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California Water Rules Curtailing New Development

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Now one might ask why there is anyone trying to move development forward in California, given the impressive downward price trajectory of real estate over the last year. We’ll take as a given that such a big state can have pocket of opportunity even in a bad market.

But this article highlights an issue that will be coming more to the fore more frequently: water scarcity. In arid states like Arizona, developers and landowners have long recognized the importance of water rights. But most Americans are blissfully unfamiliar with the idea of fresh water as a scarce resource, let along that water shortage might turn out to be a more immediate problem than peak oil or rising food costs (although water scarcity will clearly play into the latter problem).

The UN, in its World Water Development Report, forecast in its downside scenario that by 2050, seven billion people will face water shortages, but corrective action could reduce that number to a mere two billion.

On a more mundane level, mounting water pressures will major and minor dislocations. A sign of things to come is a policy in California that requires new residential developments to have a 20 year water supply. A New York Times article describes the background and the consequences:

The state law was enacted in 2001, but until statewide water shortages, it had not been invoked to hold up projects.

While previous droughts and supply problems have led to severe water cutbacks and rationing, water officials said the outright refusal to sign off on projects over water scarcity had until now been virtually unheard of on a statewide scale….

On Wednesday, Mr. Schwarzenegger declared an official statewide drought, the first such designation since 1991. As the governor was making his drought announcement, the Eastern Municipal Water District in Riverside County — one of the fastest-growing counties in the state in recent years — gave a provisional nod to nine projects that it had held up for months because of water concerns. The approval came with the caveat that the water district could revisit its decision, and only after adjustments had been made to the plans to reduce water demand.

“The statement that we’re making is that this isn’t business as usual,” said Randy A. Record, a water district board member, at the meeting here in Perris.

Shawn Jenkins, a developer who had two projects caught up in the delays, said he was accustomed to piles of paperwork and reams of red tape in getting projects approved. But he was not prepared to have the water district hold up the projects he was planning. He changed the projects’ landscaping, to make it less water dependent, as the board pondered their fate.

“I think this is a warning for everyone,” Mr. Jenkins said.

Also in Riverside County, a superior court judge recently stopped a 1,500-home development project, citing, among others things, a failure to provide substantial evidence of adequate water supply….

Throughout the state, other projects have been suspended or are being revised to accommodate water shortages, and water authorities and cities have increasingly begun to consider holding off on “will-serve” letters — promises to developers to provide water — for new projects.

“The water in our state is not sufficient to add more demand,” said Lester Snow, the director of the California Department of Water Resources. “And that now means that some large development can’t go forward. If we don’t make changes with water, we are going to have a major economic problem in this state.”….

An eight-year drought in the Colorado River basin has greatly impinged on water supply to Southern California. Of the roughly 1.25 million acre-feet of water that the region normally imports from that river toward the 4.5 million acre-feet it uses each year, 500,000 has been lost to drought, said Jeff Kightlinger, the general manager of the Metropolitan Water District of Southern California….

“We have bad hydrology, compromised infrastructure and our management tools are broken,” said Timothy Quinn, the executive director of the Association of California Water Agencies. “All that paints a fairly grim picture for Californians trying to manage water in the 21st century.”…

As the denied building permits indicate, the lack of sufficient water sources could become a serious threat to economic development in California, where the population in 2020 is projected to reach roughly 45 million people, economists say, from its current 38 million. In the end, as water becomes increasingly scarce, its price will have to rise, bringing with it a host of economic consequences, the economists said.

“Water has been seriously under-priced in California,” said Edward E. Leamer, a professor at the Anderson School of Management at the University of California, Los Angeles. “When you ration it or increase its price, it will have an impact on economic growth.”

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9 comments

  1. Tom Lindmark

    Yves,
    I spent 20 years of my working life in both Northern CA and Southern CA-about evenly split. I realized after about five years there that the state did not have a water problem. They have lots of water. They have an allocation problem. Essentially, the Northern half of the state has abundant water while the South relies on rations from the North and Colorado River water.

    Various interests need to come together in the state, put aside agendas and hammer something out to deal with the problem or they are going to reap a very bitter harvest.

    I now live in AZ and while far from perfect, they did get a handle on the water issue some time ago. More give and take needed here as well but perhaps because it is a desert there does seem to be the political will to get something done.

  2. Jojo

    I’m not at all sure that you can say that Northern CA has abundant water supplies. Here is a chart of water levels at 12 major state reservoirs as of this past Monday. Doesn’t look very good since we will not get any rain until at least October:

    http://www.sfgate.com/cgi-bin/object/article?f=/c/a/2008/06/05/MNF5113OBN.DTL&o=3

    I think we have to start charging the southern part of the state a whole lot more for the water we supply them. Like anything, higher prices will eventually lead to better systems to store what water we do get.

  3. Richard Kline

    Tom, you misspeak on California water issues. They do not have ‘plenty’ in the North; already, so much is drawn off from the Sacramento system that the Delta and SF Bay are both suffering severely as ecosystems. SoCal developers have lusted after NorCal water for decades but couldn’t get it when water was still there for the getting, and assuredly will _NOT_ get their wallets on it now. AZ ‘solved’ it’s problem by a) collaborating with other SW users on draining unsustainable amounts out of the lower Colorado River, which in turn is impacting the Sea of Cortez rather adversely, and b) pumping out fossil water in southern AZ to flush toilets in subdivisions for a decade or two before it’s all gone forevermore. It is true that both in the Imperial and Sacramento valleys the largest consumers of water by far are large scale farmers with senior water rights. Your proposal that ‘everybody needs to come together’ amounts to farmers going out of business so that more subdivisions can be built to profit developers. It’s zero-sum—no WORSE than zero sum, because as just mentioned already more water is being drawn down in the SW than the ecosystems can sustain. All of this is without factoring in any climatic changes from global warming which, though hard to figure, are _unlikely_ to increase rainfall in the SW USA. I’m sure you know as well that the ecological history of that region indicates _even in ‘good times’ prior to the onset of global warming climate change that the SW was subject to decade long super-droughts, not a bit of which is factored into the development plans of Plasticville subdisions from the Catalina Islands to the Four Corners.

    It’s worth adding that the huge bulk of residential development in California during the recent bubble has been in arid or desert regions with no uncommitted water resources: ALL recent ‘growth’ [note: cancers grow too] has been completely dependent on water piped in from other areas. The growth machine in CA, NV and AZ has been so far out of control for so long that we already are beyond carrying capacity. I fully expect to live long enough to see most of the urban blight in AZ you see around you turn into cut off, shut off, and abandoned ghost-burbs. (I wonder what we’ll call the refugees, ‘Zoners,’ maybe?) To the extent that we have ‘more development’ in CA, it needs to be concentrated rather than spread, and on severe water restriction. The idea that everyone who wants a stand-alone, single familiy residence in the SW USA should have one is delusional.

  4. Anonymous

    With global warming, I think there will be more snow in Colorado Rockies and thus plenty of water for the pools and lawns in California; relax, all waters of the state belong to the state and when it rains it pours!

  5. Anonymous

    California has a water allocation problem, but its not North versus South. Its agriculture versus everyone else. Agriculture uses 80% of the states water but represents only 2% of the states economy.

    Growing the alfalfa crop, which is used as cattle feed and worth maybe $200M p.a, consumes as much water as all households in the state. Flood irrigation of the rice crop uses more water than all industry in the state.

    Maybe if the water was not subsidized to the tune of several hundred dollars per acre foot then this insane mis-allocation of resources would end.

  6. Anonymous

    I can’t speak to the whole state, but where I live the water comes from wells. If you subtract alfalfa (about 40% of the water use) we are sustainable (more or less, there is a large error bar on the estimated rate of aquifer replenishment). Alfalfa is an obvious target since it is a small number of people who don’t produce all that much. If we could set up an assessment district to charge all water users a fee to buy out the existing alfalfa farmers (and ban new entrants) I’d vote for it. Since the average age of the farmers is pretty high this could probably work. I’m all for not approving developments that don’t have water, but is this really the best way to handle a water shortage. How about high prices for water? Finally, if Cali has a water shortage is it a good idea to import 300,000 to 400,000 illegal immigrants per year?
    blueskies

  7. Anonymous

    No doubt they will soon find a way to charge us for the air we breath. The cost of all necessities will drain everything people are still able to earn.

  8. James Moore

    “But most Americans are blissfully unfamiliar with the idea of fresh water as a scarce resource, let along that water shortage might turn out to be a more immediate problem than peak oil or rising food costs…”

    The exact opposite is true – anyone who’s spent any time at all in the western half of the country is absolutely aware that water is a huge issue. That’s been true for more than a century – remember Chinatown? the western water wars? The Peripheral Canal 30 years ago?

    Change this to perhaps “A few easterners are blissfully unfamiliar…” and you may have a point. But vicious struggles over water have been a fact of life here for generations. Suggesting that it’s a new issue is baffling.

  9. Yves Smith

    James,

    The comment thread above disproves your assertion. Tom at the start claims that Northern California does not have a water problem. When I was young, I lived in western Oregon, and I am pretty confident that Oregon and Washington west of the Cascades still get plenty of rain and have ample water.

    Similarly, a colleague worked on a failed deal at the end of the 1980s-early 1990s called American Water Development. It was going to be the first private development of a water resource, A consortium of investors had bought the land over the third largest aquifer in the US, in Southern Colorado.

    Yet even though many of the members of the VC firm that promoted the deal lived in Denver, only the one who came from a sixth-generation Arizona family understood the value of water and water rights and pressed to pursue the deal. So twenty years ago, you have Denver residents and supposedly savvy investors who have to be persuaded that water is a valuable resource.

    Ironically, it failed because they were unable to perfect their rights.

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