Private sale to AZ Water Bank comes at high price

Update: A nearly identical sale was made in January 2017 to CAGRD from Active Resource Management (Vidler). An article from Nasdaq Global Newswire reaffirms that these are two separate sales, adding up to 100,000 long term storage credits for $25 million.

The Arizona Water Bank recently purchased water credits from a private company that has been hoarding water until the price and demand were high enough to sell.

Nasdaq.com reported on December 2nd:

PICO Holdings, Inc. (NASDAQ:PICO) announced today that its wholly-owned subsidiary, Vidler Water Company, Inc., has agreed to sell 50,000 Long Term Storage Credits stored in the Phoenix Active Management Area of Arizona to the Arizona Water Bank Authority (“AWBA”) for gross proceeds of $12.5 million.

The December 7 agreement was recently posted by AWBA.

The sale to the AWBA was at a rate of $250 per Long Term Storage Credit (LTSC). Each LTSC is equal to one acre-foot of water. Water Market Insider explains the relationship between the credits and actual water:

Each LTSC authorizes pumping of 1 acre-foot (AF) of renewable water stored underground. Recovery of a credit must occur through a permitted recovery well within the Active Management Area (AMA), irrigation nonexpansion area, or basin in which the LTSC was created.

Vidler’s plan all along was to sell their purchased and stored water for a higher price when demand would be greater. The company has collected over 260,000 of these credits (as of the last update 12/31/14) in the Phoenix Active Management Area (AMA). They also acquired Active Resource Management, LLC in 2010 which had 146,830.89 LTSC as of 12/31/14.

This means that as of that date, Vidler had 406,830 LTSC, approximately equal to the quantity of water that could supply the entire populations of Phoenix and Tucson for a year if we use the equivalency described by the Arizona Experience website: “One acre-foot is the amount of water required to cover one acre of area to the depth of one foot: 325,851 gallons. Approximately one acre-foot serves the needs of a family of five for one year.”

$250 per LTSC is highest price paid within the 2008-2014 time period reported by Water Market Insider, and far above the average.

In many ways it is reasonable to store water for future use especially if it can’t be used. Yet since Vidler stored the water just to turn a massive profit, wouldn’t their activities be considered speculation? Did AWBA pay too much for Vidler’s stored water? Most importantly, what might this mean for the future of water prices?

Speculation?

“The law of all western states prohibits speculation, either explicitly or through requirements that water be applied continuously to actual, beneficial use,” according to “The Anti-Speculation Doctrine and Its Implications for Collaborative Water Management.” The article continues:

Speculators in water do not acquire water rights for the purpose of immediately utilizing the water by applying it to beneficial use, but rather with the hope that water values will increase over time, allowing the water rights holder to sell those rights in the future for a substantial gain while locking up the resource from contemporaneous uses in the meantime… the adoption [historically by western states] of prior appropriation, by definition, required the appropriator to apply the water to beneficial use, thereby precluding speculative hoarding in hopes of future gain.

Arizona would not be the only location where Vidler has been obtaining water. High Country News article from 2003 discussed a scuffle Vidler Water had set off in Nevada.

Critics accuse Vidler of water speculation, or acquiring water rights in the hope of reselling them and turning a profit. The practice is anathema in the Western water world, where the “use-it-or-lose-it” paradigm reigns supreme. They see Vidler’s deal with Lincoln County as a major step toward privatizing water, which has long been viewed as an essential public resource…

It’s by no means the first private water-development company, but experts are at a loss to name any other outfit that’s so artfully blurred the lines between the private and public realms…

Speculation and use are therefore contradictory.

Except if you change the definition of use, then it’s no longer speculation.

It turns out that in Arizona, as of the last couple decades at least, storage for future beneficial use does not constitute abandonment or forfeiture or in AZ (A.R.S. §45-141).

Another state law (A.R.S. §45-2401) clarifies, “The legislature further finds that for the purposes of this chapter diverting Colorado river water for storage off of the Colorado river system is a consumptive use of that water.”

Water storage was not new when Vidler began storing water in 1998. Arizona had the Underground Water Storage and Recovery Program (1986), “which allowed entities with surplus water to store it underground and withdraw it later,” and the Underground Water Storage, Savings, and Replenishment Act (1994). “In addition to receiving ground water credits from direct recharge, credits could now be obtained by using surface water rather than pumping from the aquifer on a well with an established water right.” These built upon the 1980 Groundwater Management Act to conserve groundwater. Use of CAP water instead was encouraged. The assured water supply rules also required of new housing developments to show a 100-year water supply that could not include groundwater.

Arizona apparently did not consider storage of Colorado River to be beneficial use in 1994 when the Bureau of Reclamation’s draft regulations for potential banking would expand the definition of beneficial use to include storage and banking. The change in definition was not specifically for the purpose of conservation, but to create a loophole for interstate water transfers. Even though Arizona was already storing water, it was perhaps the scale of quantity and geography that made Arizona initially oppose the change. These draft regulations and other states’ water banking proposals provided impetus to Arizona’s creation of the Arizona Water Banking Authority in 1995.

After days of research with just the internet as a resource, I was unable to determine at what point and why Arizona passed the legislation referenced above and how this relates to speculation and to the Bureau of Reclamation’s definition, since those draft regulations did not seem to have been adopted. What I could determine is that most likely what Vidler is doing is not technically speculation even though by most definitions it would be.

Perhaps the words of Rita Pearson Maguire, who is considered to have played a major role during her time as director of the Arizona Department of Water Resources in the creation of the AWBA (and she became the chair of the bank when it started) can shed some light on this. She wrote in 2007:

The notion of market-based transfers treads upon the notion of “present and perfected” water rights, which requires appropriated water to be put to beneficial use on the land for which it was appropriated. But economic pressures have come to bear to broaden the ability of willing sellers to market their appropriation to willing buyers wherever they may be.

Maguire has written in favor of water marketing and is now the local legal counsel for Nestle USA, which as a company has promoted water marketing on a global scale. It’s uncertain if she envisioned the AWBA purchasing credits at such high prices, but she seemed enthusiastic in 2007 that, “The need for more water is gradually opening the doors for the buying and selling of water as a business opportunity. Premium prices are paid between willing participants to the transaction, even for short-term supplies.”

In the mid-nineties, the blurring of the lines between speculation and beneficial use may have had a lot to do with Arizona’s concern over California getting that water at no cost. In Trading Water, Tom Marcinko wrote in 2013,

For years the Bank was full to the brim. As a result, CAP had ‘excess’ water on its hands – about 832,000 AF in 2009. It would be a shame, CAP reasoned, to let the feds liberate Arizona’s unused Colorado dole and give it to California – for free…
To keep the excess water in Arizona, CAP held an annual sale to farmers, municipalities, Native American communities, and – last served – dozens of private companies like Resolution Copper Mining, Rosemont Copper, and Vidler. Now, rising demand for the wet stuff has dried up CAP’s excess supply, Modeer says. But up to 2009, CAP was happy to sell excess to Vidler, Timian-Palmer says. “They didn’t want the water to go to California. So we met a need. And now… CAP doesn’t want us here any more.”

When a Colorado River shortage is declared, which is very likely within the next few years, possibly even next year, there will be no excess water to store. Vidler may sell even more water to the AWBA at these high prices in the future, which means Arizona tax dollars may continue to go into the coffers of a private company who’s been banking on water scarcity.

Vidler frames this sale as though they’re helping Arizona.

Vidler’s President and Chief Executive Officer, Dorothy Timian-Palmer
commented, “Vidler is pleased to assist in helping with the critical planning to prepare for shortages on the Colorado River.  Thankfully, Arizona had the foresight to encourage water storage for times such as this and the Arizona Water Bank continues to work toward protecting the state’s water needs in the future.”

While Vidler was also storing water that might’ve gone to California which AWBA could not store themselves, on the other side of the coin, there has been an ecological crisis in the Colorado River Delta due to water not making its way to the Gulf. There are plans for new housing developments and massive mines in Arizona which will use even more water. At the same time, Colorado River water is over-allocated, tribes are not getting their due, there is a structural deficit in Lake Mead and some people argue for the importance of leaving excess water in that reservoir (which is also happening). There’s no simple answer here, but financial motive should not be involved when it comes to such an important resource.

Price

What was the cost of Arizona’s water to Vidler? This depends on where the water came from and how it was stored. According to the Arizona Department of Water Resources recent blog, the water they just sold to AWBA came from Active Resource Management LLC’s (ARM) storage. Vidler acquired this company for $15.8 million, listing their “primary asset [as] approximately 126,000 acre–feet of stored water,” so Vidler spent no more than $125 per LTSC, and likely far less.

Vidler stated in 2005 (prior to acquiring ARM) about the water they were collecting at that time that, “The water to be recharged [into underground storage] will come from surplus flows of [Central Arizona Project] water.” Marcinko reported in 2014, “All told, Vidler paid a relatively low $78 per AF (about $33.4 million) for a total Arizona water pool of 427,351 AF, according to CAP.”

As far as LTSCs go, when an entity stores water, in most cases 5% of the recharge quantity is deducted to take losses into consideration, so 1 recharged AF would equal .95 LTSC. Vidler constructed their own storage facility along the CAP Canal and has been storing water in Arizona since 1998 according to their website, filling it with surplus CAP water they’ve purchased (for at least 15 years). That may not have been their only source, although it likely is (companies can recharge effluent to earn LTSC as well).

Scarcity

As the company wrote in 2005, they were counting on the value of water increasing as the resource diminishes.

Due to the low level of Lake Mead, the states of Arizona, California, and Nevada may be required to take no more than their current allotments of water from the Colorado River. This is likely to increase demand for the net recharge credits owned by Vidler, representing water which Vidler has in storage in its Arizona Recharge Facility. We also anticipate demand from developers and other entities to store water for various purposes, including back-up water supply for dry years by developers, and assured water supply for new development projects.

Vidler intentionally acquired water to sell in areas projected to have substantial to high likelihood of conflict over water as seen in the map here.

vidler-map

Source: Vidler

The company had purchased farm land for the water rights. After they’d stored a lot of the water over the years, they sold the land, making over $110 million in profits.

Arizona water law is by no means perfect, but as the push towards a water market builds, promoted by hedge fund managers to environmental non-profit organizations to the Bureau of Reclamation, water prices in general could drastically increase due to a combination of profit motive, global price uniformity, and climate. Because scarcity increases value, profit motives butt heads with actual conservation (though not so much “conservation” schemes).

Private interests

The level of involvement of the private sector in water management is likely no surprise.

According to the ADWR blog, at the recent Colorado River Water Users Association conference, the AWBA “met with public and private interests to discuss other innovative firming concepts as well as water management strategies the Bank can employ in the future to meet its objectives.”

It’s worth noting that AWBA’s Ray Jones, appointed by Governor Ducey, is Executive Director at Water Utilities Association of Arizona (WUAA), which is a strong representative of private water interests.

Marketwired reported Ray Jones’ 2015 appointment to his WUAA position,

“Private water companies have an important place in Arizona’s water industry,” said Troy Day, president of the Water Utilities Association of Arizona and Vice President of Operations for EPCOR Water (USA), Inc. “Ray Jones brings a deep understanding of Arizona’s water industry, and the needs of private utilities, to WUAA, and we are extremely pleased to have his leadership as the future of Arizona’s water policies are explored.”

…In 2004 Jones founded ARICOR Water Solutions, providing water, wastewater and water resources strategy master planning, facility design, project management and regulatory expertise for both the private and public sector.

Jones is currently on the Board of Directors for the Greater Maricopa Foreign Trade Zone as well.

There are various problems that arise when it comes to water privatization’s growth. For one, water prices are rising, which is only exacerbated by the profit motive, exemplified by the the $250 price on Vidler’s LTSCs.

The LTSC system has created a small water market, which West Water Research has their eye on. The economic consulting firm pointed out in 2014 that there is an emerging market in Arizona for LTSCs that “may eventually allow it to develop into an efficient market with active trading,” with tribes as the primary sellers.

The intention of the state’s LTSCs are said to incentivize water conservation as part of the Groundwater Management Act. Yet in some ways the credits function as offsets that are used to justify new housing developments and are increasingly seen as a commodity. LTSCs can even be earned by recharging effluent/waste water into an aquifer or river. This system therefore provides incentives to continue to introduce mass quantities of water that may have a wide variety of contaminants into bodies of water, with lacking oversight.

The possibility of water officially recognized as a market commodity and then the development of a futures market (which is very possible) brings up a number of concerns, among those being increased speculation, rising water prices, and rising food prices. A form of water futures market exists in Australia and the same company is creating one in the US.

In some ways the acquisition of mass amounts of water is said and done and the scarcity of water will increase the price. Is there anything we can do about it? At the very least, we should be paying attention to the increasing privatization and commodification of water, even in conservation schemes. We should take lessons from controversies like that of the complicated Kern Water Bank in California, exposed in Gaming the Water System. It’s worth looking at the Resnick’s success in making at least $30 million by selling back to the state water that they received at a much lower rate.

Conservation schemes are popping up in Arizona (and other places), such as those on the Verde River, tribal water rights are increasingly tied into a developing water market, and international water transfers are continuing as well.

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