The Texas Water Exchange: A Water Marketplace Emerges

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None other than that wit and wag from American history, Ben Franklin, said way back in 1746, “They’ll know the worth of water when the well runs dry.”

Drought-prone Texas, with its heavy reliance on just a few sources of water for multiple uses, from industry and commerce to agriculture and drinking water, combined with exploding population growth seems particularly at risk for finding out the truth of that saying.

Cue San Antonio’s Anastasia Valdes and her plans to change that. “Do you know what your water rights are worth?” Valdes asked. “We do.”

 At 38, Valdes is CEO of the newly formed Texas Water Exchange, already open for business, but about to launch its public-facing website in late July. The focus is trading permitted groundwater rights by individuals, and doing this on a free-market model instead of one developed as a result of a governmental regulatory process. “We want to catalyze people into thinking about water differently,” said Valdes, a former senior resource analyst for San Antonio Water System who draws on her background in international consulting.

 The Habitat Conservation Plan executed by the Edwards Aquifer Authority was what sparked Valdes’ initial interest in water rights trading, she explains. Despite all the great work achieving consensus among stakeholders for the plan, she says, “If you don’t secure options on the 160,000 non-critical-period acre-feet, the plan falls apart to the detriment of the communities along U.S. Highway 90 and Interstate Highway 35 that rely on the Edwards Aquifer,” she said. To secure options on 160,000 acre-feet at some future date is a mighty challenge when all legislatively-capped 572,000 acre-feet are allocated and the city of San Antonio already controls 55 percent of all the water rights available in the Edwards Aquifer. I recognized that an exchange was the only way to achieve this goal.”

 For a trading model, she reaches past the U.S. to Australia, which has perhaps the only mature water market on the globe, currently functioning as a stock exchange, though it appears to have taken approximately 20 years to morph into this level of maturity.

 The Australian initiative began in Victoria, New South Wales and grew to encompass the entire country. During that time, it weathered fears that water “robber barons” would play too large a part in the trading, and observers found that Mother Nature kept her ever-present, inscrutable hand in as well. At one point market prices soared through scarcity, shocking farmer,s and then the rain came, righting the market unexpectedly. The Australian Water Exchange, Valdes says, “is very successful and widely acknowledged as such, but while other states in the U.S. allow for trading water rights, like Utah, there is no exchange like what we are building.”

 No less an economic authority than the Federal Reserve Bank of Dallas — which covers a region including San Antonio, El Paso and Houston — said that “despite an array of challenges, groundwater often lends itself well to market trading.” In a report published in the fall of 2013, Keith Phillips, Edward Rodrigue, and Mine Yücel wrote that “sixty percent of Texas’ water comes from groundwater aquifers,” like San Antonio’s Edwards Aquifer. “There are no ownership rights to groundwater in Texas, the report explains, but a legal doctrine known as ‘the rule of capture’ allows any landowner to drill a well and, in many parts of the state, pump almost unlimited amounts” of water from it.

A chart compiled by the Federal Reserve of Dallas from “Water Scarcity a Potential Drain on the Texas Economy" by Keith Phillips, Edward Rodrigue and Mine Yücel. Courtesy image.

A chart compiled by the Federal Reserve of Dallas from “Water Scarcity a Potential Drain on the Texas Economy” by Keith Phillips, Edward Rodrigue and Mine Yücel. Courtesy image.

 “Because water becomes private property only after a landowner draws it from the ground, there is a strong incentive to be the first to pump. Economists call this the ‘tragedy of the commons’,” the report read. “Groundwater pumping from an aquifer has negative spillovers because one person’s actions leave less for everyone else. The system sends users exactly the wrong message: Pump faster as water becomes scarcer.”

 (For a truly frightening look at “how greed, drought and rampant overdevelopment are sucking Texas dry,” read “Who Stole the Water?” in this month’s issue of Men’s Journal.)

 While the history of man’s reliance on water is — literally — as old as human history, a communal understanding of what water rights are and how best to use them feels by comparison like it’s in its infancy. Not to rely on a water metaphor, but the wave of public interest in this scarce and sacred natural resource apparently has yet to crest. Benjamin Powell, who leads the Free Market Institute at Texas Tech University, doesn’t place the blame for water scarcity on Mother Nature and her bad weather; instead, he calls shortages the “man-made result of bad economic policy.”

 Amy Hardberger teaches at St. Mary’s University School of Law. She acknowledges that “before (water) scarcity forces a change in behavior, a customer’s only connection with water is its price.”

 Pricing, and the fluctuations in pricing as the market righted itself, is perhaps the most interesting part of the Australia water reform story. And it leads Valdes to explain that “in the world of water industry, what the (Texas Water Exchange) proposes to do is not particularly controversial.”

Amy Hardberge, assistant professor of law at St. Mary's University.

Amy Hardberger, assistant professor of law at St. Mary’s University.

 “Texas Water Exchange, Inc. was born after some research into how water rights are currently transacted. It’s a very slow process, requiring individually negotiated contracts that can take anywhere from 18 to 24 months or longer to complete,” Valdes said, adding in typically entrepreneurial fashion, “I saw opportunity in that inefficiency.”

How Texas Water Exchange intends to inject value is “by using smart technology to provide a digital marketplace where users trade water rights,” and capitalizing on their development of “the only dedicated software available anywhere for water permit management and record keeping,” she said. “We are the only independent and transparent marketplace for water rights in Texas. Our objective is to standardize permit data across the state and bring buyers and sellers together, and we have what no other organization can provide: Pricing data essential to the owners of water rights.”

 Apparently part of why the local conversation around water rights hadn’t progressed much until recently was the wait for the definitive court decision to shake out the landscape. That happened two years ago, when the lawsuit that the Edwards Aquifer Authority brought against Day and McDaniel, two farmers who bought land overlying the aquifer and needed to drill a well, was resolved at the Texas Supreme Court level.

 The 50-page opinion makes for fascinating reading, and says in part, “Whether groundwater can be owned in place is an issue we have never decided. But we held long ago that oil and gas are owned in place, and we find no reason to treat groundwater differently.”

The other reason why the water rights conversation might not have progressed far enough until recently is that the actual volume of aquifers like the Edwards had not been fully mapped. That’s a process that has taken years, but is finally more or less complete. Today, 1,600 entities hold 1,900 permits to pump water from the Edwards Aquifer, Valdes said, with more than half of those owned by the City.

“We’re not in competition with SAWS,” she says. “We’re putting our faith in the power of individuals to make decisions about the highest and best use of their (permitted) water rights,” and “providing the marketplace where that can be done.”

Hardberger acknowledges that she doesn’t know all the details of the Texas Water Exchange model, but remains unconvinced that the mere existence of a marketplace is enough to compel the highest and best use of individuals’ water rights.

 “It’s an interesting concept.” she said. Markets “can be very good tools” that support sustainability, she said, “but I’m not sure how this isn’t going to be just water going to the highest bidder. There is a public trust aspect to water that can’t be ignored,” Hardberger remarked. “It’s all fine and dandy until it’s gone.”

A San Antonio Water System diagram of the Edward's Plateau, Edward's Aquifer, and Balcones Fault Zone. Courtesy image.

A San Antonio Water System diagram of the Edward’s Plateau, Edward’s Aquifer, and Balcones Fault Zone. Courtesy image.

*Featured/top image: Water cascades over rocks in a creek. Photo by Lily Casura.

4 thoughts on “The Texas Water Exchange: A Water Marketplace Emerges

  1. This article really doesn’t make much sense. First of all, it’s San Antonio Water System, not Service. Second of all, groundwater IS private property and not just when it’s pumped — that’s the whole point of the Day case. Third of all, the rule of capture legally unfettered is only a reality in parts of the state where there is no groundwater conservation district, and most of the state is covered by a GCD. Fourth, the Edwards Aquifer rights ARE traded by a type of market system today, and this article doesn’t explain at all how this new exchange makes that different…

  2. After the scientists with Intera and the state water board recognized this past spring (2014) at the regional planning meeting in Amarillo that Texas has enough groundwater to supply its needs for the next 1,500 years, even without rain during that period, expressing a public (governmental ownership) interest in private property in a bid to impose Marxist-like central control based on the tragedy of the commons cannot be justified. Economists should not use the tragedy of the commons because it was written by an eccentric suicidal biologist based on the teachings of Hegel’s brutal attitude of scarcity that rejects our sacred individual rights. Marx considered property to be theft. However, our Founders considered property rights to be human rights. We should prefer the proven 180 year success of economic freedom that resulted in Americans having the highest standard of living since the 1830’s. Jesus taught us, with the example of the fishes and loves, that the attitude of abundance engenders love and generosity even in times of true scarcity.
    J. Edgar Hoover said that America’s exceptionalism is her exception to Communism. America’s exceptionalism is based on private control of private property. Central control of private property abolishes private property in the same way that the carjacker takes control: without an immediate diminution in value and without going through the legal title of the property.
    Scarcities, real and imagined, are also known in economics simply as demand and, as such, constitute only a small part of the study of economics. Economic freedom always adequately addresses demand in such a way as to make our country stronger, create wealth for ordinary families and contribute vast amounts of money to the government’s Treasury. Witness Venezuela, Argentina and Zimbabwe, all formerly wealthy countries, to see that central control does none of that.

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