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A New Kind of Groundwater Market for California

Farmers, regulators and an economist teamed up to launch a first-of-its kind groundwater market in California. Matthew Fienup, who was involved in the effort, explains how it works and the plans for its expansion.

Written by Ian Evans Published on Read time Approx. 5 minutes
Expensive fertilizer
Workers pick strawberries in Oxnard, Calif. The first groundwater market in California has launched, covering the Oxnard Plain in Ventura County.AP/Damian Dovarganes, File

California’s drought might be over, but the state continues to suffer groundwater woes. A new kind of groundwater market for individual landowners hopes to address some of those problems.

For much of California’s history, most groundwater was completely unregulated. While some water agencies, like the Mojave Water Agency, implemented local water markets in the early 2000s, many California cities and farmers freely pumped from underground aquifers. Then in 2014, the state passed the Sustainable Groundwater Management Act (SGMA) to help curtail over-pumping during droughts and bring groundwater basins into sustainability.

One powerful way to achieve that, says Matthew Fienup, is with market forces. Fienup, the director for economic research and forecasting at California Lutheran University, helped lead the charge to create the new groundwater market in California.

For seven months, Fienup and Edgar Terry, a local farmer and senior adjunct professor at Cal Lutheran, worked with the Water Market Group – a coalition of regulators from the Fox Canyon Groundwater Management Agency, farmers, urban officials and environmentalists – to create a pilot of their groundwater market in California. Unlike previous water markets, which required a central Watermaster to adjunct pumping rights and monitor transfers, Fox Canyon’s system is designed to be more of a free-market, where landowners can trade pumping rights on their own. This kind of system is only possible now thanks to increased electronic monitoring of groundwater

For now, the project only covers Oxnard Plain, a coastal area in Ventura County, about 54 miles northwest of Los Angeles. But, the pilot has already received a $1.9 million grant from the United States Department of Agriculture to continue and expand.

Water Deeply recently talked with Fienup about creating this pilot water market, and how a marketplace can help regulate groundwater.

Water Deeply: What makes markets a solution to groundwater management?

Matthew Fienup: Well, so to be clear, markets are not the only solution. They are one of the solutions. I think the elegance of markets is that they realign incentive in a way that, if well designed, can fundamentally alter behavior. I would hold up as an example of this the situation in Fox Canyon in Ventura County. Farmers here are looking at [significant] reductions in groundwater use. Confronted with those cuts, growers built consensus around the development of a water market.

Farmers realized, if someone’s cheating and pumping more groundwater extraction than they are allocated, they’re devaluing my asset. Markets here realigned incentive in a truly unique way.

Water Deeply: Do you think that this kind of market, or these solutions, would have been as well accepted had they not come from inside the industry?

Fienup: No, I don’t at all. In Ventura County, it was growers meeting for over a year, building consensus in that industry around a set of reforms that included a water market, that really helped moved the process along. After the farmers had consensus, then we brought the regulators in, and at that point it was hard to stop the momentum that these reforms had.

Water Deeply: Why hasn’t there been a groundwater market like this up until now?

Fienup: There just wasn’t the regulatory infrastructure in place to do this well in California. SGMA really changed a lot of that, by subjecting groundwater to regulatory oversight. The situation in Ventura County is a little different than the rest of the state, in that we actually had state legislation pass in the 1980s which subjected local groundwater use to regulatory oversight. We had metering of wells since the 90s. We had modest cuts to groundwater extraction since the 90s.

That’s sort of the power and the potential of the Ventura County water market. Because we were out in front on the issue, there’s the potential to learn important lessons here that allow us to replicate this system in other parts of the state, and bring other basins up to speed more quickly.

Water Deeply: What was your role in getting this group together?

Fienup: Well, about three years ago, [Edgar Terry] and I started having one-on-one meetings with farmers. We had dozens of these meetings, talking about fundamentally changing groundwater management and moving to a market system of allocation. Farmers, of course, loved the idea because of the greater flexibility that it would provide them, but what every one of them said was, “This sounds great, but the regulator would never go along with this.”

Then Terry and I, with the help of the CEO of the Ventura County Farm Bureau, met one-on-one with the directors of the local groundwater regulator. In those one-on-one meetings with regulators, we talked about cap and trade, and about capping groundwater extraction at a sustainable level. The regulator said, “Well this sounds great, but the farmers would never go along with this.” That was the lightbulb moment, where both sides realized that this was a set of solutions that both water users and regulators could support.

Water Deeply: Now that you’ve designed it and after you hashed all the details out for seven months, what does this pilot ground market really look like?

Fienup: One of the recommendations of the Water Market Group was, look, you’re trying something that’s never been done in Ventura County, and actually hasn’t been done in this way in California. We should start simple, and learn as we go, and really adapt. The first phase of the pilot that’s underway now involves agricultural water users only, and they’re all located within one geographic region in the county, which is the Oxnard Plain groundwater basin.

We’re currently working with in-kind transfers of groundwater pumping allocation; we’re not transporting water. If a grower needs extra pumping, they need to pay someone else not to pump nearby in the basin. We’re trading the simplest unit first, which is this one acre-foot of groundwater pumping within the given water year. It’s temporary transfers of pumping – it’s just for the term of that water year.

It’s limited in terms of geographic area, and limited in terms of water use types, but we learned that the U.S. Department of Agriculture awarded a $1.9 million conservation innovation grant to support expansion of the water market. The hope is for a second expanded phase that includes a larger group of farmers, and also includes urban water users and environmental water users as market participants.

I see that as really important validation of the importance and the promise of the work that’s being done in Ventura County. It’s natural for those of us that are here in Ventura County and are part of this amazing project to think, “Well, of course there’s lessons here for others.” It’s just nice to get that validation from the outside.

Water Deeply: In terms of the complications of sitting on top of the same aquifer, what prevents people from just pumping out their neighbor’s groundwater?

Fienup: Currently, in California, if you own land and there’s either groundwater or surface water associated with that land, you have the principal water right. That principal water right entitles you to the “reasonable and beneficial use of that water.” That’s to say, there are not explicit limitations on your ability to pump that water. If everybody’s pumping too much, and groundwater levels are declining, the only way to stop other water users from pumping is to initiate an adjudication and get a court to intervene to cut other people’s water use.

We’re talking about a totally different system. In Fox Canyon, under SGMA, we’re talking about fixing groundwater allocations. Each individual has a set amount of water that they have to operate within. If they use less than that amount, they can actually trade the surplus. If they need more, they can buy the surplus allocation from somewhere else. The idea is to cap total extraction at a level that’s sustainable over the long term.

Correction: This piece was edited to reflect that the Ventura County groundwater market is not the first groundwater market in California.

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