Rocky Mountain Water Markets: How the West was Watered

In David Schorr’s well-researched and well-written book, The Colorado Doctrine: Water Rights, Corporations, and Distributive Justice on the American Frontier, he argues that the primary driver in the formation of western US water rights, and indeed, property rights to critical natural resources, such as mineral land, was distributive justice, rather than efficiency. Chapter 1 contains an introduction and basic arguments. Chapter 2 describes the sources of Colorado Doctrine where he says that western water law was most precisely described. Chapter 3 examines early Colorado water law and the famous 1882 Coffin v Left Hand Ditch case where priority was acknowledged over riparian water claims. Chapter 4 describes the regulation of Colorado water corporations where monopoly threatened. Chapter 5 outlines beneficial use and limits on water transfers. Chapter 6 summarizes key arguments and makes broad claims about the critical role of fairness in other contexts, such as multilateral negotiations regarding greenhouse gas controls.

Yale University Press, 2012

Yale University Press, 2012

In the volume Schorr examines various aspects of western water law, especially as it developed in Colorado, and finds equity motivations. These include prior appropriation water rights that granted usufructory or possessory rights to a fixed amount of water for diversion, based on the date of the original claim; beneficial use—the “use-it-or-lose-it” mandate; and no injury to third parties from water diversion and changes in the location, timing, and nature of use.  All of this was quite different from the common law riparian doctrine that dominated in the eastern US.  In eastern states water rights were based on ownership of land appurtenant to flows, and land owners were granted correlative rights to reasonable use of water so long as doing so did not harm other riparians. Most applications, such as transportation and power generation, were non-consumptive and did not diminish downstream flows. Riparian rights were not forfeited due to lack of use, and were transferable only with adjacent land.

Except for certain areas, riparian water rights were not effective for the more arid West where water supplies were both lower and unevenly distributed relative to the East. Instead, water diversion through ditches, canals, and aqueducts was necessary for mining and irrigation in areas remote from streams and other water sources. Following the same property rights allocation practices used for land and hard rock minerals, prior-appropriation rights to water were assigned through first possession, or first-in-time, first-in-right.

For Schorr, the elements of the appropriative doctrine in western water—and indeed, of early mineral rights were set by a desire among claimants for distributive justice, rather than for efficiency. He cites an overriding concern about monopoly land ownership among westerners that led them to craft laws to constrain the nature and distribution of water (and mineral) rights and to regulate corporations. He claims that prior appropriation and its requirements were anti private property and pro distributive justice.

Despite the research underlying this volume which is to be applauded, the argument is flawed and it does not stand up to empirical test. Schorr provides no definition of distributive justice. Was it the relinquishment of land rents by some claimants in order to insure that others would receive an equal amount? Or was it the relinquishment of land rents by some in order to insure equal opportunity to acquire rents by others? Without a clear definition, it is difficult for the reader to know whether observations are consistent with equity and not efficiency. How would things have turned out differently had efficiency been the prime driver rather than equity as Schorr argues?

There are plenty of reasons for believing that efficiency would be a driving force in the determination of the property rights regime. In the 19th century western US, land was the fixed input and it was in large supply and varied enormously in quality for agriculture and location of mineral ore.  Settlers were the scarce, mobile input and regions competed for them. A property rights system that seemed to offer less than elsewhere would not have been attractive. Schorr directs much of his argument on activities with low capital costs.  Placer or surface mining was such activity.

Schorr points out that local mining camp rules assigned mineral claims on priority and included limits on individual size and beneficial use or work requirements to avoid forfeiture.  Water rights developed similarly.  He argues that this arrangement was designed to block corporate monopolies.  Schorr is correct that western settlers wanted open access to natural resources to claim, and there was little information as to what areas had the best farm or ranch land, timber land, or mineral land.  What every region required, then, for efficiency, was search. The rights structure had to encourage search and it did.

Mining claims had to be worked; early on miners did not want their boundaries defined precisely so as to be able to “float” their boundaries as more information emerged about the exact location of ore. Once the ore was located, they demanded well-defined mineral rights. A somewhat similar process occurred for water.  Search did not have economies of scale. Nor did early mining. In this case piecemeal allocation with use requirements were consistent with attracting as many miners and potential farmers to a region as possible and encouraging them to locate ore deposits or farm land.  There were some economies of scale in capital intensive hard rock mining, and the pre-existing mineral rights allocation described by Schorr did not block consolidation and the development of industrial mining.

There were fewer such economies of scale in farming, and likely little fear of corporate farms. The fear was of denying access for search and with discovery the ability to claim rents. Had the water in a stream been claimed by one party, the costs for search and diversion would have been higher. But is this realistic, despite Schorr’s argument?   There is little in western history that suggests that claimants sought to evenly share in the rents. Economics also suggests why distributive justice was probably not a major factor.

Consider evidence on riparian versus appropriative distribution of water in mining camps. Appropriative water rights developed to support hydraulic mining of dry hillside ore deposits and then were applied to farming areas to support irrigation. Research finds that every mining district that was exclusively “dry” adopted prior appropriation and every district that was exclusively “wet” (had sufficient local water on site) did not.  Were these miners driven by different equity concerns?

The advantage of prior appropriation in a semi-arid region is that it ranked competing claimants based on priority in order to ration water during times of drought.  Appropriative rights were not tied to the land, and therefore could be sold or leased for use elsewhere, creating a basis for water markets and security for investment in water-delivery infrastructure, agriculture, and mining. Diversion was a low cost way of measuring a water right—there was no need to monitor exactly how the water was used, but it was to be used. Accordingly, beneficial use was a low-cost way of determining if there was excess water to be appropriated. The driest western states–Arizona, Utah, Colorado, Montana, Idaho, New Mexico, and Wyoming recognized only appropriative water rights whereas, the wetter states of Washington, Oregon, California, the Dakotas, Nebraska, Kansas, Oklahoma, and Texas recognized both riparian and appropriative institutions. Were settlers in the latter states less concerned about equity than the former or were the economic conditions, rather than distributive justice the major drivers?

There was considerable fixed investment in dams, reservoirs, canals, and feeder ditches to capture, store, and deliver water. These were sometimes supplied by the corporations of concern to Schorr. Irrigated farms also required fixed investments in local ditches and water-intensive annual and perennial crops.  This setting created contracting hazards for investors in water supply organizations and for farmers. Both parties were dependent upon one another, but non-deployable capital, bilateral monopoly, holdup, free-riding, and timing could undermine either endeavor.  The costs of an irrigation network meant that there was likely to be only one water supply organization in any location, and it relied upon demand by farmers in its delivery area. There was potential for either party to engage in opportunism to extract the associated quasi rents.

The supply organization as monopolist could threaten to deny water during key growing periods to gain higher rates, and farmers could organize for lower prices by withholding demand. Long-term price and delivery contracts between water supply organizations and farmers also were complicated by the unpredictability of precipitation and stream flow.  Right-of-way holdup was possible because canals and ditches had to cross multiple land parcels to build an irrigation network of sufficient size. Free-riding was a threat as farmers located at the head of a ditch were less motivated to provide maintenance to insure water flow to downstream farmers. Finally, in terms of timing and sequence of investment, agriculture was not feasible without upfront irrigation capital, but such investment required agricultural demand to generate favorable rates of return for attracting funds. Hence, coordination of investment was a challenge for both parties. The economic problem was far more complex than Schorr implies and the ability of any party to monopolize far more limited.

Vertical integration was not a solution because optimal farm sizes were far less than economies-of-scale in irrigation infrastructure mandated. No large scale corporate farms were likely then and few exist today, except with specialty crops and orchards. The transaction costs associated with optimal irrigation investment resulted in different institutional responses.  In relatively straightforward cases, unincorporated, non-profit mutual irrigation associations were formed by small groups of farmers, who jointly agreed to construct and maintain a water delivery infrastructure. Farmers generally retained their individual water rights and priorities with their water shares based on them. In some states unincorporated mutuals were granted the authority to condemn property for right-of-way. Because of their low cost for simple networks, unincorporated mutual irrigation associations were popular, covering 46% of irrigated acreage in the West in 1910 and 56% in 1978.

Larger projects, however, involved incorporated mutual irrigation companies and commercial irrigation companies. Mutuals were non-profits organized by farmers as shareholders with either the company holding the water rights and supplying water according to shares held by farmers or the farmers retaining the rights and receiving the water as specified. Because they were initiated and managed by farmers, incorporated mutuals reduced the cost of water delivery, and they supplied 30% of irrigated acreage in 1910, declining to 16% by 1978.

For-profit commercial irrigation companies were among the earliest irrigation institutions and the ones most likely of concern to Schorr.  They included development companies that assembled land parcels, provided irrigation, and then profited from the sale of irrigated land; commercial water companies that sold water to farmers; and public utilities that sold water to any party in their service area. They built ahead of agricultural settlement and failed when they misjudged demand and could not cover outstanding construction bonds. Commercial irrigation companies declined from providing 11% of irrigated acreage in 1910 to 0.5% by 1978.

The other important water supply organization to emerge is the irrigation district.  Irrigation districts covered 4% of irrigated acreage in 1910 and nearly 25% by 1978.  The popularity of irrigation districts arose from their ability to better address the costs of water supply by being political subdivisions of the state. As such, they have eminent domain powers to address hold-up in laying the network; ability to tax all lands within the district to cover expenses; power to coerce membership in the district once the required majority of voters agree; and authority to issue tax-exempt bonds for construction, backed by assessments against the land within the district. Moreover, they have direct access to Federal Bureau of Reclamation (BOR) water, following Congressional legislation in 1922 and 1926 authorizing and then requiring the agency to contract only with irrigation districts in the provision of agricultural water.

David Schorr has positioned his interesting volume as support for the dominance of distributive justice relative to efficiency in determining the nature of water rights in the western US with broader implications for resource allocation and use in other settings.  Absent a clear definition of distributive justice, it is difficult to search for tests to compare its role against the alternative.  But the evidence that can be mustered does not come down on the side of distribute justice.