and the need to cope with change in water supplies and demands. This paper describes the development of a database on water right prices using observed transactions from 1980 to 2007. An empirical model was developed using the data to identify important factors influencing those prices. Five water right price predictors were found to be significant: total regional urban water use, priority date of the water right, quantity of water rights offered for sale, regional reservoir storage volume, and regional farm income. Depending on the future status of food scarcity and urban water conservation programmes, water right prices in the basin could grow from zero to 27% over 2010–2020.

Acknowledgements

Support by the New Mexico State University Agricultural Experiment Station and the New Mexico Water Resources Research Institute is gratefully acknowledged.

Notes

1. For an earlier and more lengthy and detailed version of this study, see New Mexico Water Resources Research Institute (2010).

2. Whenever there is a real possibility that temporary water shortages will be administered through the use of a priority system (priority administration), a high economic-valued urban use of water risks having its supplies being cut off as a consequence of their being trapped holding water rights of a junior status. This occurred in Roswell, New Mexico, in 2001 when the state faced the threat of lawsuits by Texas for under-deliveries under the Pecos River Compact. In October 2001 the New Mexico State Engineer stated that his office would implement a priority administration plan for dealing with shortages in the Pecos. He stated that ‘this year, if there is an under-delivery of water to Texas which results in New Mexico being in a net debit to Texas and, therefore, in violation of the United States Supreme Court Decree, it is my intention to immediately begin administration in this manner. This I will do without hesitation. New Mexico not meeting the Supreme Court Decree and Injunction requirements is simply not an acceptable option’ (Turney, 2001).

3. The model explaining the price of a water right for any given tth year was specified as:where Y _t is water rights price, a dependent variable, in US$/acre-foot; β₀ is the intercept; β _j is the parameter for the jth explanatory variable; X _jt is the tth of 39 years of observations on jth of five explanatory variables shown in Table 1; and e _t is an error term for tth year observation, i.e. the deviation of the actual and predicted value of the tth observation on water rights price.

4. According to the results in Table 5, the best predictor equation is:

Price = 23,708+95.80 * total urban water consumption – 12.83 * priority year of water right +11.42 * regional farm income – 1.21 * quantity offered for sale – 0.22 * regional reservoir storage volume.

5. For the city's webpage, see http://www.las-cruces.org/utilities/.

6. Ward and Pulido-Velazquez (2008) describe some challenges faced by efforts to promote water conservation in irrigated agriculture.