The ability to reallocate water to higher-value uses during drought is an increasingly important ‘soft-path’ tool for managing water resources in an uncertain future. In most of the Western United States, state-level water market institutions that enable reallocation also impose substantial transaction costs on market participants related to regulatory approval and litigation. These transaction costs can be prohibitive for many participants in terms of both costs and lengthy approval periods, limiting transfers and reducing allocation efficiency, particularly during drought crises periods. This manuscript describes a mechanism to reduce transaction costs by adapting an existing form of informal leases to facilitate quicker and less expensive transfers among market participants. Instead of navigating the formal approval process to lease a water right, informal leases are financial contracts for conservation that enable more junior holders of existing rights to divert water during drought, thereby allowing the formal transfer approval process to be bypassed. The informal leasing approach is tested in the Upper Colorado River Basin (UCRB), where drought and institutional barriers to transfers lead to frequent shortages for urban rights holders along Colorado’s Front Range. Informal leases are facilitated via option contracts that include adaptive triggers and that define volumes of additional, compensatory, releases designed to mitigate impacts to instream flows and third parties. Results suggest that more rapid reallocation of water via informal leases could have resulted in up to $222 million in additional benefits for urban rights holders during the historical period 1950 – 2013.

Many water markets in the Western United States (U.S.) have the ability to reallocate water temporarily during drought, often as short-term water rights leases from lower value irrigated activities to higher value urban uses. Regulatory approval of water transfers, however, typically takes time and involves high transaction costs that arise from technical and legal analyses, discouraging short-term leasing. This leads municipalities to protect against drought-related shortfalls by purchasing large volumes of infrequently used permanent water rights. High transaction costs also result in municipal water rights rarely being leased back to irrigators in wet or normal years, reducing agricultural productivity. This research explores the development of a multi-year two-way option (TWO) contract that facilitates leasing from agricultural-to-urban users during drought and leasing from urban-to agricultural users during wet periods. The modeling framework developed to assess performance of the TWO contracts includes consideration of the hydrologic, engineered, and institutional systems governing the South Platte River Basin in Colorado where there is growing competition for water between municipalities (e.g., the city of Boulder) and irrigators. The modeling framework is built around StateMod, a network-based water allocation model used by state regulators to evaluate water rights allocations and potential rights transfers. Results suggest that the TWO contracts could allow municipalities to maintain supply reliability with significantly reduced rights holdings at lower cost, while increasing agricultural productivity in wet and normal years. Additionally, the TWO contracts provide irrigators with additional revenues via net payments of option fees from municipalities.

Water scarcity is a growing problem around the world, and regions such as California are working to develop diversified, interconnected, and flexible water supply portfolios. To meet their resilient water portfolio goals, water utilities and irrigation districts will need to cooperate across scales to finance, build, and operate shared water supply infrastructure. However, planning studies to date have generally focused on partnership-level outcomes (i.e., highly aggregated mean cost-benefit analyses), while ignoring the heterogeneity of benefits, costs, and risks across the individual investing partners. This study contributes an exploratory modeling analysis that tests thousands of alternative water supply investment partnerships in the Central Valley of California, using a high-resolution simulation model to evaluate the effects of new infrastructure on individual water providers. The viability of conveyance and groundwater banking investments are as strongly shaped by partnership design choices (i.e., which water providers are participating, and how do they distribute the project’s debt obligation?) as by extreme hydrologic conditions (i.e., floods and droughts). Importantly, most of the analyzed partnership structures yield highly unequal distributions of water supply and financial risks across the partners, limiting the viability of cooperative partnerships. Partnership viability is especially rare in the absence of groundwater banking facilities, or under dry hydrologic conditions, even under explicitly optimistic assumptions regarding climate change. These results emphasize the importance of high-resolution simulation models and careful partnership structure design when developing resilient water supply portfolios for institutionally complex regions confronting scarcity.