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Chapter 19—Water Allocation Alternatives • 365

Water Allocation Alternativesfor the Upper Klamath Basin

19

William K. Jaeger

Alternatives for managing water resources inthe Upper Klamath Basin are varied and numer-ous. A long-run strategy to protect fish and otherspecies, while at the same time providing waterfor agriculture and other interests, likely willinclude restoring riparian vegetation, screeningirrigation canals, reducing nutrient loads, refor-estation, dam removal, continued controls onfishing, etc. Indeed, many of these actions havebeen recommended in recent and earlier Biologi-cal Opinions pursuant to the Endangered SpeciesAct (ESA).

In addition to these broad actions to improvewater quality and fish habitat, however, alterna-tives involving water quantity and its allocationalso may have advantages over current and pastapproaches. The aim of this chapter is toappraise the merits of several water allocationalternatives from an economic perspective. Theestimated impacts of an irrigation curtailmentused in this chapter are model based. For adiscussion of reported economic outcomes in2001, see Chapter 14 (“Outcomes”).

Our effort is set in the context of the 2001irrigation curtailment and the prospect that watershortages may occur again in the future. Alterna-tives will be evaluated primarily on their directcost to the agricultural sector in the UpperKlamath Basin. However, this should not beinterpreted as implying that agricultural interestsare paramount, nor that the value of waterallocated to other uses, such as environmentaland tribal interests, tourism, or commercial and

recreational fisheries, is unimportant orperipheral.

Unlike Chapter 12 (“Crop Revenue”), thisanalysis focuses not only on the Klamath Recla-mation Project, but on the entire Upper Basin. Inthat chapter, Burke considered alternative waysof allocating water within the Project that couldreduce the losses to gross farm crop sales result-ing from an irrigation curtailment. Here we lookinstead at all irrigated areas within the UpperKlamath Basin that could reasonably be consid-ered interconnected for purposes of satisfyingthe mix of competing ecological and agriculturaldemands. Our definition of the Upper KlamathBasin is broader than many; we include thecombined Klamath River–Lost River watershedand also the Shasta and Scott rivers (Figure 1,following page). Thus, the Shasta and Scottvalleys are included in this analysis.

Clearly, it is important to recognize therelationships between past, current, and futurecompeting demands for water among agricul-tural and nonagricultural uses. However, it isbeyond the scope of this chapter to quantify andcompare the long-term costs and benefits ofirrigated agriculture in the region. Nor do weattempt to place a value on in-stream uses ofwater, declining fish populations, or the conse-quent inability of the Klamath and downrivertribes to avail themselves of their legally recog-nized fishing rights. We recognize that by usingthe late 1990s as our benchmark for comparison,we are implicitly selecting as “normal” a

WaterAllocation

Alternatives

Water Allocation in the Klamath Reclamation Project, 2001: An Assessment of Natural Resource,

Economic, Social, and Institutional Issues with a Focus on the Upper Klamath Basin

Oregon State University • University of California

366 • Chapter 19—Water Allocation Alternatives

situation that reflected decades of water alloca-tion decisions and outcomes that may havebenefited some groups more than others.

As competing demands on water resourcesin the Klamath Basin continue to grow, there arelikely to be additional constraints on irrigationdiversions. In addition to limitations imposedunder the Endangered Species Act, changes inwater allocation may result from the resolutionof tribal water claims in the ongoing adjudica-tion process. Moreover, relicensing of the IronGate Dam by the Federal Energy RegulatoryCommission (FERC) in 2006 will require givingequal consideration to power and nonpowerbenefits (such as recreational use and the provi-sion of fish and wildlife habitat) under theElectric Consumers Protection Act of 1986 (seeChapter 6, “Coho Salmon”). Whether thisrequirement will influence required summerflows in the Klamath River mainstem is unclear.

In the midst of these conflicts, futuredroughts are likely to give rise to future waterscarcity. More cost-effective approaches to the

allocation of scarce irrigation water mayrepresent ways to minimize the costs of futureshortages—provided there is public support andthe institutional capacity needed to carry themout (see Chapter 18, “Policy”).

Thus, our focus is on alternatives that dealdirectly with the quantity of water available andthe allocation of that water among competinguses. In addressing these issues, we estimate thenet gains and losses from allocating water todifferent soils in different locations. Thus, thecost of short-run curtailment of irrigation sup-plies forms the basis for comparing alternativeresponses to shortages.

An economic description of agriculture inthe Upper Basin is the starting point for thisanalysis and for interpretation of the results. Twokey characteristics of irrigated agriculture in theUpper Klamath Basin emerge as crucial to theanalysis. First, the acreage within the KlamathReclamation Project that did not receive water in2001 represents only about 35 percent of thetotal irrigated area in the Upper Basin. Second,

Figure 1. Key features and irrigated areas in the Upper Klamath Basin and Klamath River system.

Fort Klamath,

Agency Lake

UpperKlamath

Lake

Willi

amso

n R

iver

Sprague River

Lost River,

Langell Valley

Clear Lake,Gerber Reservoir

Klamath Reclamation Project

Wildlife refugesShasta River

Scott River

Klamat

h Rive

r

Irrigated areas

Lakes, reservoirs, wetlands

Return flows from irrigation


the irrigated soils throughout the Upper KlamathBasin range in productivity classification fromClass II to Class V (see Chapter 7, “SoilResources”). These differences give rise to largevariations in the economic gains from irrigationbased on differences in the market values forirrigated and nonirrigated lands.

In the face of limits on irrigation, allocatingwater in ways that reflect these productivitydifferences will promote “economic efficiency”(produce the highest value of agricultural outputwith a given amount of water) and thus helpminimize the overall cost of water scarcity. If

water is withheld from its highest value uses,while irrigation continues in locations where thebenefits are minimal, there will be a high overallcost compared to an efficient, cost-minimizingallocation. A decentralized response to watershortage, one that accounts for the very differentmarginal losses and gains across plots, willachieve the desired reduction in irrigationwithdrawals at a much lower cost.

Thus, this analysis will consider alternativesthat meet this criterion. For example, if irrigatorscan transfer water, create water banks, or buyand sell water rights, those with the most to lose

Gross versus net economic indicators

As explained in the Preface to the economics chapters, we use two main types ofdollar measures to describe agriculture in the Upper Klamath Basin in economic termsand to measure the effects of events in 2001. Each measure is intended for a specific use.To avoid confusion, differences between these measures are reiterated here.

The first monetary measure is intended to reflect the benefit or economic value of aresource. “Net revenue” and “income” are economic measures of this kind. They areintended to reflect the net gains from farming. Thus, they include revenue from the saleof a crop minus the cost of the inputs used to produce it. These measures represent thenet financial benefit to the farm owner or operator. This chapter uses this type of measureto look at the net gain associated with a particular activity, piece of land, or quantity ofirrigation water.

The second monetary measure is referred to as “gross farm revenue” or “gross farmsales.” This measure is intended to indicate the scale of the farm economy, but it does notaccurately reflect the gains accruing to an individual, group, or specific resource becauseit does not subtract the cost of inputs. As a result, a region’s gross farm revenue or salesalways is higher than its net revenue or net farm income. This type of measure is usedextensively in Chapter 12 (“Crop Revenue”) to evaluate changes in the scale of agricul-ture in the Project. Similarly, “regional economic output” is a measure of changes in thegross value of goods and services produced in the regional economy. This measure isemphasized in Chapter 13 (“Regional Economic Impact”).

Each of these monetary measures is appropriate for addressing particular questions.Gross farm revenue and regional economic output are useful for describing changes inthe scale of economic activity in agriculture or in the region. In this chapter, however, weare interested in assessing the value or return on an investment, as well as the willingnessof individuals to pay for, or be compensated for, gains or losses in resource availability.For these purposes, “net revenue,” “loss,” or change in “income” are the appropriatemeasures. In general, we expect such measures to correspond to the market price—theamount that individuals should be willing to pay to acquire a given quantity of land,water, or other resource.


from a water cutoff could assure themselves of amore reliable supply. Partial reductions inirrigation deliveries, or “deficit irrigation,”represent another way to achieve efficiency.

The aim of this analysis is, first of all, toidentify ways in which the overall cost of irriga-tion restrictions could be reduced by promotingeconomic efficiency in water allocation. Alterna-tive scenarios or policies of this kind will pro-duce economic and social consequences thataffect individuals in different ways. Whetherthose alternatives are viewed positively ornegatively will depend on many factors, includ-ing the overall cost of any given scenario.

We recognize that some alternativeresponses to a water shortage may generateundesirable social or environmental side effects.Before implementing any alternative, thoseconsequences should be considered as part of anoverall assessment of the quantitative andqualitative differences between alternativecourses of action. In principle, if an alternativeapproach substantially lowers the overall cost ofa water shortage, other actions could be taken tooffset possible negative consequences.

The economic valueof irrigation water

In this section, data on irrigated areas, landprices, crops, and yields are used to estimate theeconomic value of applied irrigation water, aswell as the cost of withholding water. These datagenerate an economic portrait of irrigatedagriculture in the Basin, one that provides a basisfor evaluating a range of water allocationoptions.

For these purposes, it is crucial to look at thedifferences in irrigated agriculture across loca-tions and soil classes rather than simply charac-terizing the entire region based on averagevalues. We must take into account how theseagronomic differences translate into differencesin revenues, costs, and the economic value ofwater used in irrigated crop production(i.e., water used in combination with other inputssuch as equipment, energy, labor, and land).

Understanding long-runversus short-run value

For this analysis, when measuring the valueof water, we need to distinguish long-run valuefrom short-run value. The “long-run” value ofwater in irrigated agriculture reflects the netrevenue (income) generated when irrigationwater is applied regularly to an acre of land of agiven soil class over time. It reflects the effi-cient, planned use of water in combination withequipment, labor, and other inputs. We expectthis measure of value to be reflected in marketsales and prices of land or water rights. It isespecially relevant to decisions about investingin irrigation infrastructure or other capital assets.

Given efficient capital and land markets, weexpect the sale price of agricultural land toreflect the present value of the income that canbe generated annually by farming it. The rela-tionship between the annual income (Y) madepossible by farming a piece of land and itspurchase price (P) involves an interest rate (r).As with a financial asset such as a stock orannuity, an asset with a face value of P can beexpected to generate annual dividends of r timesP. (We can write this relationship as Y = r * P.)

This relationship allows us to infer the valueof irrigation water by comparing the sales pricesof irrigated and nonirrigated lands. For example,if the difference between the purchase prices ofsimilar irrigated and nonirrigated land is $1,000,we can infer that the difference reflects thebenefits resulting from irrigation. Then, we canuse the formula above to estimate that the annualnet benefits of irrigation equal r * $1,000. For a6 percent interest rate, this suggests that $60 peryear is the net benefit of irrigation water in thisexample (0.06 * 1,000).

In addition to long-run values, a “short-run”measure of the value of irrigation water isimportant. This value more accurately reflectsthe losses suffered by growers who go withoutwater unexpectedly or temporarily.

The short-run losses associated with reduc-tions in water availability can be expected toexceed the long-run measures discussed above.The difference between the short-run and


long-run measures arises from the fact that someproduction costs are “fixed costs” and cannot beavoided in the short run.

In the short run, growers are likely to incursome fixed production costs whether water isavailable or not. Examples include equipmentthat would be idled without water, insurance, anddepreciation. Given these fixed costs, the short-run cost of having water withheld is higher thanthe long-run values discussed above. In otherwords, short-run changes or “surprise” adjust-ments in the amount of water available willproduce per-acre losses that exceed the long-runvalue of water reflected in land prices.

Consider how this works. A farmer’snet revenue (NR) is equal to total revenues (TR)minus variable costs (VC) and fixed costs (FC).Thus, NR = TR – VC – FC. Giving up farmingin the long run means giving up NR. Giving upfarming in the short run means losing TR andeliminating VC, but the farmer still has fixedcosts, which now are not offset by revenues. Theloss then is NR + FC, which also is equal toTR – VC.

Suppose a farmer’s total revenue (per acre)with irrigation is $750. If variable costs are$300, and fixed costs are $200, the farmer’s netrevenue is $250. If irrigation water is withheld inthe short run, total revenue and variable costsfall to zero. Fixed costs of $200 remain, how-ever, so that net revenue becomes –$200. Thedifference between net revenue with irrigation($250) and net revenue without irrigation(–$200) is $450, which equals NR + FC orTR – VC. This is the farmer’s net loss, whichrepresents the short-run value of irrigation water,or the cost of withholding water.

If production involved zero fixed costs, thenthe short-run and long-run values of watershould be equal. A grower who anticipates a1-year pause in irrigation (for example, a volun-tary agreement to leave water in-stream for1 year) may avoid some of the fixed costs (forexample, by renting equipment to other grow-ers). Nonetheless, he or she likely still will incursome fixed costs. In this case, the costs of

irrigation curtailment should be lower than in theshort-run, “surprise” scenario, but higher thanthe long-run values of irrigation water. This kindof anticipated short-run cost is relevant to thediscussion of water markets and water bankslater in this chapter.

Because the water shortage that occurred in2001 was short-run and unanticipated, themeasure of short-run loss is the relevant measurefor assessing the overall cost of irrigation curtail-ment. For other considerations, such as thedevelopment of additional storage capacity,improved irrigation efficiency, or permanentretirement of irrigated land, the long-run value ofwater is more relevant.

It also is important to recognize that thevalue of an “incremental” or marginal change inthe amount of water available often differs fromthe “average value” of water. Irrigation watermay have a very high average value whenapplied to the most productive lands in a givenregion, but the marginal value of an additionalunit of water may be quite low. This situationoccurs when adequate water already has beenapplied to existing high-productivity lands, whilethe additional lands that could be irrigated aremuch less productive.

Value of irrigation waterin the Upper Klamath Basin

Based on available market, crop, and farmenterprise data, we have estimated both short-runand long-run values of water by soil class foreach location within the Upper Klamath Basin.The primary data source is the Klamath CountyAssessor’s office (Klamath County Assessor2001). Data from this source include irrigatedland areas by soil class, cropping pattern, andmarket value (as distinct from the assessedvalues used for tax purposes). These data weresupplemented with additional data from thecounty assessors in Modoc and Siskiyou coun-ties in California, the U.S. Bureau of Reclama-tion office in Klamath Falls, and the OregonState University (OSU) Extension Service (forcrop budget data).


Soils in the Upper Basin range from Class IIto VI. Higher numbers indicate progressivelygreater limitations and narrower choices forpractical use (see Chapter 7, “Soil Resources”).

Crops and crop rotations vary by locationand soil class. For the Upper Basin overall,54 percent of irrigated land is pasture, 22 percentis alfalfa, 15 percent is cereal grains (barleyand wheat), and 5 percent is other hay. Theseare followed by 3 percent for potatoes and0.5 percent for peppermint. Other crops, such as

onions, each account for less than 1 percent ofthe area planted, although they may represent alarger share of total revenue. Alfalfa, cereals,potatoes, and peppermint are grown on Class IIand III soils; pasture is grown almost exclusivelyon Class IV and V soils.

Long-run value of irrigation waterData on irrigated land areas for the Klamath

Basin are presented in Table 1. These dataindicate that irrigated soils range from Class IIto V, with most being Class III and IV.

Table 1. Irrigated acreage in the Upper Klamath Basin by location and soil class.

Irrigated acresClass Class Class Class

II III IV V Totals

Areas above Upper Klamath LakeFort Klamath Valley 0 1,800 8,025 26,055 35,880Modoc Point to Chiloquin 2,710 6,475 7,215 335 16,735Sprague River Valley 0 640 54,120 910 55,670North Country 0 5,410 16,865 1,530 23,805

Areas east and south of Upper Klamath LakeSwan Lake Valley 2,620 8,310 14,930 0 25,860Bonanza (non-Project) 4,541 6,425 6,354 0 17,320Langell Valley (non-Project) 3,145 6,611 5,209 535 15,500Poe Valley (non-Project) 525 697 778 0 2,000West of 97 to Keno (non-Project) 2,388 9,048 11,367 198 23,000Lower Klamath Lake (non-Project) 69 4,614 309 7 5,000

Klamath Reclamation Project areasMerrill-Malin 2,030 13,965 6,205 0 22,200Poe Valley 4,424 5,873 6,562 0 16,859Midland-Henley-Olene 7,625 18,555 11,890 0 38,070Bonanza-Dairy-Hildebrand a 2,569 3,635 3,596 0 9,800Langell Valley a 3,315 6,969 5,491 565 16,340Lower Klamath Lake 211 14,021 941 23 15,195Malin Irrigation District 300 2,905 120 0 3,325Shasta View District 1,000 3,100 1,100 0 5,200West of 97 to Keno 387 1,467 1,843 32 3,730Tule Lake/California portion 13,244 40,000 20,000 0 73,244

Shasta and Scott valleys 8,000 41,100 35,000 0 84,100

Total 59,103 201,620 217,920 30,190 508,833aPortions of the Project that received surface water in 2001.

Note: Figures in this table may differ slightly from those in other chapters due to different data sources andgeographical categories.

Sources: County assessors in Klamath, Modoc, and Siskiyou counties (personal communications)


In Table 2, average land values by soil classindicate the extreme variability in productivity ofirrigated land across locations. Land values varyfrom Class II irrigated areas that sell for $2,600per acre to Class V lands that sell for between$250 and $600 per acre. We expect these marketprices for land to reflect the capitalized value ofthe annual income generated from current use.Our data on average market values reflect

transactions and markets during a number ofyears prior to the events of 2001.

These land-value data also provide anindication in relative terms of the economics offarming in the Upper Klamath Basin. The valueof farm real estate in 1998 averaged $960 peracre in Oregon and $974 per acre in the U.S. Inthe Upper Klamath Basin, the market value ofClass II lands is double these levels, and it is50 percent higher for Class III lands. This

Table 2. Average market values for irrigated land by location and soil class.

Market value of land ($ per acre)

Class Class Class Class NonirrigatedII III IV V (Class VI)

Areas above Upper Klamath LakeFort Klamath Valleya — 1,100 850 600 400Modoc Point to Chiloquin 1,700 1,100 850 600 400Sprague River Valley — 1,000 750 300 200North Country — 750 750 250 200

Areas east and south of Upper Klamath LakeSwan Lake Valley 2,100 1,450 750 370 200Bonanza (non-Project) 2,100 1,450 750 370 200Langell Valley (non-Project) 2,100 1,450 750 370 200Poe Valley (non-Project) 2,600 1,400 1,000 500 300West of 97 to Keno (non-Project) 1,700 1,100 850 600 400Lower Klamath Lake (non-Project) 2,600 1,900 1,000 300 300

Klamath Reclamation Project areasMerrill-Malin 2,600 1,350 1,000 500 300Poe Valley 2,600 1,400 1,000 500 300Midland-Henley-Olene 2,600 1,400 1,000 500 300Bonanza-Dairy-Hildebrand b 2,100 1,450 750 370 200Langell Valley b 2,100 1,450 750 370 200Lower Klamath Lake 2,600 1,900 1,000 300 300Malin Irrigation District 2,600 1,900 1,000 300 200Shasta View District 2,600 1,350 1,000 300 200West of 97 to Keno 1,700 1,100 850 600 400Tule Lake/California portion 2,600 1,800 1,100 — 300

Shasta and Scott valleys 2,000 1,650 1,050 — 300

Average 2,278 1,402 895 421 276aValues based on agricultural use. Recreational demand has increased land values in this area.bPortions of the Project that received surface water in 2001.

Sources: County assessors in Klamath, Modoc, and Siskiyou counties (personal communications)


suggests that the income-generating capacity ofan acre of these lands is significantly higher thanthe average for Oregon or for the nation as awhole. Indeed, the market values on Class II andIII soils are comparable to those in Iowa, one ofthe most productive agricultural areas in thecountry. By contrast, the value of irrigatedClass V land in the Upper Klamath Basin($421 per acre) is at the low end of state-averaged land values, comparable to those inNorth Dakota, where dryland farmingpredominates.

By combining the data in Tables 1 and 2, wecan estimate the total value of irrigated land inthe Basin at $654 million. Using an interest rateof 6 percent, this asset value suggests an annualincome from irrigated agriculture in the regionof $39 million. This figure is very close to the$38 million figure for farm labor and propri-etors’ income (1997) reported by the U.S.Bureau of Economic Analysis.

As explained above, the long-run value ofirrigation water can be estimated by looking atthe difference between the values of irrigatedland and similar nonirrigated land. From Table 2,we see that the difference between the per-acremarket value of Class II irrigated and Class VInonirrigated lands in much of the Project is$2,300 ($2,600 – $300). The difference betweenirrigated Class III soils and nonirrigated Class VIsoils ranges from $550 to $1,700 per acre. ForClass IV soils, the difference averages $620per acre.

Notice that for some locations, and espe-cially for Class V soils outside the Project, thedifferences in land values suggest very lowvalues to irrigation. For example, the differencein market value between Class V irrigated and

Class VI nonirrigated land ranges from $0 to$200 per acre. This suggests that applying waterto Class V soils in these regions generates lownet revenues as irrigated pasture.

Even ignoring the extreme low estimates of$0 and $50 per acre, these data indicate that thevalue of applied water varies by a factor of 23between the most productive lands ($2,300 peracre) and least productive lands ($100 per acre).On average, the data suggest that irrigation wateradds about $1,000 per acre to the value of land.This interpretation is corroborated by a localfarm appraiser with many years of experience inthe region, who estimates differences betweenirrigated and nonirrigated lands to be between$900 and $1,000 (Caldwell 2001).

When these estimates are used to estimatethe annual value of applied water (multiplyingby a 6 percent interest rate), we arrive at themarginal per-acre annual values for waterpresented in Table 3. Average values range from$9 for class V soils to $103 for Class II soils.The lowest value is $0 for Class V soils in theLower Klamath Lake area. The highest value is$144 for Class II soils in the Malin and ShastaView irrigation districts.

We can compare these values to estimatesfor similar soil classes in Malheur County,Oregon, which were developed using a moredetailed statistical approach (Faux and Perry1999). The Malheur County values are nearlyidentical to the soil class averages in Table 3,with the exception of the Class V soils. Klamath-area Class V soils seem to be significantly lowerin value than those in Malheur County. Onereason for this difference may be the higherelevation and shorter growing season in theUpper Klamath Basin.


Table 3. Marginal value of applied water in irrigated agriculture by location and soil class.a

Marginal value of water ($ per acre per year)

Class Class Class Class WeightedII III IV V average

Areas above Upper Klamath LakeFort Klamath Valleyb — 42 27 12 17Modoc Point to Chiloquin 78 42 27 12 41Sprague River Valley — 48 33 6 33North Country — 33 33 3 31

Areas east and south of Upper Klamath LakeSwan Lake Valley 114 75 33 10 55Bonanza (non-Project) 114 75 33 10 70Langell Valley (non-Project) 114 75 33 10 67Poe Valley (non-Project) 138 66 42 12 76West of 97 to Keno (non-Project) 78 42 27 12 38Lower Klamath Lake (non-Project) 138 96 42 0 93

Klamath Reclamation Project AreasMerrill-Malin 138 63 42 12 64Poe Valley 138 66 42 12 76Midland-Henley-Olene 138 66 42 12 73Bonanza-Dairy-Hildebrand c 114 75 33 10 70Langell Valley c 114 75 33 10 67Lower Klamath Lake 138 96 42 — —Malin Irrigation District 144 102 48 6 104Shasta View District 144 69 48 6 79West of 97 to Keno 78 42 27 12 38Tule Lake/California portion 138 90 48 — 87

Shasta and Scott valleys 102 81 45 — 68

Unweighted average 103 68 37 9 —Weighted average — — — — 60

Estimates for Malheur County, Oregond 105 67 35 32 —aBased on comparison of market price data for irrigated versus nonirrigated land.bThese values reflect agricultural use. Recreational demand has increased land values in this area.cPortions of the Project that received surface water in 2001.dBased on Faux, J. and G.M. Perry. 1999. “Estimating irrigation water value using hedonic price analysis: A casestudy in Malheur County, Oregon.” Land Economics 75:440–452.


Two other data sources provide estimatesthat generally are consistent with those presentedhere. First, the Oregon Water Trust purchaseswater from irrigators in Oregon to augmentin-stream flows and protect fish habitat. Data onthese transactions over the past several years arepresented in Table 4. There are two types oftransaction: permanent purchases of water rightsand 1-year leases. These data also are presentedas the annual value (per acre-foot), using a6 percent interest rate in the case of the perma-nent purchases.

Detailed data on soil class are not availablefor these transactions. However, given theorganization’s desire to minimize costs and totarget small tributaries in upper basins, weexpect that most of these transactions involveClass IV and V soils. For a consumptive use of2 acre-feet per acre (the average irrigation use inthe Upper Klamath Basin), the average annualvalue per acre-foot for Class IV and V soils is$11.50, which is close to the $9.16 average paidby the Oregon Water Trust.

Additional information on transactions bythe Oregon Water Trust (reported in Niemi et al.2001) is remarkably consistent with Faux andPerry (1999). Niemi et al. report that for waterrights previously associated with pasture andirrigated hay, Oregon Water Trust paid growers$6 to $17 per acre-foot per year. For waterpreviously used in producing wheat (likely to begrown on Class II or III soils), purchase priceswere $22 per acre-foot per year. Similarly,Landry (1995) surveyed water rights transfers inOregon in the early 1990s and found that theaverage price corresponded to an annualizedvalue of $22 per acre-foot per year.

Second, the U.S. Bureau of Reclamationmanages the annual leasing of lands within theUpper Basin’s national wildlife refuges. Using asealed bidding process, irrigators compete foruse of these relatively high-productivity lands.These data, therefore, are on a per-acre basis and

are primarily for Class II, III, and IV lands. In2000, the successful bids averaged between$51 per acre for “area K” grain production to$83 per acre for “Sump 3” lands (where onlyone-third of the land may be planted with rowcrops; the rest typically is planted with grains).These prices are comparable to those forClass III and IV lands in Table 3. Assuming2 acre-feet per acre, they also are close to therange of prices paid by Oregon Water Trustunder 1-year leases.

Short-run losses from irrigation curtailmentAs defined above, the short-run losses

from curtailed water deliveries reflect the finan-cial changes faced by farmers. These lossescannot be inferred from market prices for farm-land alone.

Short-run losses vary, depending on thecrops grown and other circumstances faced byindividual farmers. Average values reflectexpected net revenues from crop sales as well asfixed costs. Losses facing individual farmersmay be higher or lower than the estimatedaverages due to fluctuations in crop prices orother differences. Losses are likely to be higherfor growers of perennial crops.

Average values for short-run losses can beestimated by combining information on long-runirrigation values and fixed costs. Fixed costs arecrop-specific and must be estimated based on thecrop rotations common to each location and soilclass. Using data on observed cropping patternsin conjunction with OSU crop enterprise bud-gets, we have estimated fixed costs for alllocations and soil classes in the Upper KlamathBasin. The per-acre loss associated with with-holding irrigation water is the sum of (a) netrevenues or marginal values of applied water(from Table 3) and (b) nonland fixed costs fromthe OSU crop enterprise budgets. (See “Refer-ences.”) These losses include the amortizedfixed cost of establishing perennial crops such aspeppermint and alfalfa.


Table 4. Recent water rights transactions to augment stream flows.

Current Contract Consumptive use Price Cost per acre-footLocation use type (acre-feet/year) ($) per yeara ($)

Rogue River, Sucker Creek Fallow Purchase 67.80 8,800 7.79Rogue River, Sucker Creek Fallow Purchase 107.62 13,627 7.60Rogue River, Sucker Creek Fallow Purchase 57.47 8,138 8.50Deschutes River, Squaw Creek Pasture Purchase 417.19 42,900 6.17Deschutes River, Squaw Creek Pasture Purchase 308.08 44,352 8.64Deschutes River, Squaw Creek Pasture Purchase 48.14 7,425 9.25Deschutes River, Squaw Creek Pasture Purchase 8.46 870 6.17Deschutes River, Squaw Creek Pasture Purchase 96.27 13,860 8.64Rogue River, Little Butte Creek Hay Purchase 173.95 20,000 6.90Hood River, Fifteenmile Creek Wheat Purchase 71.76 26,307 22.00Average (purchases) 9.16

Deschutes River, Buck Hollow Creek Hay 1-year lease 196.80 6,630 33.69Deschutes River, Buck Hollow Creek Hay 1-year lease 196.80 6,630 33.69Deschutes River, Buck Hollow Creek Hay 1-year lease 196.80 6,630 33.69Grande Ronde River, Crow Creek Hay 1-year lease 194.00 1,600 8.25Umatilla River, East Birch Creek Hay 1-year lease 238.50 2,500 10.48Deschutes River, Trout Creek Hay 1-year lease 1,135.50 23,843 21.00Deschutes River, Trout Creek Hay 1-year lease 270.00 4,680 17.33John Day River, Hay Creek Hay 1-year lease 248.80 14,500 58.28Rogue River, South Fork Little Butte Creek NA 1-year lease 83.34 1,438 17.25Deschutes River, Buck Hollow Creek Hay 1-year lease 196.80 6,630 33.69Grande Ronde River, Crow Creek Hay 1-year lease 197.70 5,272 26.67Deschutes River, Tygh Creek Pasture 1-year lease 94.50 945 10.00Rogue River, South Fork Little Butte Creek NA 1-year lease 83.34 1,438 17.25Grande Ronde River, Crow Creek Hay 1-year lease 197.70 5,136 25.98Deschutes River, Tygh Creek Pasture 1-year lease 94.50 945 10.00Rogue River, South Fork Little Butte Creek NA 1-year lease 83.34 1,438 17.25Umatilla River, Couse Creek Wheat/Pea 1-year lease 1,065.9 23,800 22.33Deschutes River, Buck Hollow Creek Hay 1-year lease 196.80 5,000 25.41Grande Ronde River, Crow Creek Hay 1-year lease 197.70 5,136 25.98Rogue River, South Fork Little Butte Creek NA 1-year lease 83.34 1,438 17.25Umatilla River, Couse Creek Wheat/Pea 1-year lease 1,065.9 23,800 22.33Umatilla River, Couse Creek Wheat/Pea 1-year lease 1,065.9 23,800 22.33Average (1-year leases) — — — — 23.19

aAssumes a 6 percent discount rate to compute annualized cost of permanent acquisitions.

Source: Oregon Water Trust


Nonland fixed costs range from $25 forpasture to $207 for alfalfa. When net revenuesare included, the short-run loss estimates rangefrom $206–$312 on Class II lands to $25–$37 onClass V lands (Table 5). Like the long-run valuesof irrigation water estimated above, per-acrelosses vary greatly (in this case, by more than afactor of 12) across location and soil class.

To validate our loss estimates, we cancompare them to two sources of market datainvolving short-run transactions or temporary

transfers—land rentals and annual water leases.In these situations, however, landowners arelikely to make arrangements to avoid leavingequipment idle (e.g., they may rent it out or useit on other lands). They will want to cover theirforgone net revenue and the cost of the land (thecapital tied up in land ownership), but nonlandfixed costs may be zero or very low if theirequipment and vehicles are fully utilizedelsewhere.

Table 5. Estimated per-acre losses from irrigation curtailment by location and soil class.

Losses ($ per acre)Class Class Class Class Weighted

II III IV V average

Areas above Upper Klamath LakeFort Klamath Valley — 67 52 37 42Modoc Point to Chiloquin 232 182 52 37 131Sprague River Valley — 210 58 31 59North Country — 58 58 28 56

Areas east and south of Upper Klamath LakeSwan Lake Valley 236 162 58 35 110Bonanza (non-Project) 309 260 58 35 199Langell Valley (non-Project) 242 106 58 35 115Poe Valley (non-Project) 297 158 67 37 159West of 97 to Keno (non-Project) 206 134 52 37 100Lower Klamath Lake (non-Project) 307 159 67 25 155

Klamath Reclamation Project areasMerrill-Malin 312 232 67 37 193Poe Valley 297 158 67 37 159Midland-Henley-Olene 297 247 67 37 201Bonanza-Dairy-Hildebrand a 309 260 58 35 199Langell Valley a 242 106 58 35 115Lower Klamath Lake 307 159 67 25 155Malin Irrigation District 295 243 73 31 242Shasta View District 299 217 211 31 232West of 97 to Keno 206 134 52 37 100Tule Lake/California portion 259 211 73 25 182

Shasta and Scott valleys 273 228 70 — 167

Unweighted average 274 173 69 33 —aPortions of the Project that received surface water in 2001.


The loss estimates in Table 5 correspondvery closely to observed market prices from theactive land rental market in the Upper KlamathBasin, where per-acre rental prices are $200 to$300 for row crops, $125 for alfalfa, and $30 to$50 for pasture (Todd 2002). We also can com-pare them to the annual water leases fromfarmers by the Oregon Water Trust. As shown inTable 4, these leases indicate an average value of$23 per acre-foot of consumptive use on pastureand hay fields. Assuming 2 acre-feet per acre,this value corresponds to an implicit price of$46 per acre, about 35 percent higher than the$33 short-run loss estimate for Class V soils.

Estimates of short-run costs exceed the long-run estimates of the economic value of water(compare Tables 3 and 5) by more than a factorof 2. This result is consistent with the expecta-tion that a large-scale, unexpected curtailment ofirrigation is more costly to growers than small-scale individual transactions that are anticipatedand planned.

It is important to recognize that certain kindsof losses in the Upper Klamath Basin are notcaptured by these estimates. Examples includedissolution of experienced and trained crews andloss of contracts with crop processors andpurchasers.

Implications of these dataTwo striking features emerge from these

data.

• The value of irrigation water varies widelyacross locations and soil types in the UpperKlamath Basin.

• In relative terms, the variations across soilclass and location are large for both long-runand short-run measures of the value ofirrigation water. Per-acre values differ by afactor of 12 or more across soil classes inboth cases.

The limitation on irrigation water imposedin 2001 represented only about 35 percent ofthe water normally applied throughout the

Basin, yet the reductions were made byimposing 100 percent reductions on a subset ofirrigators—those within most of the KlamathReclamation Project. Most of the areas withinthe Project that did not receive water in 2001were high-productivity Class II and III soils. Bycontrast, many of the areas outside the Projectthat did receive water in 2001 are Class IV and Vsoils. Examples include areas north and east ofUpper Klamath Lake and in the Scott and Shastavalleys.

This observation raises questions about thecost-effectiveness of the way in which irrigationcurtailment was implemented in 2001 andsuggests ways to reduce losses with more cost-effective responses.

The role of government farm paymentsand other subsidies

In examining the economic value of waterbased on its use in agriculture, it should berecognized that in the Upper Klamath Basin, asin the nation as a whole, there are significantgovernment payments to farmers via commoditysupport and other programs. In the KlamathBasin, payments are made to eligible farmersbased on their past production of any one ofthree crops—wheat, barley, or oats. Paymentsare made under the Agricultural MarketingTransition Act, the Market Loss Assistanceprogram, and the Loan Deficiency Paymentsprogram.

These government payments averaged about$5 million per year from 1990 through 1999 inthe three counties, according to the Bureau ofEconomic Analysis (www.bea.gov). Paymentsrepresented about 15 percent of total farm laborand proprietors’ income.

While these transfers affect land values andother economic data in the region, the magnitudeof the effects may not be large. Although thethree eligible crops are grown on about30 percent of the land within the Project (2000data), and about 15 percent of the land in theBasin overall, they represent only 17 percent of


revenues from the Project and are grown almostexclusively on Class II and III soils. Currentpayments are based on levels of production ofthese three crops prior to the mid-1990s, so theydo not influence current cropping decisions.

To consider the effects of these subsidies onfarm values or agriculture generally in theregion, one needs to ask: “What would bedifferent if these subsidies were unavailable?”Without these subsidies, or since the mid-1990s(after which payments no longer were tied tocurrent production), farmers are likely to havereduced the acreage allocated to the three eli-gible crops, while increasing production of othercrops that can be grown profitably in rotationson the same Class II and III soils.

With these substitutions to other crops,changes in net returns per acre might be small.Land rental rates paid by farmers to landownersmight decline, but because the net benefits offarm subsidies tend to become capitalized intoland values or land rental rates, the effects on themore than 50 percent of farm operators who rentland likely would be negligible. Moreover, interms of overall irrigated agriculture in theUpper Klamath Basin, these programs likelyhave no effect because the economically mar-ginal lands (Class V) used for pasture and hayare unaffected.

These government payments may have asmall positive effect on estimates of the long-runvalue of irrigation water presented in Table 3.Without these payments, the values on Class IIand III lands might be $19 per acre lower onaverage ($5 million annually spread over260,000 acres).

Irrigators in the Project also benefit from a50-year BOR contract with PacifiCorp forelectricity provided at 80 to 90 percent belowmarket rates (as low as $0.003 per kwh). Thisimplicit subsidy amounts to an average of $6 to$9 per acre per year, or between $1.2 million and$1.75 million annually for the Project overall.

These subsidies have a modest effect on thenet returns to agriculture in the Project. Theyamount to 8 to 12 percent of the average long-run value of irrigation water for those portions of

the Project not receiving water in 2001 (based onfigures in Table 3).

The current energy contract ends in 2006.The elimination of these energy subsidies likelywould reduce the long-run net returns to agricul-ture on Project lands by $6 to $9 per acre peryear.

Economic costs ofirrigation curtailment

The data presented above form the basis fora mathematical representation, or model, ofirrigated agriculture in the Upper Klamath Basin.This analysis differs from the estimates inChapter 12 (“Crop Revenue”). That analysisreflects only the Klamath Reclamation Project,and she estimates changes in gross revenuesrather than changes in net revenues. It alsodiffers from the analysis in Chapter 13(“Regional Economic Impact”), which focuseson changes in the scale of economic activitythroughout the region.

This analysis does not attempt to representall potential consequences of irrigationcurtailment that might affect individuals in theregion. Nor does it attempt to quantify the“benefits” of irrigation curtailment arising fromincreased stream flow, improvements in aquatichabitat, and possible (but uncertain) improve-ments in fish populations, fish harvests, or otherrelated changes. Putting a dollar value on all ofthese impacts within and outside the UpperKlamath Basin would represent an impossibletask—in part because the biological relation-ships are so uncertain.

Our model is essentially a system ofaccounting equations representing the land areas,soil types, costs, and revenues discussed aboveand described in Tables 1–5. The model charac-terizes 16 areas in Oregon and California. Ten ofthese are portions of the Project; others includeirrigated areas around and above Upper KlamathLake and in the Shasta and Scott valleys ofCalifornia.

Typically, there are about 509,000 totalirrigated acres in the Upper Basin. The modelassumes that each acre is irrigated fully or not at


all. (It does not allow for reduced, or deficit,irrigation on a given acre nor for groundwatersupplementation.)

For the analysis of short-run losses, we startfrom a base case in which all of these acres areirrigated and earn “normal” net revenues. Wewant to evaluate the losses from curtailment ofirrigation on some portion of those lands.1

Losses from the 2001 curtailmentOur first scenario replicates the 2001 situa-

tion, but without supplemental groundwater orthe midseason delivery of canal water. All of theareas that were cut off from irrigation arerequired to receive zero water. These areas areestimated to equal 177,823 acres, or about35 percent of the 509,000 total irrigated acres inthe Upper Basin. Areas receiving full watersuffer zero losses; areas receiving zero watersuffer losses as indicated in Table 5.

By replicating the actual allocation of waterin the Basin in 2001, the model produces anestimate of losses of $33 million in net revenues.This loss corresponds to a decline in gross farmrevenues of $87 million (which is about17 percent higher than the $74.2 millionestimated in Chapter 12 (“Crop Revenue”) byBurke, who included some groundwater-basedirrigation). Wage payments to farm labor wereestimated to have been reduced by $8.2 million.The reductions in net revenues and farm wagesamount to 48 percent of the reduction in grossfarm revenues.

This estimate will overstate actual directlosses if some of the 177,823 acres assumed tohave been cut off from irrigation were croppedusing publicly or privately provided groundwateror the midseason canal flows allowed by theBOR. (In Chapter 14, “Outcomes, by Jaeger,actual Project acreage in 2001 is reported to havebeen 102,338 acres below normal.) This changewas primarily the result of supplemental publicand private groundwater irrigation.

Conversely, this estimate will understateactual direct losses if additional costs wereincurred by growers. Examples might includecosts associated with groundwater pumping,

planting cover crops, clearing canals of weeds,losses from early “distress” sales of livestock,and idled or underemployed farm labor. If weassume that half of the farm labor normallyemployed on the cutoff acres was unable to findother employment, the estimate of losses wouldrise from $33 million to about $37.5 million.

Losses under efficient water allocationWe are particularly interested in evaluating

how the losses of the 2001 curtailment wouldhave differed if there had been more flexibilityin how water was allocated. We expect that thelosses could have been significantly lower had acost-effective, loss-minimizing approach beenpossible—one that cut off water from thoselands that would suffer the least.

To estimate these differences, we ask themodel to choose the most cost-effective way toreduce the total irrigated area by the samenumber of acres. In other words, the total loss(TL) to the region is minimized, while stillreducing irrigated acreage by 177,823 acres, aswas assumed in the 2001 scenario.2

This cost-minimizing scenario generates anestimated cost of only $9.5 million, or about71 percent lower than the $33 million cost undera scenario replicating the curtailment in 2001.Rather than curtail irrigation only on the Project,the model identifies Class IV and V landsthroughout the Basin as the ones where irrigationcan be eliminated with the least amount of loss.In particular, substantial areas along the Spragueand Williamson rivers, Fort Klamath, and in theHorsefly and Langell Valley areas would be cutoff. No lands in the Shasta or Scott river valleyswould be affected.

These scenarios involve choosing whichacres to irrigate, but not how much water toapply to each. Since water scarcity has onlyrecently become a direct concern for irrigators inthe Basin, precise measurement of applied water

1A curtailment of irrigation for an area A, in zone i, of soil typej, (A

ij) will produce a loss, L

ij.

2Algebraically, we can write this procedure as:Minimize: TL = ∑L

ijA

ij

subject to: ∑ Aij = A*

where A* =177,823, the acreage not receiving water


has not been practiced. If gauges and volumemeters were available throughout the Basin, onecould “fine tune” the allocation of water toinclude partial reductions in the applied waterfor some fields. Such “deficit irrigation” maylower the cost of irrigation reduction even morethan the “acre-to-acre” reallocation reflected inthe model above.

The cost of installing gauges and meteringdevices must be considered. For flood irrigationdiversions, the installation of flumes and meterscan cost $2,500 at each diversion point. Forpiped diversions, the cost may be $1,000. Aninventory of diversion points in the area countsabout 300, but there are about 850 irrigatedfarms. If one metering device is required foreach irrigated farm, and if about half of thediversions are piped, the average cost of installa-tion would be about $3 per acre. Given anadditional 10 percent cost for annual mainte-nance and depreciation, the cost of meteringamounts to less than 50 cents per acre per year.Therefore, these costs do not seem to signifi-cantly weaken the case for metering water in theBasin.

An analysis of irrigation managementinvolving deficit irrigation and fine tuning ofwater deliveries was undertaken for the Projectby Adams and Cho (1998). They included onlythe Project in their model, but their resultsprovide some evidence of the additional poten-tial for cost reductions provided by this method.They find that for small percentage reductions inirrigation deliveries (less than 20 percent), thecost is about $17 (per “acre equivalent”), com-pared to the $30 to $35 short-run loss for leavingan acre of pasture completely dry.

With a combined approach that would leave100,000 acres of pasture dry and require deficitirrigation (of 18 percent) on other acres, the

same reduction in total diversions as wasimposed in 2001 could be achieved at a cost of$6.3 million, or 80 percent less than the esti-mated actual cost. If half the labor reduction isassumed to be left idle, the estimate rises to$7.6 million. A summary of these cost estimatesfor different water allocation alternatives ispresented in Table 6.

Two caveats remain. First, it is important torecognize that any change in the allocation ofscarce water will produce consequences formany individuals that differ from the circum-stances of 2001. Some would see these changesas improvements, others would not. Forexample, reductions in irrigated acres wouldcause operating and maintenance costs for theaffected irrigation districts to be shouldered by asmaller production base. Second, implementingcost-effective water management is more diffi-cult than simply estimating the cost savings thatmight result. How the legal, administrative, andpolitical institutions might be realigned tofacilitate cost-effective responses to scarcity is acritical question facing the region.

Ways to reallocate wateramong irrigators

“Water is becoming increasingly scarcein the United States. Demand is risingalong with population, income, and anappreciation for the services and ameni-ties that streams, lakes, and other aquaticecosystems have to offer…. Ordinarily,Americans count on prices and marketsto balance supply and demand andallocate scarce resources…. As condi-tions change, markets enable resourcesto move from lower- to higher-value

Table 6. Estimated loss in net farm revenues from restricting irrigation diversions in the UpperKlamath Basin under alternative allocation methods.

Losses from 2001 restrictions on the Project (177,823 acres without water) $33–37.5 millionLosses for equivalent restrictions but with cost-minimizing acre-to-acre transfers $9.5–12 millionLosses for equivalent restrictions but with acre-to-acre transfers and deficit irrigation $6.3–7.6 million


uses. Market forces, however, have beenslow to develop as a means of adaptingto water scarcity” (Frederick 1999).

The analysis presented in this chapter sug-gests that about 80 percent of the cost of the2001 irrigation curtailment in the Upper KlamathBasin was due to inefficiencies in the wayirrigation water was allocated. In other words,only 20 percent of the cost was directly attribut-able to water scarcity arising from the droughtand ESA-related requirements.

The situation facing growers in 2001 con-tained the two characteristics that economistsrecognize as working against producers in anyindustry: a high degree of uncertainty and fewoptions or flexibility. Not only was irrigationinterrupted on the most productive, highest valueacreages in the Basin, but there existed nomechanism—such as a market—to reallocateother irrigation water between low-value andhigh-value uses.

This is not to suggest that water marketscould have been introduced on short notice as the2001 situation became apparent. In the future,however, if similar water scarcities arise, theability of irrigators to transfer water rights viamarkets could transform a potentially very high-cost event into a much less significant one.

Water marketsWater markets or water banks represent the

option to buy needed water or to sell water toothers. The willingness to buy or sell water willreflect differences in land productivity, crops,and fixed costs. Growers who have the most tolose from a cutoff of water are likely to benefitmost from the ability to buy additional water insuch circumstances. Likewise, irrigators of low-productivity lands or those with low fixed costsmay decide they would be better off selling theirwater to others.

Although water markets and water rightstransfers are a relatively recent phenomenon inthe western U.S., there is growing evidence oftheir use and beneficial effects. In Texas’ RioGrande Valley, transfers of 74,966 acre-feet

occurred prior to 1990. The net benefit of thesetransfers has been estimated at more than$1 trillion (Griffin 1998). Active water marketshave long existed in Colorado, Utah, and NewMexico, and more recently in Arizona, Wyo-ming, and California (Howe 1998).

The thousands of applications documented inColorado, Utah, and New Mexico includepermanent sales of water rights as well astemporary transfers to accommodate short-termneeds, such as those that occur during drought.Approved trades in these states include manytransfers among irrigators and from agricultureto nonagricultural uses, and a few from nonagri-cultural uses to agricultural ones. Colorado longago adopted a water court system in whichproposed water transfers may be challenged byparties who believe they will be “injured” by thetransfers.

In California, during the early 1990s, federaland state legislation helped clarify water rightsin order to facilitate rights transfers, althoughthese changes have not yet achieved their fullintent involving long-term transfers (Archibaldand Renwick 1998). Nevertheless, California hasdeveloped informal intraseasonal spot marketsand annual lease markets, both of which havebeen dominated by trades within agriculture. Astate-run “water bank” has handled 40 percent ofall water transfers since 1992, demonstrating thatannual lease arrangements could benefit thewilling buyers and sellers in these markets(Howe 1998). This water market activity hasaveraged 122,000 acre-feet in each drought yearduring the early 1990s. In the case of the 1991water bank, the statewide net benefit was esti-mated to be $104 million, including $32 millionin benefits to agriculture (Howitt 1998).

Existing Oregon water law is quite condu-cive to water markets. Water right transfers havebeen common in the state since the 1980s.Oregon law allows water rights to be transferredbetween beneficial uses, including in-streamflow, following an application and approvalprocess through the Oregon Water ResourcesDepartment (OWRD).


The number of applications rose from about100 to more than 200 per year between the1980s and 1990s. Currently, OWRD receivesmore than 250 applications per year for out-of-stream uses and 5 applications for transfers toin-stream uses such as protection of fish habitat.The total includes about 50 temporary transfers.About half of commercial water right transfersconvey water rights from one agricultural use toanother, according to a survey conducted in theearly 1990s (Landry 1995). The average salesprice in these water markets was $360 per acre-foot, which corresponds to an annual value ofabout $22 per acre-foot (using a 6 percentinterest rate).

Potential effects of water marketsin the Upper Klamath Basin

There is continued uncertainty about thetotal amount of water available for irrigation inthe Upper Klamath Basin. It also is possible thatfuture curtailments may be implemented in waysthat do not promote efficiency, as they were in2001. In the face of these circumstances,irrigators may wish to increase their options insuch situations.

The suggestion that water markets couldplay a central role in solving Klamath waterconflicts frequently is met with two kinds ofobjections. First, growers in the region typicallydismiss it as an idea that “can’t work” and will“never happen.” Second, they are concerned thatso much water might be transferred from irriga-tion to other uses that the scale of the localfarming economy would be greatly reduced, thusthreatening the viability of their rural communi-ties. These issues are discussed in this and thefollowing section.

Permanent market transfers or “swaps” ofwater rights with different priority dates may beadvantageous to some growers. The financialrisk associated with not receiving water variesamong irrigators, depending on their crops, soils,and production technologies. Our estimates ofshort-run losses from losing access to water varyfrom $25 to $312 per acre. Efficiency suggeststhat the highest priority water rights will have

the highest financial value when held by thoseirrigators with the highest risk of loss.

Consider an example. If a senior water rightis held by a grower facing losses of only $25 peracre (due to lower productivity land), while ajunior water right is held by a grower facinglosses of $300 per acre (due to having highlyproductive land and higher risk crops), there areobvious gains from an exchange of assignedpriority rights between these two growers.Assume the high-loss, junior-right holderexpects to lose access to water 1 year out of 4.He likely would be willing to pay up to $300every 4 years to avoid that loss. The low-loss,senior right holder, on the other hand, couldexchange his senior right for a junior right andface only a $25 loss once every 4 years.

Thus, after taking into account the changesin their expected losses over time, the high-lossgrower should be willing to pay up to $1,250 fora permanent trade of priority dates, while thelow-loss grower should be willing to acceptanything higher than $104. The combined gainfrom this swap is $1,146 per acre.3

Oregon law allows for these kinds of waterrights transfers, both permanent and temporary,provided there are no adverse “third-partyeffects.” When a water right transfer changes thepoint of diversion, it is possible that holders ofwater rights between the two points of diversionwill be affected adversely. Such transfers wouldbe prohibited by the OWRD.

There is reason for optimism that water righttransfers would be allowed in the Upper Kla-math Basin. Most transfers would move seniorwater rights from upstream to downstream,where they could be used on more productiveland. This would reduce the likelihood of thiskind of “third-party effect” because more waterwould be flowing past intermediate diversion

3The present value of these changes in seniority is computedby annualizing the expected losses (dividing by 4), and thenapplying the formula for a perpetuity (dividing by the interestrate). Using 6 percent, we calculate for the high-loss groweran increase in the present value of his water right of(300 ÷ 4) ÷ 0.06 = $1,250; for the low-loss grower, there willbe a loss in present value terms of (25 ÷ 4) ÷ 0.06 = $104.


points rather than less. If the ownership of waterrights evolved so that most senior water rightswere in the Project area, basinwide managementof water allocation would involve restrictingwater diversions among the junior-right holdersin the upper reaches of the Basin to ensureadequate supplies for the senior-right holdersbelow.

Were such a reallocation of priority rights tooccur, an unintended, but desirable, side effectwould be more water left in-stream in the upperportions of the Basin and in Upper KlamathLake. Additionally, in years when water supplieswere inadequate to provide water to junior-rightholders, the curtailment of water deliveries inthese upper reaches would reduce stream andlake contamination from agricultural chemicalsand animal waste by reducing agricultural runoffin the upper portions of the watershed.

For the Upper Klamath Basin overall, theexception to the idea of fully functioning watermarkets and transfers of water rights involvesthe Scott and Shasta valleys in California. Thereare multiple obstacles to including those areas inany realistic scenario. First, there is no physicalway to move water from those tributariesupstream to the Project. Second, it is unclearwhether individual water transfers between rightholders in different states would be allowedunder the laws of either California or Oregon.

Nevertheless, other mechanisms for includ-ing Scott and Shasta valley irrigation as part of acomprehensive solution are possible. Forexample, government agencies or nongovern-mental organizations might take actions toaugment in-stream flows in the Scott and Shastarivers. To the extent that these actions improvefish habitat, it might be possible to relax require-ments for in-stream flows below Iron Gate Dam.

In addition to the possibility that thesetransactions might increase economic efficiency,the adjudication of water rights might reduce thelosses from water shortages in a secondary way.In the long run, junior-right holders can beexpected to alter their production decisionsbased on the recognition that they face arelatively higher risk of not receiving water.

Given this fact, they are likely to takeprecautionary measures that reduce their vulner-ability. For example, they might be able tochoose a different combination of fixed andvariable costs of production, or they mightprepare contingency plans to minimize theirlosses in the event of drought. An example is thepurchase of insurance against water loss.

One variation on the water market thememay be appealing to irrigators and a good fit forthe current administrative structure of theProject. This variant is called a “water bank.” Itcan be thought of as a cooperative arrangementamong growers for the distribution of water andpayments for its use.

In the case of the Project, a water bank mightwork as follows. Each grower could be entitledto a proportional share of the available waterbased on the size of his or her farm. In a droughtyear, when the total amount of water available islimited, these shares may not represent enoughwater to fully irrigate each acre of land. In thatcase, farmers may offer to forgo irrigation and“deposit” their water in the water bank. Otherirrigators may be willing to pay the bank in orderto obtain additional water. The bank acts as aclearinghouse between buyers and sellers ofwater, all of whom are growers in the Project.

What if all growers wanted additional water?In that situation, the Project, or a district withinthe Project, may be willing and able to lookelsewhere for additional water, for example, bybuying water from irrigators above UpperKlamath Lake.

A well-functioning water bank can achievean efficient allocation of water similar to a watermarket. However, a water bank may be bettersuited to the existing collective arrangementsand operations of the Project; it may facilitatethe necessary coordination within the Projectbetter than a decentralized water market.

Without conducive and supportive institu-tions, it is unlikely that adjudicated water rightswill be transferred via water markets or waterbanks to reduce financial risks to the agriculturalsector overall. External funding might serve as a


catalyst to purchasing, and then reselling, high-priority water rights.

Reallocation of waterfrom agriculture tononagricultural uses

How water will be allocated in the futurebetween irrigators within the Project, irrigatorsoutside the Project, and nonagricultural uses is acentral concern for everyone in the region. Theevents of 2001 have raised the level of concern,apprehension, and uncertainty about future waterallocation in the Basin.

The events of 2001 and the conflicts betweenecological and agricultural uses of water haveled some to question whether agriculture iscompatible with competing ecological goals.This is a complex question that does not have asimple “yes” or “no” answer, certainly not onebased solely on the existing methods for valuingand comparing benefits and costs. Moreover, theeventual outcomes for water allocation in theBasin will be based in part on legal determina-tions involving tribal rights, the EndangeredSpecies Act, Bureau of Reclamation obligations,and competitive forces in national and interna-tional agricultural markets. Although it is notpossible to predict the future path of waterallocation within the Upper Klamath Basin, itcan be expected to evolve in response to changesin the legal, economic, demographic, and politi-cal setting.

Economic forces also can be expected to beat work, by influencing legal and politicalprocesses, and by creating individual and collec-tive incentives to allocate water in ways thatreflect the most valuable uses of that water tosociety. In that context, some observations aboutthe allocation of water between agricultural andnonagricultural uses are possible, based on theeconomic description of agriculture in the UpperKlamath Basin and the estimates of the value ofwater when used on various classes of agricul-tural land.

When water rights adjudication in the Basinis complete, Oregon water law allows purchasesof water rights from individual irrigators toaugment in-stream flows, so long as there are nodirect “third-party” effects that limit the legaldiversions by other water rights holders.Whether and how much water might be returnedto in-stream flows is unclear. However, there islittle evidence to suggest that such transactionswill result in the complete demise of agriculturein the Upper Klamath Basin. The followingevidence should dispel such fears.

First, while there are examples of largetransfers of water from agricultural to nonagri-cultural uses via water markets (for example, inTexas’ Rio Grande Valley, where 99 percent ofwater rights transfers were from agricultural tononagricultural uses), much of the agriculturalwater that was sold would otherwise have beenunused by its owners (Griffin 1998). In addition,nearly all of these transfers were near largeurban centers and went to municipal uses or toaccommodate urban sprawl. In the UpperKlamath Basin, there are no comparable circum-stances in which water is unused, nor is therelarge unmet urban demand for water nearby.Long-distance conveyance seems impractical atthis time.

Second, the estimates presented above of thelong-run agricultural value of water rights,especially on the highly productive “prime”Class II and III farmlands, seem to be more thanenvironmental groups have been willing tospend, except in exceptional circumstances.Most of the Class II and III soils are estimated togenerate between $75 and $144 per acre peryear, or between $37 and $72 per acre-foot ofwater. Purchases of water rights for in-streamflow, for example by the Oregon Water Trust,tend to be in the range of $6 to $22 per acre-foot.Thus, the agricultural value of water on thesesoils is 1.5 to 12 times higher than the prices thathave been paid elsewhere in the region.

This evidence suggests that, given scarcefunding for the improvement of aquatic ecosys-tems and fish habitat, available funds are likely


to be targeted where they can do the most good(in terms of improving fish habitat) at the lowestcost. Some of the Class IV and V soils in theUpper Klamath Basin, where estimates of thevalue of water are within the range of $6 to$22 per acre-foot, might be candidates.

This economic evidence may or may not bea good predictor of the course of legal challengesand political support for ESA-related restrictionson irrigation diversions. It also is not clearwhether the introduction of water markets wouldalter the political balance among interest groupsin any predictable way. To the extent that markettransactions are used to improve stream flow andaquatic habitats in the region, the status ofthreatened and endangered species may improve,and pressures for additional legal or politicalchallenges may abate. Moreover, market trans-fers involve direct compensation to those waterright holders who willingly sell their waterrights. Generally speaking, a water market alsowill put the agricultural economy in a betterposition to reduce the economic effects of anyfuture restrictions on irrigation, both in terms ofindividual farmers and the overall agriculturalcommunity.

It is important to recognize that with watermarkets, land retirement would have a smallereffect on the agricultural economy than if landwere taken out of production arbitrarily or bysome other procedure that did not take accountof market values. When irrigation water rightsare bought by environmental interests to protectfish, a market approach will encourage andfacilitate the purchase of those water rights withthe lowest agricultural value. These rights arelikely to be those associated with Class IV and Vsoils, where net revenues may be only 7 percentof those on the most productive soils. As a result,the retirement of those lands will have thesmallest effect on the region’s agriculturaleconomy.

For example, we estimate that if 20 percentof the lowest value irrigation water rights werepurchased for in-stream use, total net farmrevenues for the Basin would be reduced by onlyabout 10 percent.

A change of this magnitude would have avery modest effect on the agricultural economyoverall. For example, this change is less than thetypical year-to-year percentage change (positiveor negative) in gross farm sales in KlamathCounty, and it is about half as large as the typicalyear-to-year change in revenues for Oregoncounties such as Sherman and Gilliam, whererainfed agriculture predominates.

None of the foregoing analysis is intended toprovide an answer to the question of which usesfor water in the Klamath watershed produce thehighest social value. In addition to agriculture,other individuals and groups with interests inhow water is allocated in the Upper KlamathBasin include the commercial fishing industry,recreational users, and Native American tribesthroughout the Basin and in coastal communi-ties, as well as urban, regional, and nationalgroups who value the protection of species andaquatic ecosystems. As much as one would liketo quantify these different (and difficult-to-measure) values in order to compare them toagricultural values (including the values associ-ated with the protection of farm communities), itwould be an extremely costly endeavor unlikelyto achieve a credible result.

Biological flexibilityThe mechanisms for water transfers dis-

cussed above involve introducing flexibility inthe ways in which irrigators are able to respondto water scarcity. It is reasonable to considerhow flexibility in the biological requirements forlake elevation in Upper Klamath Lake andstream flow below Iron Gate Dam can be partof a cost-minimizing way to allocate wateramong competing uses. In the event of adrought, is there room for flexibility in the ESArequirements?

Several recent Biological Opinions havebeen responsive to drought conditions in consid-ering how much water would be required tosupport fish populations. However, the limitedflexibility in the 2001 decisions raised questionsabout how biological flexibility might best bemanaged, while at the same time offering


reasonable and prudent protection for fish. Arule-based, long-term approach that incorporatesdrought-year compromises by both in-streamand irrigation uses might be a way to avoid largenegative consequences for either agricultural orenvironmental interests.

Given the language contained in the Endan-gered Species Act, to a large extent this is aquestion for biologists and court interpretations.(See Chapter 5, “Suckers,” and Chapter 6, “CohoSalmon,” for discussion of the biology of theseissues.) The ESA indicates that costs should notbe taken into account when devising plans toprotect endangered species; yet, it also instructsthat responses should be “reasonable andprudent.”

More flexible rules for species protectionthat allow exceptions to a general rule (for lakeelevation or stream flow) under certain circum-stances would seem to be consistent with thedirective for “reasonable and prudent”approaches, so long as these rules would notcompromise the protection of the species. Toillustrate, consider the possibility that therequired lake elevation in Upper Klamath Lakecould be lowered by 1 foot below the desiredminimum, say, once every 5 years (but no morefrequently, regardless of whether multipledroughts occurred within a 5-year period) andthat the in-stream flow requirement below IronGate Dam could be relaxed by 25 percent, say,once every 5 years. Given these rules, watershortages sometimes would restrict irrigationdiversions by farmers, and they sometimeswould reduce flows or lake levels for fish.

Based on the distribution of hydrologic year-types, how often, and to what extent, wouldsevere irrigation restrictions be necessary?Depending on the biological requirements andfrequency of low-water years, a flexible alloca-tion mechanism of this kind might make itpossible to completely avoid severe irrigationreductions like the one experienced in 2001.Instead, there might be only infrequent, modestrestrictions.

Although the U.S. Fish and Wildlife Service(USFWS), the National Marine Fisheries

Service (NMFS), and the Bureau of Reclamation(BOR) have at times made provisions for relax-ing the biological requirements in drought years,they have not established a regular, long-termdirective that would rule out sequential, orclosely timed, reductions in lake level or streamflow that might place fish in jeopardy.

The BOR proposals for managing lakeelevation in Upper Klamath Lake and streamflow below Iron Gate Dam, for example,allowed for relaxing lake elevation and streamflow requirements in dry years and critically dryyears. The BOR proposal, however, would relaxbiological requirements in all dry or criticallydry years, even if they occurred consecutively.The alternative suggested here would allow forrelaxed biological water requirements only ifthose requirements had not been relaxed in theprevious 5 (or some other number of) years. Toavoid considering every year to be a specialcase, rule-based limits on the frequency ofcompromises must be upheld.

In principle, arrangements of this kindrecognize the uncertainty of future water avail-ability, and they also implicitly recognize thatsmall reductions in water supplied to severaluses might be preferable to large reductions insupply to any one group. This approach is yetanother way in which flexibility, if managedeffectively, can promote better use of a scarceresource. Once again, however, the possibility ofimplementing a proposal of this kind woulddepend on scientific and court interpretations ofthe ESA as to whether such an approach couldbe considered “reasonable and prudent” and notlikely to jeopardize the continued existence ofspecies listed as threatened or endangered underthe ESA.

Increasing the water supplyMany observers would like to see the quan-

tity of water in the Basin increased in some way.Proposals include using groundwater in times ofdrought, building new reservoirs, and “savingwater” through the adoption of technologies withhigher irrigation efficiency.


These solutions are appealing because theyavoid making hard choices to resolve the conflictover existing scarce water; they simply makemore water available so that all users can havewhat they want. In practice, these solutionsrarely work. The options for increasing suppliestend to be very expensive relative to the value oftheir intended use, and they often are environ-mentally damaging (Frederick 1999).

The sections below evaluate the economicsof two approaches that have been suggested asways to increase the amount of available water.Analyses of other options are beyond the scopeand resources of the current study. For example,we do not look in detail at augmenting waterstorage with new reservoirs.

Supplementing irrigationwith groundwater

In drought years, might it be feasible tosupplement irrigation diversions by pumpinggroundwater, or by using groundwater toaugment in-stream flow so that additionalirrigation diversions could be permitted? Thereare important hydrological concerns about doingso on a large scale, as there is evidence that suchpumping would have adverse effects on localaquifers, private wells, public drinking watersupplies, and subsurface irrigation in nearbyareas (see Chapter 2, “Klamath ReclamationProject”). For these reasons, there may be legalobstacles as well.

Our goal here, however, is to provide anapproximate picture of the economic costs andbenefits to farmers of such an approach. Thequestion is whether the installation of high-volume groundwater pumps can be an economi-cally viable way to respond to drought condi-tions in the Upper Klamath Basin. We are notasking whether such pumps can be economicallyjustified to permanently augment irrigationsupplies, but rather whether they could be usedas a source of supplemental irrigation water intimes of extreme need.

In 2001, for example, the TulelakeIrrigation District projected that, with $5 million,wells producing 170 cfs could be developed.

Assuming 100 days of pumping and 2 acre-feetper acre, this volume would serve about17,000 acres.

A key question is how often this supplemen-tation would be required. The drought conditionsobserved in 2001 and 1992 represent extremeconditions that occur only 5 percent of the timebased on data from the past 41 years. Changes inforests, climate, and biological requirementsmay mean that irrigation water scarcity willoccur much more frequently in the future. If weassume that supplemental water is needed onceevery 5 years, can the costs estimated by theTulelake Irrigation District be economicallyjustified? It depends on how the available wateris otherwise allocated.

Based on the $5-million investment cost anda 5 percent annual cost for maintenance anddepreciation (given usage only 1 year in 5), thecost when supplementation is offered would be$162 per acre for the investment and deprecia-tion. Assuming pumping requires 100 feet (totaldynamic head), and with a commercial rate forenergy (or opportunity cost) of $0.035 per kwh,the energy cost per acre would be $9. Thus, thetotal cost of supplemental pumping would be$171 per acre.

If a groundwater pumping activity permits17,000 additional acres to be irrigated, whichacres would these be? In the absence of ground-water pumping, efficient water allocation wouldinvolve irrigating high-value lands and leavinglower value lands dry. If we assume that efficientallocation occurs (for example, via water mar-kets), then the additional areas irrigated as aresult of groundwater pumping would be lowervalue lands. Since one-half of the acreagenormally irrigated is Class IV and V soils, wherelosses due to an irrigation cutoff generally are$33 to $70 per acre, supplemental irrigation withgroundwater pumping cannot be justified if itcosts $171 per acre.

If an efficient allocation of water in droughtyears is not possible, and the most productivelands are required to be left dry 1 year out of 5,then the $171 per-acre cost would be justified toavoid per-acre losses ranging from $173 to $312


for Class II and III soils. However, this conclu-sion requires one to assume that surface waterwill be allocated in a highly inefficient mannerduring future water shortages, as it was in 2001.

Improving irrigation efficiencyIrrigation efficiency is defined as the ratio of

the amount of water actually consumed by thecrop to the total amount of water diverted (fromsurface water or groundwater) for irrigation.Depending on the irrigation technology used, afarmer may need to apply twice as much wateras the plants need. The water that is not con-sumed by plants flows back to the stream,percolates down through the soil, or evaporates.

It generally is assumed that water thatpercolates into the subsoil eventually finds itsway back into the stream. This may take hours,days, or years, depending on soils, geology, anddistance to the stream. The benefits to fish ofchanges in irrigation diversions vary greatly,depending on what is assumed about the amountand timing of changes in these return flows.

Evaporation varies as well, depending ontemperature and humidity, but it often isassumed to account for no more than 10 to15 percent of the water applied.

Surface (flood) irrigation efficiency may beless than 50 percent; sprinkler efficiency may behigher than 70 percent. In the Upper KlamathBasin, surface irrigation is most common,especially on the less productive lands. For mosthigh-productivity lands, sprinkler irrigation isused. Conveyance efficiencies (typically canalsfor transporting water) of 70 to 80 percent arecommon in the Northwest, although efficienciesfor unlined canals can be as low as 20 percent.Overall efficiencies, including conveyance andirrigation delivery, average less than 50 percent,and in some cases are as low as 20 percent(Butcher et al. 1988).

Several western states have passed legisla-tion encouraging farmers to invest in improvedon-farm irrigation technology (Huffaker andWhittlesey 2000). However, while irrigationefficiency may be an important factor affectingthe potential for satisfying agricultural and

ecological demands, it should not be assumedthat improved irrigation efficiency in agriculturewill result in less water being diverted from thestream. Thus, it does not necessarily leave morewater for fish or other in-stream uses. Reality ismore complicated, since improved irrigationefficiency also reduces return flows.

Assume a farmer diverts 400 acre-feet withan irrigation efficiency of 40 percent. Thismeans that his consumptive use is 160 acre-feet,and return flows are 240 acre-feet. What happensif this farmer adopts improved irrigation technol-ogy that raises irrigation efficiency to 70 per-cent? With higher irrigation efficiency, thefarmer may alter production methods or evenswitch to different crops that take advantage ofthe improved irrigation technology. As a result,consumptive use may increase. Assume, forexample, that consumptive use increases from160 to 175 acre-feet. With 70 percent irrigationefficiency, the stream diversion would be low-ered from 400 to 250 acre-feet (175 ÷ 0.7). Onthe face of it, this would seem to be good for fishbecause it leaves an additional 150 acre-feet instreams or lakes.

However, the return flow now is only75 acre-feet (250 – 175) instead of the previous240 (400 – 160), a decrease of 165 acre-feet.Return flow has decreased by 165 acre-feet,while diversion has decreased by only 150 acre-feet. Thus, stream flow is reduced by 15 acre-feet as a result of the adoption of the newtechnology.

This hypothetical example illustrates thepossibility that investment in improved irrigationefficiency can substantially reduce the amount ofwater left for streams or lakes. The actualoutcome depends on what changes the farmermakes in farming practices and on how irrigatorsdownstream respond to changes in the availabil-ity of stream flows at different times—especiallywhere surface water is overappropriated viaexisting senior- and junior-right holders.

This issue is especially relevant to the UpperKlamath Basin, where water that is “wasted” dueto inefficient irrigation technology frequentlyprovides ecological benefits elsewhere. In areas


above Upper Klamath Lake, return flows fromirrigation return to streams or to Upper KlamathLake, either reentering the Project for irrigationor providing in-stream flows below Iron GateDam. Return flows in the Lost River watershedand the Project are believed to be reused severaltimes by other irrigators as these waters arecollected in lateral canals or seep into canals,wells, and subsurface irrigation throughout theProject. Because of this recycling of water acrossthe Project, overall irrigation efficiency is esti-mated to be above 90 percent.

In addition, return flows within the Projectsupply water to Tule Lake and Lower Klamathnational wildlife refuges. Return flows in theShasta and Scott river areas supplement streamflows and augment habitat for coho salmon.Overall, it is hard to make the case that improvedirrigation efficiency will make more wateravailable for fish and wildlife habitat.

If, however, return flows are very slow, sothat “wasted” irrigation water does not return tolakes and rivers during critical months, there maybe potential gains from improved irrigationefficiencies—but not without a cost. Ultimately,the cost of making more water available for fishthrough improved irrigation efficiency must becompared to the cost of the alternatives.

Even in cases where improved irrigationefficiency makes more water available for fish,the farmer may not benefit. For some crops,especially low-value crops, the cost of improvedirrigation technology may be higher than the netrevenues from production. For high-value crops,sprinkler irrigation may provide some gains tofarmers due to increased yields, lower labor andpumping costs, or the possibility of switching toa higher value crop.

The principal costs of improved irrigationefficiency are the capital costs of the new tech-nology and associated maintenance costs. Sprin-kler systems can cost from $400 to $1,200 peracre to install. The annualized cost for theseinvestments would amount to $24 to $72 per acreper year. Given the net revenues for Class IV andV soils reported in Table 3, the cost of these

investments would be prohibitive unless theyenable irrigators to increase revenues or lowercosts in other ways.

Concluding commentsThe legal and political institutions and

infrastructure that currently exist in the UpperKlamath Basin were developed over the past100 years to fit the circumstances of thatperiod—one in which per-capita income was lowand natural resources were relatively abundant.For these historical reasons, improvements in theinstitutions and infrastructure necessary forefficient water allocation have not kept pace withother changes in the region. In particular, thecurrent lack of adjudicated water rights and theabsence of water-metering devices are two keyobstacles to managing water in a way that wouldreduce uncertainty, promote efficiency, andavoid costly events like the one experienced in2001.

Costs are minimized most directly by flex-ible mechanisms that allow scarce irrigationwater to be transferred among growers so that itfinds its way to the highest value uses throughvoluntary exchange. The analysis above suggeststhat more than 80 percent of the costs of the2001 water situation could have been avoidedhad water markets or other transfer mechanismsbeen available at that time. Given the high valueof agriculture within the Project, and the pres-ence of large areas of significantly lower valueagriculture in other parts of Klamath County, acost-minimizing approach to reducing irrigatedacreage would involve full irrigation for theProject and curtailed irrigation in other, lessproductive areas. Indeed, a comparison betweenthe $6.3 million in estimated cost for a cost-minimizing irrigation curtailment equivalentto the one imposed in 2001 and the $27 to$46 million in estimated losses in 2001(Chapter 14, “Outcomes”) is sobering.

This analysis suggests that in the UpperKlamath Basin, the absence of water transfermechanisms such as water markets or waterbanks magnified the costs of drought and ESA


determinations fourfold. The cost of future watershortages could be reduced if mechanisms fortransferring water rights were put in place. Inaddition, the incorporation of rule-basedbiological flexibility into the species-relateddecisions also could lessen the prospect of costlyrestrictions on irrigators during future droughts.

The completion of the adjudication processpromises to create a new opportunity for thereallocation of water rights among groups andusers with different interests and risks. Whateverthe outcome of tribal water right claims or futureESA rulings and Biological Opinions, if waterrights can be transferred across different loca-tions within the Basin, it will be possible forwater available to irrigators to be allocated withthe greatest certainty to those users with the mostto lose from not getting their water. Users withjunior water rights may develop contingencyarrangements to reduce their short-run losses,plant crops more tolerant of deficit irrigation, ordiversify their farm activities.

Other mechanisms, such as insurance againstcurtailed water deliveries, may develop as waysto reduce uncertainty, promote flexibility, andencourage cost-effective responses. Whencombined with long-term actions to addresswater quality issues throughout the Basin, thereis reason for optimism that a sustainable balancecan be found among the competing demands forthe Basin’s water.

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Huffaker, R. and N.K. Whittlesey. 2000. “Theallocative efficiency and conservationpotential of water laws encouraging invest-ments in on-farm irrigation technologies.”Agricultural Economics 24:47–60.

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