Property rights, prior appropriation & public trust

In the course of writing this post, Michael Hanemann and I debated the nature and importance of property rights. Michael said:

"Priority in appropriative water rights is rhetoric, not a functioning legal rule; it is a convenient myth that makes small children and economists happy."

He sent along a few documents to back up his claim.

The first is his March 2009 testimony on water rights laws [doc] before the California Senate, in which he says:

I am concerned that, in the event of sharp reductions in stream flow and/or substantial increases in variability, there will be a growing political opposition to prior appropriation with seniority based on a historical hydrology that no longer exists in California.*

In that case, another possibility is some major change in surface water rights towards a more equal sharing of water, entailing the ultimate phasing out of existing appropriative rights with some substantial grace period, and with some appropriate compensation.

This is the direction in which Australia has moved over the past 25 years, in the face of a serious decline in environmental quality in the Murray-Darling River system and severe drought over the past decade.

Australia’s recent experience has been that water markets per se are not an adequate response to water scarcity. Instead, it turned out to be necessary to first reform water rights: They have in fact gone through three waves of water rights reform over this period, turning to larger changes as lesser revisions were found to have failed.

In essence they have made three key changes:

1. changing from a right to extract an absolute amount of stream flow to a right to a proportional share of inflow
2. raising the share allocated for environmental purposes
3. unbundling rights and creating separate rights to inflow, to storage & to water quality

In support of his claim that a tightening supply should lead to "more equal sharing," Michael sent along David B. Schorr's very interesting 2008 law review article on the origins of prior appropriation. In that article, Schorr clarifies that prior appropriation arose in Colorado mining areas as a means of enhancing equity, by allowing non-riparians to use water that they would not have access to under traditional (eastern US) riparian law. Here's a useful summary:

Put simply, the issue was this: Would the lands of the public domain be disposed of to absentee speculators and corporations controlled by eastern and European investors, or to the archetypal “actual settler,” a mainstay of agrarian political rhetoric and law? Colorado law came down largely in favor of the latter, as well as his relatives, the “actual miner,” and later, the “actual user” of water.

[BUT!]

...the equal-sharing rule was subject to the caveat that in case of insufficient water for all, priority in time would give some a better right than others. Such a rule was section 17 of the 1860 Gregory Diggings laws:

Be it further enacted, That if two or more parties wish to use water on the same stream or ravine for quartz mining purposes, no person shall be entitled to use more than his proportionate share of water, but in case there shall not be water sufficient for all, priority of claim shall determine the right to such water.

In case you missed that, Schorr says that water rights were allocated to enhance equity, but that -- push comes to shove -- priority would trump in the case of shortage. That is, of course, what I have been saying all along :)

As further evidence, Michael send Dan Tarlock's 2000 law review article [pdf] on the application of prior appropriation rights. In it, Tarlock argues**

This article addresses the question of whether priority enforcement is in fact the rule of western water law. It argues that priority is an efficient rule of water allocation, but it is often more rhetoric than rule. Like all drastic rules, the rule's importance lies more in the threat of its application rather than the application.

Fine with me. Rights are a baseline for Coasian bargaining, giving parties a starting point from which they will negotiate their way to an efficient (my money for your water) ending point. But then Tarlock makes this claim:

Because risk is inherent in water entitlements, there are no inherent legal barriers to management solutions that equitably reassign the risks of water shortages to accommodate all relevant uses and stakeholders in a basin.

You know, I am not going to agree with him there. (He cites a legal case about flooding that does nothing to support his "pulled from air" claim.) Even better, I am going to let HIM disagree with him:

In a recent ground water adjudication, the California Supreme Court had an opportunity to implement an expectation-based allocation scheme but refused to do so when the scheme conflicted with priority rights,140 The opinion illustrates the likely judicial resistance to priority modification

And the CSC -- despite Tarlock's belief*** that they could toss out an institutionalized version of property rights that many rely upon -- made the right choice.

So, I conclude that property rights and prior appropriation are not just intact, but strongly supported in our legal and institutional frameworks.

Does that mean that OUR water**** is NOT going to be allocated to "highest and best use"? No, property rights do not prevent reallocation; they merely determine who gets paid for reallocation.

In California -- as in most parts of the world -- these rights belong to farmers, and they are the ones who are going to get paid for their water rights.

As I said before:

We cold easily "fix" our water problems with water markets (ag to urban/enviro users), but they will NEVER happen if farmers would risk losing their property rights

Bottom Line: Strengthen and clarify property rights in water, and then use markets (or all-in-auctions!) to reallocate it to highest and best use. That's what we Californians should want for our water.

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* Michael's quip is "Property rights are not what they used to be -- and never were."

** Remember that review articles are arguments, neither proofs nor factual records!

*** His concluding paragraph is a mish-mash of "I wish" rhetoric and opinion [italics added]:

...courts must eventually recognize that appropriate rights have never been risk free... priorities are likely to be enforced in the short but not the long run... new, often ad hoc risk sharing schemes will emerge... The focus should shift... to the reasonable rather than formal expectations of the right holder.

**** Some people claim that "our water" implies that "we" can take away rights of use from those who have those rights. Perhaps in principle, that's true, but then who decides where those rights will go? I am sure that everyone has his own opinion. The trouble is that those opinions are NOT the same!