Water Markets

Increasing Federal Revenues Through Water Transfers Gao ID: RCED-94-164 September 21, 1994

Most water in the arid western United States delivered through federal projects is used for agriculture, but the demand for water for urban, recreational, and environmental uses is growing. The federal government plays a role in water management in the arid West mainly through water resource projects. Water transfer, in which rights to use water are bought and sold, is seen by many resource economists as a way to reallocate scarce water to new users by allowing those who place the highest economic value on it to purchase it. Those who want more water--such as municipalities--often are willing to pay considerably higher prices for it than the current users, and irrigators who receive subsidized water from federal projects may want to transfer this water to a municipality at a profit. At the same time, these transactions may allow the Bureau of Reclamation to share in the profits. This report examines (1) whether water transfers will boost revenues, (2) how the Bureau could increase its revenues from transferred water, and (3) what issues the Bureau should consider in setting prices for transferred water.

GAO found that: (1) many irrigators pay only a portion of their share of construction costs and are exempt from interest charges; (2) water transfers to municipal and industrial users could increase revenues, since these users pay rates based on their full share of construction costs and interest; (3) water transfers to other irrigators, fish and wildlife habitats, and recreation areas would not increase revenues because these users do not pay their full share of construction costs; (4) the Bureau does not specify how water transfer charges will be determined, but there are a number of ways the Bureau could increase revenues under existing laws; (5) changes in reclamation laws would allow the Bureau to charge users current Treasury rates where authorizing legislation specifies a lower interest rate; (6) the Bureau needs to balance increasing federal revenues with retaining incentives for water transfers, since high charges will discourage some transfers and preclude economic efficiency; and (7) charges for water transfers need to be set on a case-by-case basis because of the different factors affecting transfer incentives.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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