Title: Discussions
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Title: Discussions
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Spatial Coverage: North America -- United States of America -- Florida
 Notes
Abstract: Richard Hamann's Collection - Discussion
General Note: Box 12, Folder 7 ( The Law of Water Allocation In The Eastern United States - 1956 ), Item 22
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DISCUSSION: A state water corporation.


MR. WOLLMAN: I would like to propose an alternative that is a little
different. Professor Timmons this morning said nobody had suggested
something altogether new, so I am encouraged to propose it. It is a little
harebrained, and I am not sure of what all the consequences are. But I
would like to propose this as another alternative, namely, that the state go
into the business of selling water, that the state be the sole owner of these
water rights, and rather than administer the rights possessed by others,
be itself the owner of the rights and sell the water to the users.
There are, I think, all sorts of loopholes in arguments against this kind
of proposal. A couple of people in New Mexico, one a lawyer and one an
engineer, and one an agricultural economist, all reacted in about the same
way as if I had suggested that incest become a normal matter of course.
I think there are some arguments in favor of something like this. For
one thing, who would then bear the risk of investment? Right now the water
user, by and large, has to invest a lot of money in water storage, in trans-
mission facilities, and then bear the risk himself that he will be able to
finally amortize that kind of investment.
By having the state be the purveyor of water, what you would do would
in effect be to widen the base on which the risk of such investment must
be made. You would reduce actually the investment that any one individual
would have to make, and you would simply be increasing or collectivizing
the investment here of the people as a whole, and doing it in an area where
there is at present considerable uncertainty and already a considerable
amount of collective investment.
There are some other arguments that we could give that might justify
some such device. It would allow the administrative agency to use the
price system as part of its controlling mechanism. It could ration water
not through a direct decree but by manipulating the price up and down, by
using appropriate price-discrimination techniques, .such as the railroads
use now, or private utilities now use. It could stimulate or retard the
consumption of water as it saw fit, following the same lines of action that
it might follow just as a state administrative agency. Another thing this
device would do would be to eliminate the problem of redistribution. The
state itself, the people itself, would be the beneficiaries of any enhance-
ment in value of water rights, and there would be no need for any sub-
sidiary tax system. By using the price system as a method of control
rather than direct rationing, I think you would increase perhaps the flex-
ibility of adjustments, because part of the response would be on the part
of a customer himself, and he might be then encouraged through, say, a
high price for the use of water to look around for economies that he could
perhaps accomplish in the use of water.
There are some other considerations that might also be involved. For
example, this question of compensation in the event that the state must






LAW OF WATER ALLOCATION


take away riparian rights. Well, the compensation would be taken care of
by giving to this particular individual some bonds representing or stock
representing his share in this new water corporation. In some cases-the
individual who would have to buy out the water rights of another individual
- that particular problem would also be eliminated and the outlay of a
large capital sum by the purchasing individual would be eliminated. In-
stead, he would be simply paying for water in terms of a current water
bill, and what he would pay would represent his share for the water.
Now, you run into the question of uncertainty of water supply, and
here you have, of course, an administrative problem that can't be elim-
inated by any administrative device...So we have a device here for again
broadening the risk involved. For example, this water corporation could
contract to sell water-this was already mentioned as a possibility. It
could contract to sell water, and the person agreeing to buy the water
would then make his plans specifically on the basis of the contract, and
if the water supplying agency, namely, this state or municipal unit (how-
ever it is broken down hierarchically), fails to meet its share of the
bargain, then there would be some sort of right of suit. The economy as a
whole would bear the burden of the suit since this would be a state agency.
So you would again be shifting back to the people as a whole some of these
risks that individuals in a number of cases are unable to bear.
Finally, I think, and I can stop here, through some such device I think
you would avoid some of the problems of the hydrologic cycle. Of course,
you could handle this flexibly, and I have no clear-cut ideas as to just how
far you would want to extend this, how many different kinds of states
could conceivably use this sort of system. Obviously, you could go down
to every little rivulet, every little stream, or you could lop off control in
terms of other sources of supply involving just fairly large amounts. But
you could conceivable get out of this particular contradiction that we have
been in now, where different phases of the hydrologic cycle are treated
differently. Here it could be done on a uniform basis, or with some type
of equitable consideration given to all. You could subsidize some users at
the expense of other users, just as, say, we operate a railroad in this
country today, or in perhaps some of the other utilities.
Finally, no expropriation is necessarily involved. It means simple buying
up these rights now, paying a fair price for them (and now they may be
cheaper, probably will be cheaper, than at any other time in the future).
Each year these rights will become more and more expensive. So this may
be a fairly systematic way of taking care of this whole question of expro-
priation, by providing for a due compensation and then the community as
a whole would receive the benefits of all future enhancements in value.
I am afraid I have been a little bit erratic in my talk, but I would like
to stop now and allow you to raise whatever points you like specifically
for further discussion.


~_






SYMPOSIUM DISCUSSION


MR. HARRIS: [In his paper Dr. Wollman states:]

Circumstances may compel the states to go so far as to reacquire all water
rights, and with these in hand to create a corporation designed to sell water to
all users, just as a municipal water company now does; its operations would
parallel even more closely that of a privately operated state-wide gas or elec-
tric utility. The state water corporation and its subsidiaries would probably
acquire all pertinent physical structures, including those privately owned, and
would be responsible for all new capital investment in water resource projects.
...By being itself in possession of all capital structures as well as title to water,
the water corporation could operate with maximum flexibility in the public in-
terest.

This is a proposition with which I cannot agree. It would appear that
Dr. Wollman has not fully considered the legal prohibitions, at least in
New Mexico, against such change in the water law. Article XVI, Sec. 2
of the New Mexico Constitution provides that "the unappropriated water
of every stream is hereby declared to belong to the public and to be sub-
ject to appropriation for beneficial use and that the priority of the applica-
tion shall give the better right."
In my opinion, the acquisition of the water rights by a state-owned
corporation would require an amendment to the State Constitution and, I
am sure, this would also be necessary in all of the other western states.
There is an even more far-reaching obstacle to the state owning all
water rights and that is the due process clause of the Fourteenth Amend-
ment to the Federal Constitution. In New Mexico, constitutional provi-
sions and legislative enabling enactments would be necessary to acquire
the water rights and, even so, it is doubtful if the rights could be acquired
without condemnation proceedings, or the provisions would fall under the
ban of taking the property without due process of law. This would re-
quire a great revolution indeed in the law of eminent domain.
Dr. Wollman suggests further, "Some users could be subsidized; others
might be charged what the traffic would bear. The price and investment
policy followed by the corporation would reflect certain of the larger ob-
jectives of federal, state, and local government: whether and to what ex-
tent government should participate in economic developmental and control
activities." This suggestion would certainly violate every known concept
of the appropriation doctrine and would certainly require changes in the
constitutional government of New Mexico, and perhaps changes in the
Federal Constitution. I am here concerned with the legal objections but I
feel obligated to point out that such a proposal would mean possibly even
more intransigent objections politically.
Dr. Wollman has pointed out that water dominates the entire economy
of the arid states such as New Mexico, and the query could be raised as to
whether there would be any necessity for the nationalization of any other


I






LAW OF WATER ALLOCATION


natural resource once the water resources are owned by the state. State
ownership of water, under the control of the state-owned corporation,
would place the control of all the capital in the state at the mercy of the
bureaucrats to plan, manage and direct the activities of the state-owned
corporation. I would warrant that Dr. Wollman would be the first to agree
that socialization of water resources would naturally require the social-
ization of all other resources. For what value would it be to the owner of
any capital assets to own land, machinery, etc., if he were at the \mercy
of the owners of the water rights ?
Under the alternative suggested by Dr. Wollman, there certainly could
not be competition at the market place for water since, under his theory,
some water users could be subsidized and others charged what the mar-
ket would bear. Under Dr. Wollman's theory, the query could be raised
also as to whether some property could actually be liquidated by the re-
fusal of the state-owned corporation to furnish water.
We feel that these are legitimate questions or objections that can be
directed to the idea of state ownership of water. I doubt that Dr. Woll-
man realizes the far-reaching consequences of his proposals. We re-
spectfully submit, however, that the law of water rights can expand and
grow with a growing national economy under our traditional system of
law.
We feel that the Lea County administration shows that there can be
greater flexibility in the law of appropriation,* coupled with the classic
balancing of powers between the administrator, the legislature and the
courts. This does not mean that there are not grave and weighty deficien-
cies in the law. There are many problems that remain to be solved. Dr.
Wollman has aptly pointed out that there should be greater flexibility in
the transfer of water rights from one use to another.
We take exception to his comments that the doctrine of appropriation
allows only "by relatively indirect incorporation into the price system,
(mainly by sale of land rather than water), how these rights can be
transferred from one user to another." The legislative code of New Mexico
expressly provides for the transfer of water rights without the sale of
land.t The statute on this point says: "all or any part of said right may be
severed from said land, and simultaneously transferred, and become ap-
purtenant to other land, or may be transferred for other purposes, with-
out losing priority of right." As a matter of fact, a considerable amount
of the time of the State Engineer's staff is spent on transfers of water
rights. Day by day there are more and more water rights being trans-
ferred from agricultural to industrial uses.
Dr. Wollman states:

* See pp. 160-164.
t N. M. Laws, Ch. 131, x 75-5-21, 22, N.M.S.A. 1953.






SYMPOSIUM DISCUSSION


State law, at least that of New Mexico, seems favorable to shifts in water from
one use or place to another, if economic arguments support such change; yet in
practice, except for requests by governmental units, the owner of a right to
surface water is likely to be enjoined from any shift in use.
We do not know upon what data or information Dr. Wollman based this
statement. Our own observation would be that such is not the practice.
In his discussion of the free market system of water allocation, Dr.
Wollman states:
Yet the implication of such procedure is not always made clear by its propo-
nents: to the extent that a free-market system is followed, incomes will be re-
distributed in accordance with the relative scarcities of resources. Those who
hold title to water would gain a windfall analogous to those who profit by the
rise in urban land values.
I am not an economist and may be on doubtful scholastic ground in taking
exception with the learned doctor on this point but I would express the
opinion that the situation is not all analogous to a rise of urban land values.
A holder of urban land is required to do nothing other than pay the taxes,
whereas those who hold water rights do so under the clear mandate of the
law that the water rights be used and that the non-use of water rights in-
volves forfeiture. Furthermore, owners of urban land have a scarce prod-
uct peculiar to the local area, where the holders of water rights must
compete in the national economy. There can be no windfall profits to a
farmer in the Mesilla Valley who owns a water right, when he has to com-
pete on the cotton market with farmers of the Mississippi Delta. This, of
course, is disregarding cotton subsidies.
Certainly, a manufacturer in New Mexico who owns a water right would
have no windfall profits except to the extent that he would have an advantage
in shipping costs over a manufacturer in Massachusetts. As a practical
matter, and from a layman's point of view, it would seem to me that until
there is a tremendous increase in population in the arid West, the manu-
facturer would have to overcome the disadvantage of the cost of appropri-
ating water plus the increased cost of transportation. Where are the wind-
fall profits ?
Of course, it might be considered that the holder of a water right, which
is admittedly a scarce commodity, could sell it for domestic or municipal
consumption and thus would not have to compete in the national economy,
but this would overlook the fact that a municipality has the right of eminent
domain to acquire municipal water. As long as the economy of one area
is nationally competitive and the areas of scarce water supply must com-
pete with areas of plentiful water supply, I am unable to see how there
could be too much windfall profits. That is not to say, however, that water
rights are not valuable, as they certainly are. Nevertheless, from a
practical viewpoint and being intimately acquainted with the problem, I






LAW OF WATER ALLOCATION


could cite several examples where farmers have appropriated water and
applied it on land, which without the water had small value, and, after
having filed proof of application of water to beneficial use, have been
unable to sell the land and the water right for the cost of perfecting the
water right. Where are the windfall profits ?
Dr. Wollman concludes his paper by stating:

There is ample precedent within the American economy for much more control
by government over the use of water than is now being exercised. We have
commonly tolerated encroachment upon property rights or interference with
free market processes whenever failure to do so would clearly jeopardize the
public interest. As the shortage of water mounts in intensity, we are likely to
put more faith in administrative control as it is exercised by politically con-
stituted bodies than in the market responses of those who hold property rights
in water.
I have been intimately connected with administrative law and, as a vet-
eran of many battles and numerous law suits and as a proponent of admin-
istrative control, I believe I am justified in stating that the type of control
suggested by Dr. Wollman will be bitterly fought in the arena of court liti-
gation and from political platforms. I sincerely doubt that the public would
allow this much administrative control. It is easy to envision phrases such
as "power-mad bureaucracy" and "power corrupts and absolute power cor-
rupts absolutely."
I believe that the alternative is to work for greater flexibility in the
doctrine of prior appropriation. There needs, possibly, to be more flex-
ibility to encourage transfers of water rights from agriculture to industry.
There should be greater imagination in the allocation of water. There
probably will be greater restrictions against waste and certainly there
will be more efficient techniques to conserve water. The people of the
West will allow themselves to be more and more controlled in the use of
water but I doubt that they will allow themselves to be controlled abso-
lutely.






DISCUSSION: Public ownership of water resources and the market.


MR. WOLLMAN: I do think that [my proposal] is somewhat drastic in
its scope, but I am not sure that it is so drastic but that we won't come to
it some day. As these problems become more complicated, they will re-
quire more centralized control. Then it will be a question of whether you







SYMPOSIUM DISCUSSION


are going to have an administrative agency without the control deliber-
ately over the supply, price, and so forth, but simply exercising a kind
of well, exercising authority purely from a legal point of view of the
police power, something of that sort, or whether you simply want to tie
this all up into a neat little bundle and give one agency the right to ex-
ercise control and use the price system, which is a fairly orthodox idea,
as part of the controlling device.
In a way, you might actually end up by having a little more freedom on
the part of the user through this method, because the user, the consumer,
will have certain options that he may not have by a direct administrative
control. He will have the option of deciding whether he wants to pay this
much for water, and whether he wants to consume so much if it costs him
this much...Partly I think it depends on the severity of the situation. I
have no way of predicting actually how bad it will be. It is pretty bad now.
It may get a lot worse.
MR. STEIN: I hope someone here is more familiar with the Oklahoma
plan* than I am. If they are, I will be happy to sit down. But you know, it
is very difficult, Professor Wollman, to come up with a new idea. I never
have been able to do it! It seems to me, and I hope I am correct, that the
State of Oklahoma has a similar proposal, a proposal [to deal with a phys-
ical situation, where the] state tilts all in one direction, and the trouble is
that the water is down\at the lower end of the state. Unless the water is
brought back to the high portion, it will run off to another state, and Okla-
homa won't be able to use it. There has been a definite legislative pro-
posal to float a revenue bond, as I understand it, on a state basis, involv-
ing a tremendous pipeline (I think they got the notion from the oil
pipeline) to pipe the water back up to the high and dry end of the state
and sell that to communities. The bond would be of the revenue-bond
type and will be self-liquidating.
I am not familiar with all the problems, but as far as I can determine
from this plan, they would sell this water to municipalities and for mu-
nicipal water supplies. I don't know that that would give any municipality
more control over the water thah the municipalities have now.
MR. FREDERICK: I would add to what Mr. Stein has said that it is
something that is receiving consideration in a number of states. I think
in the Oklahoma situation, in addition to selling water to municipalities,
the proposed authority there would have been able to sell directly to in-
dustries and even to farmers along its lines. That proposal, as I under-
stand it, after receiving consideration in the 1955 session, was referred
to an interim committee for further study and public hearings throughout
the state in this biennium, and will be reintroduced in January.

For information about this proposal, see Long Range Water Program, A Re-
port to the Governor and Legislature [of Oklahoma] by the State-wide Engineering
Committee, December 1954, 76 pp.







LAW OF WATER ALLOCATION


A somewhat similar proposal was considered in Michigan earlier this
year.* I am rather certain that proposals along this line will receive con-
sideration in a number of state legislatures within the next few years. It
seems to me it is a proposal that needs a good deal of careful study. It is
a direction, I think, in which some of the states are likely to be moving.
MR. NELSON: For the first time in two and a half days somebody is
talking about something that is rather familiar to me. My field is forestry.
We went through this whole thing about fifty years ago. I would like to draw
the parallel for it, how it has worked out. It has been brought out that we
didn't think the open market gave you the direction in which you always
ought to travel.
The State ownership of a natural resource was proposed as far back as
1870. There were people who said that unless all the forests in the nation
were turned over to government control we would run out of lumber and
our civilization would go to pot. That was debated. They said the law of
supply and demand at that time was causing all the cutting of trees, and
therefore we should repeal that law of supply and demand, that we should
put the forests up in some other category.
What has actually happened is that today we are in a much better condi-
tion from an economic standpoint than we were at the time when we had all
of our virgin timber. The reason for that is that as long as there were
plenty of trees, through the operation of the law of supply and demand there
wasn't very much done in the timber business except to saw boards out of
trees. But just as soon as the trees became a little bit scarcer, somebody
went to work to figure out how we could extract a little more out of each
tree. And as the trees continued to get scarcer, they continued to find ways
of getting more and more out of each tree. We have reached the place to-
day where they take the bark off the log before they saw it up and save all
of the waste pieces, chip it up and make paper. The tremendous demand
for all of these things has in turn stimulated reforestation and planting of
more trees, until we have reached a point in the country now where we are
growing more timber than we are harvesting. The projection for the future
shows that the growth should keep ahead of our demand.
The reason that I bring that up is that there are a lot of people who would
like to repeal the law of supply and demand. And I know in reading past his-
tory that way back in the Roman times, people had the idea that you could
repeal the law of supply and demand by fixing prices, for instance. All of
us have been through an era in which we have all lived under fixed prices
and under fixed wages. We all know that although the law of supply and de-
mand was temporarily repealed, we didn't repeal the law of human nature,
and that is that each of us is a very selfish person and we are going to do
for ourselves the best we can. That always circumvents any artificial at-
tempt to fix that law.


* See below, p. 593.






SYMPOSIUM DISCUSSION


It was brought out a few minutes ago that one of the places where we
have advocated removing the law of supply and demand we have taken
our agriculture and we have set artificial prices, and I don't think there
would be anyone who would agree in this room that such an artificial price
situation as we have in agriculture is leading to the best use of our natural
resources. Here [the Lea County example presented by Charles Harris,
p. 155] we have an example of a supposedly irresplaceable basin of water
which is used to produce cotton, which along with our Mississippi cotton,
goes in a warehouse. This is being done by the government, of which we
are all a part, which looks at it and says, "This, we think, is the best we
can do."
If we put all of the water resources in the state under the same sort
of thing, you are substituting for the collective judgment of all of us -
which goes off in all directions, and some of us fail and some of us make
good -.you are substituting for this broad experience in which everyone
is trying a new angle, you are substituting only the wisdom of a few. I
don't think from what we have had in the government management of prices
that the wisdom of a few is always better than the broad judgment of the
many.
MR. WOLLMAN: I would say one thing, that I had no intention of re-
pealing if I understood you to say that what I had in mind was repealing
the law of supply and demand. That would not be part of this proposal.
You would use the market forces as part of your instruments of control.
You would also then be able to use all of this collective judgment that you
want to use, because you would see all of these various responses to dif-
ferent prices that were being charged and to different conditions under
which supply was made available. So it would seem to me that you would
be also able to gain a great deal of this experience.
MR. NELSON: As I see the problem in New Mexico, the price of water
is going to keep on going higher. People are going to drop out of the mar-
ket, and somebody is going to come up with an idea [let us suppose] that we
will just pipe it up from the Gulf of Mexico. ... Sooner or later it will be
feasible to pipe water into New Mexico from the Gulf. It may also be possi-
ble to extract it out of the air or use atomic energy for some of these things.
Sooner or later through the operation of the market the price of water is
going to get high enough to compensate people for that.
Your state agencies, as they have done historically, getting back to my
other example for a minute, they would have built a fence around the thing,
as they did in Sweden in the early days. They said, "There is only so much
timber here and we are going to save it all for the people to make iron with.
Nobody else will have a crack at it because there isn't enough to go around."
I think that is the danger in a state or corporate control, that you don't
get the flexibility. You set the market and you say, "We are not going to
charge more than so much a thousand for water because we would be sub-
ject to political pressure," and you wouldn't get the price down to where
you could bring in this other use. ...






LAW OF WATER ALLOCATION


CHAIRMAN KRUTILLA: I do not mean to rob Mr. Wollman of any claim
to fame or detract from his proposal, but I would like to point out it is
not novel in any sense, that a study has been been made by Professor Mil-
likin at the University of Florida in connection with the water supply of Los
Angeles, which seems to run very much in this direction, and some gen-
eralized recommendations from that study appear to be very similar to
the type of proposal that Professor Wollman makes. I think that it is not
unusual that there should be so much similarity because this does stem
from certain considerations...-what system would one suggest in order
to use the available water in the most efficient manner? It is addressed
largely to this question.
MR. HABER: There are undoubtedly many questions one can raise about
this proposal. I just want to raise one to simply point up that it isn't clear
yet why this would be a better way of handling allocation than any other.
Take one example as an illustration.
You pointed out there is a problem of risk which has to be taken care
of. And in the first part of your discussion you spoke about risk as far
as the investment in water transporting and diversion facilities is con-
cerned. As far as that is concerned, a good deal of it could be taken over
by this agency, although even there there is a question of judgment, that
you might have some obsolete transportation machinery if you change your
uses and place of use. But take the next point. The big risk in some types
of uses is not in the investment in water transporting facilities, but it is
in the investment in the equipment that actually uses the water. Now you
protect that risk only, as I see it, with a contract. A contract would pro-
tect that risk.
MR. WOLLMAN: May I say one other thing? That kind of equipment
is likely to have a higher marketability than the water storage and di-
version facilities. It is usually more mobile.
MR. HABER: Perhaps. If you take a contract situation, it ties you up
again and you have the same kind of problem, namely, that after a num-
ber of years of having issued these contracts, you will have frozen the
supply up to the point where you cannot afford to pay the damages for
breach when you take the right away from these particular contract users.
So you are again faced with the question of whether you can avoid in any
way this problem of cost. If you can't avoid this problem of cost, then this
system might not work much better than any other system where you have
to pay damages.
CHAIRMAN KRUTILLA: Why would it be necessary to insure a supply
by means of a contract? Why can't you have spot transactions and have
the market price vary with the demand which is made? For example, if
you have a physical limitation on supply, rather than freeze the alloca-
tion of that fixed supply by long-term contracts, why not permit the price
to vary and have the competition for the water for those uses to which
the highest value attaches and which therefore can pay the highest price-
[for those uses to] bid for this water to use it in the most efficient manner?






SYMPOSIUM DISCUSSION


MR. HABER: I think this is a question that you, as an economist, can
answer better than L But I can just raise the issue, as I see it, namely,
that if you have a plant located in a particular area that is dependent on
water, it is paying a certain rate. Now the demand for this water goes up.
It is going to have to pay a higher rate. If it cannot meet that higher rate
because of the general and national competition for its particular prod-
uct -
CHAIRMAN KRUTILLA: Suppose it is fuel, not water. What is the
difference ?
MR. HABER: The difference is, I would say, in fuel you have a national
demand and a national market. The price of fuel is governed by national
supply and demand, and the particular competing industries are competing
for the fuel on the same market. But you take a steel plant located in an
area where the water is relatively scarce and the steel plant located in
an area where the water steel may be a very bad example in an area
where the water is relatively plentiful they are not competing on the
same market at all for that water.
The market price in the area where the water is plentiful is going to
be probably much lower than in the area where the water is scarce. In
the meantime, the steel plant has made a great deal of plant investment.
It isn't mobile, like some industries might be. There are many industries
which would not be mobile. They could not move as the scarcity of water
increases to an area where they can get it at the same price as their
competitors can get it.
MR. WANTRUP: On this economic point, I have difficulty in under-
standing some of the economic reasoning both of the Chairman and of
Professor Wollman. Both reject the market as the regulator ... Now they
turn the water over to the state and suddenly the price mechanism works
smoothly. I do not understand that particular reasoning. Either, it seems
to me, you have to throw out the market, if you are dealing with the
transfer of private rights, and then be logical and say also that if the water
is controlled by the state, we have to have other mechanisms of allocation
and price. Or you have to be consistent and also grant ... the possibility
at least of exploring whether the market might not work under private
ownership of water rights.
MR. WOLLMAN: I think you have raised an important point. This water
agency would use the market, but it wouldn't necessarily always accept the
results that the market would give if it were a private agency. If it were a
S private agency, it would have to use the market in such a way as to maximize
its profits. As a public agency, it would not have to use the market that way.
It could reject certain results of the market and decide which phases of the
market it wants to accept. That is the only way I could answer you.
CHAIRMAN KRUTILLA: I would like to make a comment in the case of
water. Take a well, for example, in which drilling by one party may affect
the outcome, the cost of someone else's withdrawal of water from a com-
mon pool. You see, you need some regulatory intervention to prevent one


I






LAW OF WATER ALLOCATION


driller from shifting the cost to another. The market mechanism in an un-
fettered way, without the intervention of some public authority, will shift
costs and gains which are not reflected on the balance sheets of the unit
involved... I think, along with Professor Wollman, that there is need for
some intervention. This is the reason I indicated that the disciplines of
the law and the administrative device appear in the case of water, where-
as they don't, for example, in the distribution of breakfast cereal. You
don't have a board set up to allocate the resources going into many prod-
ucts, but in the case of water-derived commodities you find this is neces-
sary.
MR. WOLLMAN: I think the tenor of the discussion for the last two days
was not, was intervention necessary, but what kind of intervention is it
going to be.
Mr. Harris, if you recall, in discussing the question of whether water
should be used in the Carlsbad Project or up in the Roswell Basin, said
we are going to have to come to some sort of arrangement here. I am
not sure whether or not I am putting words in his mouth, but it seems to
me that what he has in mind is some type of persuasive activity. How far
it will develop into force, I don't know. But there will be some interven-
tion, apparently with just the normal free marketing processes.
MR. HARRIS: I have never known in New Mexico that they ever had a
completely free marketing process as far as water is concerned. Perhaps
in a state like New Mexico we would have to go into a partnership between
the users and the government, state government, in order to maximize the
amount of water (which, incidentally, probably will return maximum so-
cial satisfaction), but I don't think it is necessary, in order to do that, to
take the decision as far as private ownership of the use of water out of
the hands of the people that are using it.
I don't feel you have to have a price-fixing proposition there in order
to achieve the changes that the drought situation requires. I think the fact
that it is a scarce commodity will require a lot of control regarding waste,
which is implicit in our present law. I didn't ... mean we would have to have
a corporation to set the price and fix the price there. There may have to
be public revenue bonds, and it may have to be paid back by the people
who use it.
That has, it seems to me, been traditional in our system rather than
the taking of all the controls and putting them in the hands of a super
bureaucratic board. I think that is an entirely different proposition from
what we will have to do and what we have done in the past. We may have
to import water, as someone said. We might have to set up a water
authority. But I don't think it will be necessary for us to fix the price of
water or to tax the water use as such in order to achieve an arbitrary
set of social benefits, because you have as many different ideas of what
is the best social benefit as you have people. As you pointed out in your
paper, you have recreation, manufacturing-you have many different ideas.






SYMPOSIUM DISCUSSION


That would be the arbitrariness that I think could be avoided regardless of
how scarce the water gets.
MR. BARLOWE: One of our more famous living economists is re-
ported to have said on one occasion that if any economist comes up with
something new in economics the odds are that 99 out of 100 he is either
wrong or somebody has already thought of it.
I have had a feeling that the ghost of Henry George was marching
among us for awhile, especially when we were talking about increments.
I am a little bit inclined to believe with Mr. Harris that the unearned
increments involving water rights are small as compared with the un-
earned increment in other public matters. I am sure they are worth about
as much as pickled pigs' feet as compared to a new radio channel which
can be sold for several million dollars as soon as it is really established.
I am not sure Mr. Wollman would argue that we have to take his pro-
posal in toto. What I am interested in is the application of what he is sug-
gesting in the West ... in the East and possibly elsewhere. I think there is
probably a good argument for application of the public ownership idea or,
Sat least, the public control idea, [in situations] involving considerable
outlay of public funds for new development of water resources. It makes
a lot more sense to me, as to some of our new irrigation projects in the
West, if we tend to put the water rights of these various tracts up for
sale, put it in the market mechanism instead of trying to draw lots with
the various applicants and let them get their assignments that way.
In Michigan we have been giving some consideration to the possibility
of bringing in water from the lakes primarily for municipal uses but also
for other uses. We talked in terms of a $200 million project-water for
the Detroit area. Today it makes sense to me if we were to go through
with the project, to try to treat it on a public utility basis, with the public
keeping a very definite hand in the operating and managing of this for a
long time to come.
MR. WOLLMAN: It seems to me the idea of public ownership of water
would be relevant to, say, your discussion of the Paw Paw Basin. You
raised the problem that if you pipe water into the lower part of the Basin,
should the upper part of the Basin get all the benefits without paying for
them. By simply extending the idea with respect to who owns the water and
who has the right to sell it and what compensation is to be charged, and
some type of overhead cost allocation in some way or another that we
are familiar with in the case of other utilities, why you don't exactly
solve the problem with mathematical precision but you get a point of
view that...lets you solve it in some way or another.
MR. HARRIS: That, [if you add] the interest and operating expense
[features, would be similar to] the reclamation projects of the West.
MR. WOLLMAN: ... The obligations a state water agency incurs would
depend on, however, what it has to pay out to acquire all the water rights
and the pertinent engineering projects.






594 LAW OF WATER ALLOCATION

MR. HARRIS: Except for one thing, under your assumed state corpora-
tion, you would charge the socially desirable uses less than you would the
socially undesirable -
MR. WOLLMAN: That would be an additional flexibility you would
possess.
MR. HARRIS: That would be the flexibility with which many people
would argue...
MR. FISHER: I would like to state quickly that we are talking unneces-
sarily hypothetically. We have talked about all these proposals for doing
this in the future. It doesn't strike me that this proposal is radically dif-
ferent from a lot of our public development projects in the West. We not
only have precedents that are strikingly similar in many respects, but we
also have the social policies being reflected in preferential pricing ar-
rangements, and we have already begun to see some discontent in some
quarters over these policies, [as, for instance, with regard to] preference
in the water pricing for agriculture. So, we already have some of the prob-
lems that Professor Haber has brought up in connection with this type of
pricing policy.
MR. BUSBY: I have a comment. Some of the aspects of this type of pro-
posal are already in operation in Puerto Rico under the Puerto Rican Water
Resources Authority and the Puerto Rican Sewage and Aqueduct Authority.
I don't mean to imply that it carries all of the elements that have been
described here today. I think the emphasis back of it was the deplorable
pollution problem in every town and city in the Commonwealth of Puerto
Rico a number of years ago. Now, as a result of the operation, these two
authorities, state corporations, there is pure water provided in every town
and city in the Commonwealth. That might be one way of evaluating the
result. There are other matters involving water for irrigation and hydro-
electric power to supply water on the coast. It might be well to keep in mind
that the Puerto Rican water law theoretically has rights arising out of ben-
eficial use or land ownership. They have both these types of systems that
are incorporated in the civil law. There were some specific grants there
by the Council of Spain in 1840. Those were reevaluated and pared down
before this system went into operation. But it might be of interest to you
to look into that.




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