WATER ACQUISITION FOR MAINTAINING MINIMUM FLOWS ON THE LEMHI RIVER

Joel Hamilton
joelh@uidaho.edu
www.uidaho.edu/~joelh
Professor of Agricultural Economics
University of Idaho

Background

The 2001 Idaho Legislature (HB 385) authorized the Idaho Water Resource Board to apply for an instream flow right of 35 cfs in the Lemhi River for the benefit of anadromous fish. The legislature further authorized the use of the Board’s water supply bank to obtain water from willing sellers to satisfy this right. Under the emergency provisions in the legislation, transactions are being pursued that would provided these minimum flows in the coming irrigation season. This note is in response to a request from the office of the Idaho Attorney General for help in estimating the value that might attach to such water supply bank transactions.

I have been provided with information that one transaction under consideration would involve 9 cfs of water appurtenant to 250 acres of irrigated hay ground and 100 acres of irrigated pasture. The transaction would be a water lease for 1 year only, with the present owner retaining the permanent water right. I will use that proposed transaction as an example in the discussion that follows.

The possible price at which such a one-year water transaction might occur can be thought of in terms of upper and lower bounds. The lower bound is the value of the water to its existing owner - presumably its value if used in that existing irrigated farming operation. The upper bound is the value of the water to the intended purchaser - presumably some federal government agency, with the benefits being in the form of fish-friendly instream flows on the Lemhi, flows that contribute toward BiOp-specified flows on the Lower Snake, and flows that can contribute to hydropower generation at the lower Snake and Columbia River dams. A willing-seller transaction would presumably be priced somewhere between these lower and upper bounds.

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Value of Water for Irrigation

In its report “Economics of Water Acquisition Projects” completed by the Independent Economic Analysis Board for the Northwest Power Planning Council, the IEAB outlined four approaches to estimating water values (IEAB, 2001, page 8):

  1. Evidence from water market transactions
  2. Surrogate market values
  3. Estimates based on economic modeling
  4. Estimates based on engineering cost studies.

The first and second suggested approaches are most applicable in the Lemhi River case.

We are not aware at this time of any recent water transactions that have occurred in the neighborhood of the Lemhi River. However, the Oregon and Washington Water Trusts have for the last several years brokered a few water transactions under circumstances possibly similar to the Lemhi.

“The recent draft report by Jaeger (2000) documented 10 water rights purchased in Oregon for an average price of $9.16 per acre-foot per year. This compares to 23 single year-water acquisitions in Oregon for $23.19 per acre-foot. Jaeger lists seven recent acquisitions in Washington (six water right purchases, one single-year lease) averaging $57.51 per acre-foot per year.” (IEAB, 2001, page 8)

These are either annual values or annual equivalent values in the case of the purchases. If one assumes a consumptive use of two acre-feet per acre, then the numbers double - to $18.32 per acre for Oregon purchases, $46.38 per acre for Oregon annual rentals, and $115.02 per acre for the Washington transactions.

The surrogate market value approach suggested by the IEAB is focused on the land to which the water right is appurtenant. The rates charges in the land rental market can be thought of as the returns to the land itself, plus the returns to the appurtenant water. In the Lemhi basin the land itself without irrigation is useful primarily as low intensity and low value grazing. Thus the rental price of land can be thought of as consisting mostly of the value of the appurtenant water.

(Do we have any estimates of the rental rate or sale price for comparable land without water?)

One indicator of the land rental price can be found in the crop budgets maintained by the UI Extension Service (Smathers, Loucks, and Gray, 1999). The UI budget for alfalfa hay for Butte, Lemhi and Custer counties lists a typical land rental price of $45.00 per acre. This $45.00 per acre, which is apparently a typical rate for farmers in the Lemhi region to lease land among themselves, is an obvious first estimate of the value of the appurtenant water if leased to some federal agency.

One might argue that in negotiating a lease in April for the coming irrigation season that a participating farmer also stands to lose the returns to his management and risk-bearing skills, for which he might not be able to find alternative employment in the short-term. The UI budget also suggests typical values for these values - $16.50 listed as a “management fee” but meaning the value of the farmer’s management activities per acre, and $30.71 listed as “returns to risk” which can also be thought of as the farmer’s per acre returns to his entrepreneurship efforts. Taken together, the returns to water, management, and risk which the farmer might lose if he leases his water could total $45.00 + $16.50 + $30.71 = $92.21 per acre

This is a corollary to what the IEAB called Proposition 5 in its 1999 River Economics report to the NW Power Council:

“Proposition 5. When a regional economy is disturbed by a policy change or new project, the economy goes through an adjustment process involving changes through space and time. Failure to account for peoples’ ability to adjust to a disturbance, or for the changing opportunity costs as resources move between uses and regions, can distort estimates of benefits or costs of a project.” (IEAB, 1999)

In this case it is the farmer-seller who is being called on to do the adjusting. If a farmer has fully anticipated leasing his water, leaving time to adjust and arrange for alternative employment of his other resources such as labor, management skills, risk-bearing and capital, that would be rendered unemployed by the water transaction, then the $45.00 lease rate might be a proper reflection of how much the water is worth to him. However, if the opportunity to lease the water appears suddenly, with little time for the farmer to adjust and arrange for alternative employment of these other production factors, then the $92.21 figure is probably a better estimate of the water value. Given that it is only a one-year lease that is being negotiated, and that it is a lease for this irrigation season being negotiated in April, the adjustment opportunities are limited and the higher figure may apply.

For future reference, note that longer lead times, multi-year leases, and outright water right purchases should occur at values closer to the land lease rate. If the Lemhi is in need of long-term assured minimum flows, then purchased water rights, or dry year option leases should be a more economical long-term source of water.

The UI alfalfa budget cited above is the most recent alfalfa budget available for the Lemhi area, but it is dated 1999. This raises the question whether anything has happened since 1999 that would significantly change the cost items in the budget. Without question, many production cost items, especially fuels, fertilizer, electricity and farm chemicals have increased in price. These changes have made life more difficult for tenants, putting downward pressure on land rents, and on the returns to management, and risk. In a recent conversation with Robert Morrison, land appraiser with Farm Credit Systems in SE Idaho, Morrison affirmed that land rental rates have recently been weak, aggravated by low crop prices, rising production costs, and a number of recent tenant bankruptcies (Morrison, 2001). On the other hand, the livestock, dairy and hay sectors have been relatively stronger than the other crop sectors, a factor that might be favorable to water values in the Lemhi basin, where livestock and hay dominate agriculture.

(Do we have any other evidence on water rentals, land rentals, or land sales in the Lemhi basin?)

(The bottom line estimate of value of water to irrigated farming looks like a $45.00 to $92.00 range.)

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Value of Water for Downstream Hydropower Generation and Fish Flows

In water markets where buyer and seller contemplate radically different uses of the water. The value to the farmer-seller is only a lower bound, and the value to the federal agency-buyer is an upper bound. The market solution is indeterminate between these bounds, depending on the market power of buyer and seller, and on public policy.

The value of the water to the buyer, probably the Bureau of Reclamation in this case, has at least three aspects. First, the value of the water in meeting the public policy goal of providing minimum flows in a critical segment of the Lemhi River consistent with anadromous fish passage and reproduction during a critical portion of the irrigation season. Second, the value of providing flow augmentation water downstream in the lower Snake consistent with the provisions of the BiOp and the 427k flow augmentation to be provided from Idaho sources. Third, any flows resulting from water transactions on the Lemhi will be usable at the lower Snake dams for hydropower generation.

The first two components of buyer value are difficult to attach values to since the public policy objectives are inherently non-monetary. The best evidence of value probably comes from information on what the Bureau and BPA have been willing to pay to acquire augmentation flows in recent years.

The Bureau was delegated the task of finding and paying for water to fill Idaho’s 427k commitment to lower Snake flow augmentation. The cost of this water in recent years should be public record, which I have not yet had time to pursue. In the early stages of the Corps of Engineers EIS process, one option under study was the provision of an additional million acre-feet of flow augmentation water from the upper Snake. The Bureau’s study of this option should also provide some estimates of what it would cost to provide this water - which I have also not tracked down. I seem to remember that the costs per acre-foot to meet the last increments of the 427k goal, and to meet the additional 1maf goal were substantial. To the extent that Lemhi water contributes to meeting these same lower Snake flow augmentation policy goals, its value per acre-foot for that purpose should be similar.

(I will try to track down information of Bureau payments for the 427k water, and projected costs of the 1maf water.)

Under the 2001 BiOp the federal agencies, especially the BPA Fish and Wildlife Program and the Bureau are delegated the task of promoting habitat improvements, especially in the form of flow augmentation in higher tributary streams where seasonal dewatering may critically affect anadromous fish passage and reproduction. Among the projects the Bureau and BPA have supported are projects on the Umatilla, the Teanaway, and the Yakima, and a project currently being considered on Salmon Creek in the Okanogan Basin. The federal agencies have demonstrated a willingness to pay substantial prices to assure fish-friendly flows during the critical irrigation diversion season in a range of upper tributary streams with salmon rearing potential quite similar to the Lemhi River.

(I might be able to find some costs on these.)

The federal agencies in recent years have demonstrated their willingness to pay substantial costs to meet the public policy goals of flow augmentation on the lower Snake, and minimum flow assurance on headwater streams. The proposed Lemhi project contributes to both of these policy goals, its value to the federal agencies should be commensurate.

In the present economic climate of runaway electricity prices, the Lemhi project should also have hydropower benefits this coming summer. There are eight major hydropower dams downstream from the Lemhi - the four federal dams on the lower Snake, and the four federal dams on the lower Columbia. These eight dams have a total developed head of 710 feet (Table 1). A rule-of-thumb states that an acre-foot of water dropped through a foot of head can generate 0.87 kwh of electricity. Thus each acre-foot of Lemhi River water sluiced through the eight dams could generate 618 kwh of power for BPA. (The 0.87 factor assumes that the water is usable at all the dams and that none is spilled ­ which seems a reasonable assumption given the low flow predictions for this coming summer and agencies proposed no-spill-for-fish regime.)

A calculation of the amount of Lemhi River water that would reach the hydropower dams should be based on the consumptive irrigation requirements of the crops that would otherwise have been grown - in this case alfalfa hay and pasture. The consumptive irrigation requirement (CIR) is the amount of water actually consumed for crop growth, transpiration, and evaporation from the soil surface, less the amount contributed by natural precipitation. CIR is also equal to the amount of water diverted to the crop, less the amount of surface return flow and groundwater recharge that should eventually reappear as downstream flows.

The Idaho Attorney General’s Office provided me with CIR estimates of 2.05 acre-feet per acre of alfalfa and 1.8 acre-feet per acre of pasture (Table 2). As a check, I have compared these to figures prepared a number of years ago by Dr. Rick Allen, now a UI Civil engineering professor at the Kimberly UI research station. For irrigation located near Salmon, Idaho, Dr Allen’s CIR figures are 1.89 acre-feet per acre of alfalfa, and 1.96 acre-feet per acre of pasture - reassuringly close to the numbers from the AG’s Office (Table 3). Staying with the AG’s figures, idling the 250 acres of alfalfa and the 100 acres of pasture would release 693 acre-feet of downstream water net of return flow effects. At 618 kwh/acre-foot, this 693 acre-feet of water could generate 428,000 kwh of electricity at the eight downstream dams.

(Question - the analysis above is based on the assumption that water from Lemhi transactions can be delivered past any thirsty junior appropriators downstream on the Salmon River - is this true? If not, the downstream benefits would be reduced.)

The remaining question is how much this downstream hydropower generation would be worth at the times when the water would be delivered this coming summer. The current electricity market is, of course, extremely volatile. Idaho power has recently agreed to pay $0.15 per kwh to buy back irrigation pumping power from southern Idaho farmers this coming season. Idaho Power is offering to pay $60.00 per acre-foot for rental pool water, which amounts to less than $0.12 per khw for the power that water could generate in the Hells Canyon complex only.

At the higher end, Idaho Power has agreed to buy back power from Astaris (FMC) at Pocatello over the coming two years. That agreement was based on estimates of future power market prices that range well above $0.30 for next July, August and September (Table 4). The agreement will pay Astaris 86 percent of the estimated future prices. The estimated electricity market prices used in the Astaris case were apparently based on the electricity futures market contract prices in mid-March. The futures market prices for electricity to be delivered this coming summer has climbed further as evidence of the coming tight water supplies keeps coming in. Table 4 also shows the New York Mercantile Exchange futures prices as of April 6, 2001 for electricity delivered to the California-Oregon border. These can be taken as a consensus of market investors that electricity prices will exceed $0.50 next August, and exceed $0.40 in July and September.

In a market as volatile as the electricity market has been, forecasts of future prices must be taken as highly uncertain. However, even at a rate of $0.15 per kwh, which now seems like a very conservative price forecast, the value of power that the water from the 350 acres could generate this summer would be worth $64,000 (Table 5).

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Summary

The value of water for an irrigator raising alfalfa hay and pasture in the Lemhi Basin is probably in the $45.00 to $92.00 per acre range. For a one-year lease being negotiated at this late date, the higher figure might be defensible.

The value of water to the federal purchaser would include its value in meeting public policy goals of minimum stream flows for salmon in Columbia Basin tributary streams, plus its value in meeting lower Snake flow augmentation goals. In addition, the water would have downstream hydropower benefits to the BPA system, which could easily reach $183.00 per acre or $64,000 for the 350 acre parcel if the electricity price this summer is a conservative $0.15 per kwh, and perhaps much more if power prices prove to be as high as now predicted by the electricity futures market.

In such a case the outcome of a willing-seller market is indeterminate, and will depend on bargaining power and public policy. What one can say is that the result should be somewhere between the $45.00 to $92.00 per acre lower bound and the $183.00 per acre or higher upper bound.

If water is needed for Lemhi minimum flows in most years, then a water purchase or dry year option lease should be a more economical water source than an annual water lease. The downstream hydropower benefits that contribute so much to buyer value this year, will probably contribute much less next year if electricity prices return to a more normal range in future years as suggested in Table 4.

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References:

Idaho Legislature, House Bill 358, 2001, on the web at http://www3.state.id.us/oasis/H0358.html

Independent Economic Analysis Board, “River Economics: Evaluating Trade-offs in Columbia River Basin Fish and Wildlife Programs and Policies”, Feb 1999, on the web at http://www.uidaho.edu/~joelh/IEAB/NewRiver%20Econ.htm

Independent Economic Analysis Board, “Economics of Water Acquisition Projects”, Feb 2001, on the web at http://www.uidaho.edu/~joelh/IEAB/WaterAcquisition/WaterAquisFrame.htm

Smathers, R.L., R.R. Loucks and C.W. Gray, Alfalfa Hay Production: Butte, Custer and Lemhi Counties, 1999 Southcentral Idaho Crop Costs and Returns Estimate, December 1999, on web at http://www.ag.uidaho.edu/aers/publications/Crops_CARE/dist399/ebb6ah.pdf

Morrison R., personal communication, April 5, 2001.

New York Mercantile Exchange, California-Oregon Border Electricity Price Futures Quotes, April 5, 2001, current prices on the web at http://quotes.ino.com/exchanges/?r=NYMEX_WC

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Quick Find:

Background

Value of Water for Irrigation

Value of Water for Downstream Hydropower Generation and Fish Flows

Summary

References