Smart Markets for Groundwater Trading
in Western Nebraska: The Twin Platte
October 2016
Case Study
Final Report on
Political Economy
of Water Markets
Smart Markets for Groundwater Trading in Western Nebraska:
The Twin Platte
A Case Study for the Political Economy of Water Markets Project
October 2016
Richael K. Youngi
Mammoth Trading, Inc., P.O. Box 22845, Lincoln, Nebraska 68542-2845,
richael@mammothtrading.com
i
Preface
This paper is one output of a project entitled “The Political Economy of Water Markets.” The project was
carried out by Ecosystem Economics LLC and AMP Insights LLC. The outputs of the project include a
final report and a set of case studies.
The final report comes in three parts:
1. “Healthy” Water Markets: A Conceptual Framework by Bruce Aylward, David Pilz, Megan
Dyson and Carl J. Bauer
2. Political Economy of Water Markets in the Western United States by Bruce Aylward, David
Pilz and Leslie Sanchez
3. Comparative Analysis of Legal Regimes with Respect to Fostering “Healthy” Water Markets
by David Pilz, Megan Dyson, Bruce Aylward, Carl J. Bauer and Amy Hardberger
The eight case studies consist of the following.
1. The Evolving Water Market in Chile’s Maipo River Basin by Carl J. Bauer
2. Addressing Overallocation and Water Trade in New South Wales, Australia: Namoi Basin
Groundwater by Megan Dyson
3. Evolution of Australian Water Law and the National Water Initiative Framework by Megan
Dyson
4. Opportunities for Surface Water Right Marketing in Idaho’s Rapidly Urbanizing Treasure
Valley by Jeff Fereday
5. Texas Groundwater Markets and the Edwards Aquifer by Amy Hardberger
6. Oregon’s Umatilla Basin Aquifer Recharge and Basalt Bank by Martha Pagel
7. Truckee-Carson Surface Water Markets in Northern Nevada by Leslie Sanchez, Bruce
Aylward and Don Springmeyer
8. Smart Markets for Groundwater Trading in Western Nebraska: The Twin Platte by Richael
Young
The studies and reports can be downloaded from the AMP Insights website at
http://www.ampinsights.com/rock-report.
For further information on this work please contact Bruce Aylward at bruce@ampinsights.com.
Acknowledgements
This paper was prepared with financial support from The Rockefeller Foundation. All errors and
omissions remain the responsibility of the author.
Author
Richael Young specializes in market design for the exchange of natural resource rights. As an economist,
engineer, and entrepreneur, she brings together complementary skillsets for natural resources
management and policy. She strives to create tailored and cost-effective solutions that achieve local
economic and environmental goals. In 2014, Richael cofounded Mammoth Trading, where she serves as
president. In this capacity, Richael led the development and implementation of the first smart market for
groundwater in the world. Mammoth Trading’s smart markets help communities put limited water to its
most productive uses, all while meeting regulatory obligations.
Introduction
Groundwaterisacriticalresourceforagricultural,industrial,municipal,andenvironmental
uses.Approximatelyone-fifthoftotalwateruseintheUnitedStatescomesfromgroundwater
withdrawals,extractedatanestimatedrateof227,000acre-feetperday(Maupinetal2014).
Ofthis,about70percentisusedforirrigatedagriculture.Theheavyrelianceongroundwater
hasinsomeareasdiminishedgroundwateravailabilityandwellyieldsanddepleted
hydrologicallyconnectedsurfacewaters.Inresponse,groundwatermanagementhasemerged
toincludelimitsonwelldrilling,pumping,andirrigatedarea.Toprovidemoreflexibilityto
groundwaterusers,severalmanagementagencieshaveallowedthetransfer,ortrading,of
groundwaterusepermits.Thepurposeofthiscasestudyistodescribeanagriculturalmarket
fortheexchangeofgroundwaterusepermitsintheTwinPlatteNaturalResourcesDistrict
(NRD)inwesternNebraska.
Thefirstsectiondescribestheevolutionandtypologyofmarket-basedstructuresforwater
trading;wateristransactedthroughseveralmechanismsintheUnitedStates,eachofwhich
createsdifferentincentivesforparticipants.Thesecondsectionhighlightsgeneralmarket
imperfectionsthatshouldbeconsideredinthedesignofregulatoryrulesfortrading.Thethird
throughsixthsectionsfocusontheparticular“smart”marketforagriculturalgroundwater
tradingintheTwinPlatteNRD,includingitsfeaturesandstructure,participants,imperfections,
andopportunitiesforlegalimprovements.Thelastsectionmakesconcludingremarks.
Theinsightsinthiscasestudyareinformedfromtheauthor’sexperiencedevelopingwater
marketsandindividualmeetingswithmorethan200agriculturalproducers,watermanagers,
statepolicymakers,andotherwaterusepractitionersinthewesternUnitedStates.
I.WaterMarkets
Watertransactionsoccurandevolvethroughmanyprocesses,includingbilateralcontractsor
“coffeeshop”markets,brokerage,bulletinboards,auctions,oralgorithmicclearing(“smart”
markets).Thissectionoutlinestheprimaryfeaturesofeachandhowthosefeaturesaffect
marketparticipation.Importantly,differentstructuresmayfavoreitherthebuyers’orsellers’
sideandcreatevaryingtransactionscosts.
BilateralContracts
Thesimplestandmostdecentralizedwatertransactionsoccurthroughbilateralcontracts,or
“coffeeshop”markets.Inthesemarkets,individualbuyersandsellersfindeachotherthrough
informalmechanisms,suchasthroughwordofmouthorlocalcommunitygatheringplaces,and
makearrangementsthemselves.Theyworktoidentifyoneanother,negotiatepricesandwater
rightsquantities,andobtainregulatoryapproval.Bilateralcontractsareverycommoninwater
transactions,especiallyinagriculturetourbanorenvironmentaluses,butalsoinagricultural
watertrades.Timeandeffortexertedforstafforindividualstosearchforinterestedparties,
negotiatecontracts,andobtainregulatoryapprovalaregenerallyhigh.However,thereareno
additionalthird-partycostsorfeesforcompensationfortheset-uporoperationofsucha
decentralizedapproach.
Brokerage
Aslightlymoresophisticatedapproachinvolvesrepresentationofthebuyerorseller.Real
estateagentshavebeenknowntorepresentindividualbuyersorsellersinwaterrights
transactions.Agentscanhelptoidentifyinterestedpartieswithwhichtotrade,negotiateprices
onbehalfoftheirclient,andobtainregulatoryapproval.ThismodeliscommoninAustralia,in
combinationwithelectronicbulletinboards,describedinthenextsection.Brokeragehelpsto
reducesomeoftimeandhassleassociatedwithwaterrightstransactions,thoughthebroker
commissionaddsitsowntransactioncost.
BulletinBoard
Bulletinboardscreateacentralizedhubfortradingbyallowingpartiestoindicateinterestin
trade.Typically,theywilllistname,contactinformation,andwaterrightsinformation.Priceis
generally,thoughnotalways,withheld,tobenegotiatedafterinitialcontactbetweenthe
parties.Bulletinboardscanbephysicalorelectronic:theRozaIrrigationDistrictinWashington
Statehasaphysicalbulletinboardinitsofficeforsellerstopostonthatbuyerscanreachout
to;theEdwardsAquiferandAustraliahaveelectronicbulletinboardspostedonwebsites.
Importantly,thoughthisinformationisonlineandmayexpeditesomeofthelegaltransfer
process,itisnota“smart”oralgorithmicmarket.Bulletinboards,thoughcentralized,relyon
individualsmanuallyidentifyingtradesbetweenonebuyerandoneseller.
Auctions
Atypicalauctionrunswherethereisasinglesellerandmultiplebuyerswhosequentiallyoutbid
oneanother,withthehighestbiddertakingall.Areverseauctiondoestheopposite,wherea
singlebuyerislookingforthecheapestwater,andsellersundercutoneanotherwherethe
lowestofferorwinsthecontract.Ineithercase,multipleauctions(reverseauctions)may
happeninsequencesothatdifferentsellers(buyers)canlisttheiroffer(bid).However,there
arealsocaseswhereonlyasinglesellerorbuyerexistsinthemarket.Districtscontrollingthe
growthofgroundwateruseineasternNebraskahavediscussedauctioningoffpumpingrights;
inthiscasetheywouldbetheonlyseller(amonopoly).TheDepartmentofEcologyoftheState
ofWashingtonranareverseauctionin2015tobuybackwaterrights,makingittheonlybuyer
(amonopsony).Suchsituationswherethereexistsonlyoneselleroronlyonebuyercreate
significantmarketpowerandmaygenerateperceptionsofunfairnessontheotherside.Thisis
becauseauctionsarestructuredsothatonesideofthemarketextractsalloftheeconomic
gainsfromtheotherside.Participationinstate-runreverseauctionshasbeenlowinpart
becausetheconcepthasbeenunpopularamongwaterrightsholders,whodonotwishtosell
wateratlowestpricetogovernmentalentities.
SmartMarkets
A“smart”marketisanelectronicclearinghouse,whichusesanalgorithmtosimultaneously
matchmanybuyerswithmanysellersinanautomatedfashion(McCabeetal1991,
Raffensbergeretal2009,Murphyetal2000,YoungandBrozovic2016).Ifthereareadditional
regulatoryconstraints,theymaybeincorporated.Smartmarketsleveragethepowerof
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computeroptimizationinordertomaximizetheeconomicgainsoftradingactivityandare
customizablesothataparticularwatermanagementagency’srulesmaybeincorporated
exactly.Inadditiontosurfaceandgroundwater,smartmarketscanbeusedtotradeavarietyof
othernaturalresourcesuserightsthatareconstrained,monitored,andenforced,suchasair
andwaterqualitypollutants,wetlandhabitat,stormwaterretentioncredits,andother
ecosystemservices.
Smartmarketsofferseveraladvantages.First,likebulletinboardsandauctions,theyprovidea
centralizedhubfortradingactivity,eliminatingthetimeandeffortexertedinfindingothers
interestedintrade.Instead,aparticipantsimplyentersbidorofferinformation.Asidefrom
reducingsearchcosts,smartmarketsimproveonauctionsbyactingtopoolandelectronically
clearbidsandoffers,enablingsimultaneousmatchingofmanybuyerstomanysellersrather
thanmatchingasinglebuyertoasingleseller,whichmaybeimpracticableandisgenerally
economicallyinefficient.Thisresultsinadditionalgainsoftrade,asasinglebuyerandseller
oftendon’thavetheexactsamerequirementsforwatertransfers.Insteadofsellerwith100
acre-feetofwaterhavingtofindabuyerwhoneedsexactlythatamount,shecanselltoseveral
buyers,eachneedingdifferentbutsmallerquantities.Thereverseisalsotrue:asmartmarket
canaggregatemanysellers’waterrightsforalargebiddingquantity.Withoutpoolingand
electronicclearing,thisisverydifficulttomanuallyorchestrate.
Thetailoredalgorithmofthesmartmarketiscapableofautomatingregulatorycompliance.As
previouslymentioned,thealgorithmcanincorporateeveryregulatoryrulefortransfer.A
computercanelectronicallychecksucharduousrulesinstantaneously,aconsiderablesavings
onthestafftimeneededforreview.Thealgorithmconsiderstheentirepoolofparticipantsand
determineswhichpartiesareeligibletotradewithoneanotherwithinthelocalregulations.
Suchasystemhastheadvantageofeliminatingthepossibilityforhumanerrorinchecking
eligibilityrequirements.Ofcourse,programmingtheserulesintothealgorithmitselftakes
considerabletimeandtechnicalexpertise.Forthisreasonsmartmarketsarelikelytobemore
beneficialwheretradevolumeishighenoughforthesmartmarkettoloweraggregate
transactioncostsandrecoupthecostsinitsdevelopment.
II.MarketImperfections
MarketDesign
Oneofthemostfundamentalaspectsofwatermarketsisthattheymustreflectgeophysical
relationships(KuwayamaandBrozovic2013,BrozovicandYoung2014).Duetophysicalor
naturallimitations,watermayonlyflowsofar,whichthereforelimitstheabilitytotransfer
wateracrosslargedistances.Thisisnotnecessarilyundesirable,butafeatureofsystemor
infrastructurelimitations.Evenwithinasmallerwatershed,thenetworkoftributaries,
subbasins,andconveyancemustbeconsidered.Further,therulesforwatertradingmust
preventthird-partyimpacts,includingimpairmentsonotherwaterrightsholdersor
environmentalecosystems.Thismayrequirethattherulesincorporatemorecomplex
hydrologicrelationships,includingdamagefactorsandtradingratios(KuwayamaandBrozovic
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2013,BrozovicandYoung2014).TheTwinPlatteNaturalResourcesDistrict,whoserulesand
marketdesignarediscussedlater,isatangibleexample.
Watertrading,forsurfaceorgroundwater,requiresaphysicalorlegallimitationontherightto
usewater.Inthecaseofgroundwater,iftherewerenorestrictionsondrillingorpumping
additionalgroundwater,therewouldbenoincentivetopurchasesuchrights,andthereforeno
market.Typically,acap,orlimitonthenumberandextentofgroundwaterpumpingrightsis
establishedtomeetaregulatoryobligation(e.g.meetingstreamflowcompliance)orpolicygoal
(e.g.notexceedingtheaquifer’ssustainableyield).Settingthecapcorrectlyisanimportant
challengeinstartingawatermarket.Ifthecaponwaterusageistoohigh,amarketwould
enabletheadditional,or“slack”,permitstobeputtouseelsewhere,resultinginaggregate
increasesinconsumptivewateruse(PalazzoandBrozovic2014).Asaresult,someregulatory
agencieshavestipulatedthatonlythehistoricalwaterusemaybetransferredthrougha
market,thoughthisstillmaycreateincentivesforoveruse.InAustralia’scase,thegovernment
investedbillionsofdollarsinbuybackstopreventslackpermitsfromenteringthemarket.
Ifsuchconstraintsandconsiderationsarenotincorporatedintothemarketdesign,itispossible
thatamarketcouldexacerbatewaterscarcity,degradeenvironmentalquality,andeven
devaluewaterrights.Apoorlydesignedmarketcanbeworsethannomarketatall.
AsymmetricInformation
Governmentalagenciesareresponsibleforthepermittingandregulatoryaspectsofwater
rights,includingmarketdesign,monitoring,andenforcement.Suchresponsibilitiescannotbe
delineatedtoprivateentities.Severalgovernmentalagencies,inattemptstoassisttheirwater
usersmoreeffectivelytrade,havealsosetupandoperatedthemarketmechanismitself.While
thisisdonewiththebestofintentions,itcancreateasymmetricpriceinformationandgeneral
distrustamongwaterusers.Someagriculturalproducershaverefusedtoparticipateinwater
markets,notbecausetheywouldnotbeprofitable,butbecauseproducershaveconcernsthat
thepriceinformationtheydiscloseonamarketcouldbeusedagainsttheminthefuture.
Disclosingwaterrightsvaluestotheveryentityresponsibleforregulatingthecommoditycan
createuneasinessamongwaterusers.Thismayresultinlowermarketparticipationand
economicinefficiency.
Anotherconcernwithgovernment-runmarketsisinthecasewherethegovernmentalagencyis
interestedinalsoparticipating—asabuyerorseller—inthemarket.Withinsiderinformation
onprices,theagencyisinadistinctconflictofinteresttosimultaneouslyparticipateonand
operatethemarket.Suchapracticecreatesvalidconcernsformisuse.Asaresult,itcouldbe
desirabletopromotepublic-privatepartnerships,wheretheagencyretainsfullcontrolof
permittingandregulatorycomplianceandaprivateentityhandlesthefinancialside.The
permittingandfinancialtransactionscanbethoughtofastwoaspectsoftradingthatcanbe
handledseparately.
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Prices
Confidentialityofpriceinformationisoneofthemostunderappreciatedaspectsoftrading.The
collectionofpriceinformationrequiresindividualstodisclosesensitivefinancialdataabout
themselvestothepublic;whileunintentional,mandatorypricedisclosuremaycreatean
obstaclethatisinsurmountabletosomemarketparticipants.Instead,itmaybedesirableto
foregopricedisclosuretoencouragemoretradingactivity.
Pricesettinghasalsobeenanobstacle,wheretheregulatorwillsetastaticpricethat
participantseithertakeorleave.Importantly,thevalueofwatervariesoverspaceandtime
suchthatthereisnosingle“marketprice”forwateratasinglepointintime,noristhatprice
static,butever-changingwithweatherconditions,cropconditions,commoditiesprices,and
more.Watervaluesareidiosyncratictoreflectthespecificcondition,use,andtime,anda
marketmechanismshouldallowforsuchvariability.
III.CaseStudy:TPNRDBackground
HighPlainsAquifer
Manyregionsrelyongroundwaterasacleanandreliablesourceofwaterforurbanand
agriculturaldemands.IntheUnitedStates,approximately15millionacresoffarmlandand1.9
millionpeopledependontheHighPlainsAquifer,whichunderliesportionsofeightstatesinthe
centralUS(USGS2013,USDAERS2015).TheHighPlainsAquifer,alsoknownastheOgallala
Aquifer,isthelargestinNorthAmerica.Thedepthtothewatertablerangesfromlandsurface
tomorethan300feet,andtheundergroundgradientoftheaquiferissuchthatitflowswestto
eastatapproximately1footperday(Gutentag1984).Theaquifer,whichisunconfined,is
hydrologicallyconnectedtolocalsurfacewatersourcesthroughout.
Theoveruseofgroundwatercanresultinmyriadprivateandpublicexternalities,whichhave
beenwelldocumentedinthemediaandscientificliterature(Laukaitis2015,Hathaway2011,
McCarletal1999;Stewardetal2013).Theseincludewellinterference,diminishingwellyields,
landsubsidence,seawaterintrusion,orthedepletionofhydrologicallyconnectedsurfacewater
sources.IntheHighPlainsAquifer,diminishingsaturatedthicknessandwellyieldshavebeen
causeforvoluntarygroundwatermanagementrestrictionsinNorthwestKansasGroundwater
ManagementDistrict#4,whereproducershopetostretchthelifeoftheaquifersothatarural
livelihoodispossiblefortheirchildrenandgrandchildren.Inothercases,therehasbeen
landmarkinterstatelitigationovergroundwaterpumping-inducedstreamdepletion,the
subjectofKansas’lawsuitagainstNebraskaandColoradoonsurfacewaterdeliveriesowedin
theRepublicanRiver,ariverconnectedtotheHighPlainsAquifer.Streamdepletion,asidefrom
harmingdownstreamsurfacewaterrightsholders,mayalsoimpairaquatichabitatfor
threatenedorendangeredspecies.
Asaresultofinterstatelitigation,localconcernsforgroundwatersustainability,andgrowing
intereststoprotectaquatichabitat,groundwatermanagementemerged,thoughonahyperlocalizedscale.IntheUnitedStates,thereisnonationalpolicyontheuseofgroundwater;itis
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insteaddelineatedtothestatestomanage,eachwithvariedlawsandpolicies.Forty
autonomousmanagementdistrictsineightstatesmanagetheHighPlainsAquifer,creatinga
livinglaboratoryforinnovationsingroundwatermanagement(Figure1).Thefocusofthiscase
studywillbeonagriculturalgroundwateruse,asthebulkofgroundwaterusedintheHigh
Plainsisforirrigatedagriculture,andthemarketmechanismstotransferpumpingrights.
Figure1:TheHighPlainsAquiferislocatedinthecentralUnitedStatesandisgovernedbymorethan40management
districtsacrosseightstates(YoungandBrozovic2016).
Nebraska
Two-thirdsoftheHighPlainsAquiferiswithinNebraska.Overall,groundwaterlevelsofthe
aquiferhaveremainedconstantsincedevelopment,despitethefactthatNebraskaisthetop
irrigatedstatebyacreageat8.3millionirrigatedacres(USDANASS2012),alargefractionof
whicharegroundwater-irrigated(Johnsonetal2011).Thisisincontrastwiththesouthernand
centralpartsoftheaquiferthathavebeenrapidlydeclining,asisthecaseinsouthwestKansas
andpanhandleofTexas(USGS2015).Importantly,Nebraska’sSandhillsinthenorthhave
affordedithighrechargetoitsportionoftheHPA.Ageologicformationintheaquiferthatsits
neartheborderwithNebraskaandKansaseffectivelydisjointstheaquifersothatlittle
groundwaterinitsnorthernportionflowstothecentralandsouthernportionsoftheaquifer.
ThoughgroundwaterdepletionisnotaseriousconcerninmostpartsofNebraska,stream
depletionisandhasbeentheimpetusforgroundwatermanagementinthestate.Stream
depletionbygroundwaterpumpingoccurswhengroundwaterpumpingreducesthebaseflow
uponwhichanadjacentsurfacewatersourceisdependent.Thismayresultindiminished
streamflowforsurfacewaterrightsholdersorendangeredspecies.Theconnectionbetween
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groundwaterandsurfacewaterisnowcommonlyacknowledgedandacceptedamongboth
scientistsandpolicymakers,givingrisetocallsforthe“conjunctivemanagement”ofsurface
andgroundwater.Thesciencebehindtheirinteractionsisever-improvingsothatwecannow
describetheeffectofstreamdepletionofagroundwaterwellbyknowingfactorsincludingits
extractionrate,distancefromthestream,andaquiferproperties.Thescienceisincreasingly
beingincorporatedintoregulations,thoughtheseregulationsstillareimperfect,asourability
tomonitorgroundwaterusageanditseffectsisalsoimperfect,beitfortechnological,political,
orfinancialobstacles.
Nebraskadelineatesauthoritiestomanagegroundwatertoits23NaturalResourcesDistricts
(Figure2).Importantly,thejurisdictionsoftheNRDsfollowwatershedboundariesratherthan
politicalones.Theirboardsarelocallyelected,sothatregulationscanreflectlocaleconomic
needs,whilethestatehasenoughoversighttoensurethattheNRDmeetsitsresponsibilitiesto
managegroundwater.NRDshaveauthoritytolevytaxesandtocraft,monitor,andenforce
regulations.Regulationstodatehaveincludedwellmoratoria,certificationofirrigatedacreage,
groundwaterpumpingallocations,continuingeducationrequirements,andmore.
Figure2:Nebraska's23NaturalResourcesDistricts,whichareresponsibleforgroundwatermanagement(Youngand
Brozovic2016).
Nebraska’sprecipitationgradientislarge,atabout35inchesannuallyinthesoutheastand14
inchesinthewest(Fergusonetal2011),suchthatirrigationintheeasternpartofthestateis
rarewhileanearnecessityinthewesternpart.Groundwatermanagementconcernsareas
variedasitsprecipitationpatterns;NebraskaNRDshavedealtwithgroundwaterdepletion,
streamdepletion,wellinterference,andcontaminationbyagrichemicals.Withvariedconcerns
anditslocalapproachtomanagement,Nebraskahasbecomealivinglaboratoryforinnovations
ingroundwatermanagement.Inthiscasestudy,thefocusisontheTwinPlatteNatural
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ResourcesDistrict,whichfacesconcernsfromstreamdepletion,anditsnascentgroundwater
market.
TwinPlatteNaturalResourcesDistrict
TheTwinPlatteNaturalResourcesDistrictishometofourcountiesand325,000irrigatedacres
offarmland.ItisoneofseveralNebraskagroundwatermanagementdistrictsalongthePlatte
River,ariverbasinthatspansthethreestatesofWyoming,Colorado,andNebraska.ThePlatte
hasitsheadwatersintheRockyMountainsinWyoming,formingtheNorthPlatteRiver,and
Colorado,formingtheSouthPlatteRiver.TheseflowwestwardintoNebraska,joiningattheir
confluencewithintheTwinPlatteNRD.ThePlatteRiverdischargesintotheMissouriRiverat
theeasternborderofNebraskanearOmaha.ThePlatteisabraidedstream,oronethatisslow,
meandering,andhasmanysmallsandislandsthatserveascriticalwildlifehabitat.ThePlatteis
athoroughfare,calledtheCentralFlyway,fortheiconicsandhillandwhoopingcranesthat
migratebetweenCanadaandMexico.
InthePlatteRiverBasin,thewhoopingcraneisoneofthreefederallylistedendangered
species,alongwiththeleastternandpallidsturgeon;thethreatenedpipingploveralsoshare
thishabitat.Colorado,Nebraska,Wyoming,andtheU.S.DepartmentofInteriorenteredin
2007intoacooperativeagreementtoreducenegativeimpactstostreamflowtothesespecies’
habitat.Importantly,thisregulatoryenvironmentisoneofpre-compliance,thatis,donein
advanceoflitigationorbindingcourtorders.By2019,theTwinPlatteNRDaimstoreturn7,700
acre-feetofwatertotheriverthrougheducation,strongerregulations,andincentive-based
programs,includingretirementsandagriculturaltransfers(TPNRDIntegratedManagement
Plan2012).
Inadditiontothecooperativeagreement,thestatewaterregulatoryauthority,theNebraska
DepartmentofNaturalResources(DNR),in2004determinedthewesternportionoftheDistrict
tobeoverappropriatedandtheeasternportionfullyappropriated(TPNRDIMP2012).By2007,
therewasadistrict-widewelldrillingmoratoriumwithrestrictionsonthegrowthofirrigated
acres.GroundwaterpumpingintheDistrictisnotmeteredtoprovideflexibilitytotheir
agriculturalproducers.Meteringisextremelyunpopularamongproducers,andoftenpolitically
infeasibletoinitiate.Meterequipmentandstafftimetoconductreadingscanalsobecostprohibitiveforadistrict,sotheTwinPlatteonlymonitorstheirrigatedacreageoffarmsintheir
jurisdiction.
IV.CaseStudy:TPNRDMarketDescription
Facingexpansionsingroundwaterpumpingamidobligationstoreducestreamdepletion,the
TPNRDboardenactedawelldrillingmoratoriumandrestrictedthegrowthofirrigatedacreage.
TheTPNRDverifiedandcertifiedexistingirrigatedacreage,calledcertifiedirrigatedacres
(CIAs).Anyonecaughtirrigatinglandsuncertifiedaresubjecttostrictpenalties.However,
recognizingthattheeconomiclandscapemightchangeregardingwhowouldorwouldn’tbe
interestedinirrigating,theDistrictdidnotoutrightprohibittheexpansionofirrigation:Instead,
itrequiredagriculturalproducersinterestedinexpandingtheirownproductiontoobtain
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appropriateoffsetsfromproducerswhoalreadyhadCIAs.Inessence,theTPNRD,inlookingfor
flexiblemanagementsolutions,capped,certified,andallowedthetradingofCIAs,formingthe
regulationsofagroundwatermarket.
UnitofTrade
Importantly,therearenovolume-basedirrigationallotmentsorallocationsintheTPNRD.Other
NRDsinNebraskahavevolumetricrestrictions(theUpperRepublicanNRDhasanallocationof
13acre-inchesperirrigatedacre),whicharemetered,monitored,andenforced.IntheTPNRD,
whilethereisacaponthetotalnumberofirrigatedacres,thereisnosuchcapontheamount
ofgroundwaterextractedatthewell.Therefore,buyersandsellersintheTPNRDexchange
CIAs,ortherighttoirrigateaspecifiednumberofacres.Tradesarebasedonirrigatedacres
(area-based)ratherthangroundwaterpumpedorconsumptiveuse(volume-based).TheNRD
annuallyconductsflyoversandaerialimageprocessingtoensurecompliance.
Whilethereisvariabilitybetweenfieldsinwaterapplicationandconsumptiveuse,the
differencesinthisDistrictaresmallduetoratherhomogenouscropwaterrequirements(Figure
3,Young2014).GrowersintheTwinPlattealmostexclusivelygrowcornandsoybeans,
requiring14-16inchesofirrigationapplication(Figure3).Inregionsormanagementdistricts
wherethereismorediversityofcropsorwateruserequirements,area-basedtradingislikely
insufficient;metersandvolume-basedtradingwouldbebettersuited.
Figure3:Estimatesofwaterusagevariabilityandstreamdepletionfactor(SDF)variabilityintheTwinPlatteNRD(Young
2014).TheproductofwaterusageandtheSDFgivesthetotalamountofstreamdepletiontoanadjacentsurfacewater
source.SincetheeffectismultiplicativeandwaterusagefairlyhomogenousintheTPNRD,theSDFisthedominantfactoron
agroundwaterwell’sdamagetostreamflow(Young2014).
Therearetradeoffsassociatedwiththelevelofmonitoring,discussedindetaillaterinthecase
study.Insummary,area-basedmarketstranslatetolowmonitoringcoststotheregulatory
agency.Forvariousreasons,itmaybepolitically,financially,orpracticallyinfeasibletomonitor
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groundwater.TheTwinPlatte’sregulationsthereforelimitorreducefarmsizeratherthan
groundwaterpumped,anadjustmentattheextensiveratherthantheintensivemargin.
Further,thereisbuilt-inflexibilitytothegrowers,whomayusemoreorlessgroundwater
annuallydependingonseasonalweatherconditions.Insteadofhavingtoadheretoastrictor
inflexibleallocation,thegrowershavetheabilitytoapplyhowevermuchwaterisrequired.
Becauseenergycanbeanexpensiveagriculturalinput,thereislittleincentivetoover-pump.
Therearedownsidestoarea-basedtrading,though.First,becausethereisnoallocation,
growersintheTPNRDhavelittleneedtoleaseextraorexcesswater—theycanfulfillseasonal
waterrequirementswithoutfearofexceedingaregulatorycap.Forthisreason,alltransfersof
CIAsarepermanent(sales),andnottemporary(leases).However,economictheorysuggests
thattradingismostcost-effectivewhenproducerscanmakeandmonetizeadjustmentsonthe
intensive(volume),ratherthanextensive(area),margin.Ignoringmonitoringandenforcement
costs,thebasicinsightisthatgrowerslikethoseintheTwinPlattecouldcollectivelymakemore
moneywhileusingthesameamountofwaterwithvolume-basedtrading,whichlendsitselfto
leaseandderivativesmarkets,aswellasapermanentone.
SpatialExternality
Reallocatinggroundwaterpumpingislikelytochangethetiming,magnitude,andlocationof
thedamagestostreamflow;thatis,streamdepletionisaspatiallyheterogeneousexternality.
Toensurethatgroundwatertradingdoesnotimpairdownstreamsurfacewaterusersor
exacerbatestreamdepletion,anumberoftradingruleshavebeencodifiedintotheregulations
governingtradethatreflectthehydrologicscience.Forexample,tradingratios(inthiscase,
streamdepletionfactors,orSDFs)areoftenusedtocomparetherelativeenvironmental
damage(streamdepletion)betweenabuyerandseller,withadjustmentsmadeaccordingly
(KuwayamaandBrozovic2013,BrozovicandYoung2014,Young2014).Inmovinggroundwater
pumpingtoalocationthatwouldinducehigherstreamdepletion,thenumberofgroundwater
permits(CIAs)wouldshrinkproportionately.However,thereverseisnottrueintheTwin
Platte:movingfromahigher-damagetolower-damagelocationdoesnotresultinthegrowthof
CIAsperTPNRDtradingregulations.Suchanasymmetricaltradingschemeiscalled
“unidirectional”;whileunidirectionaltradingisnotafirst-bestsolution,itcanhedgeagainst
uncertaintyorslackinthemarketorassisttomeetpolicyobjectivesofreducinggroundwater
overuse(BrozovicandYoung2014,Young2014).Inpractice,tradingratioschangetheeffective
pricesbetweenbuyersandsellers,makingitcostlytomovegroundwaterpumpingtolocations
inducinglargerstreamdepletion.Streamdepletionfactorscanbehighlyvariableacrossspace
(Figures3and4).
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Twin Platte Natural Resources District
State of Nebraska
Legend
Stream depletion factor (%)
0 - 10
50 - 60
10 - 20
60 - 70
20 - 30
70 - 80
30 - 40
80 - 90
40 - 50
90 - 100
0
5
10
20 Miles
±
Figure4:ThestreamdepletionfactorvariesacrossspaceintheTwinPlatteNRD(Young2014).
TheTPNRDmarketrulesincorporateothergeophysicalrelationshipsandconcerns,including
estimatedconsumptiveuse,flowzones,soiltypesandslopes,subbasinboundaries,andbuffers
aroundmunicipaldrinkingwatersupplies.Whilesuchrulesthinthemarketsothatfewer
buyersandsellersareeligibletotrade,italsohelpstopreventthird-partyimpacts.
Conveyance
Unlikesurfacewatermarkets,conveyanceofgroundwaterisnotrequirednorposespractical
constraints(BrozovicandYoung2014).Ratherthanthegroundwateritselfbeingtransferred,it
istherighttopumpgroundwaterthatisbeingboughtandsold.Still,therearephysical
limitationstohowfarabuyerandsellermaytransfergroundwaterpermitsinthattheremust
behydrologicconnectivitybetweenthem.AbuyerinCaliforniacouldnotacquiregroundwater
permitsfromsomeoneinNebraskabecausethereisnohydrologicconnectivity.Oftentimes,
thereareevenregulatoryhurdlestointer-districttradingoverlyingthesameaquifer,suchas
betweentheTwinPlatteNRDanditsneighboringdistrict,theCentralPlatteNRD.Thissection
focusesontheintra-districttradingbetweenagriculturalgroundwateruserswithintheTPNRD.
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MarketParticipants
TheTwinPlatteNRD’slargestresponsibility,likethatofmostNRDsinNebraska,isagricultural
groundwatermanagement.Thereislittlecompetitionbetweensectorsforwateruse.NRDs,
perNebraskaStateLegislativeBill1226,assumeresponsibilitytoacquiregroundwaterrightsin
theeventofmunicipalgrowth,whichitwouldaccomplishthroughthepermanentretirement
ofCIAs.TheTPNRDhasnotfacedthisissueyet,asthecommunitiesandcitieshavenot
experiencedmuchgrowthandsubsequentincreasesinmunicipalwaterdemands.Yet,ifthey
wereto,theywouldpurchasetheappropriatenumberofCIAsthatwouldaccountforthe
changeinconsumptiveusefromirrigatedagriculturetomunicipaluse.TheTPNRDisalso
subjecttoitsowntransferrules.
WhiletheTPNRDmustoffsetadditionalmunicipaluse,itisnotrequiredtodosofornew
industrialuserswithlargewaterrequirements.Theindustrialusersmustacquiretheirown
CIAs,andthesearealsosubjecttothetransferrules,plusadjustmentsbasedonthe
comparativeconsumptiveusesbetweenirrigatedagricultureandthenewuse.Thoughtrading
hashappenedbetweentheindustrialandagriculturalsectorsinthepast,activityisdominated
betweenagriculturalusers.
Amongagriculturaltrades,buyersarelookingtoexpandproductioncapacity.Somebuyersare
interestedinacquiringlargerquantitiesofgroundwaterrightssothattheycanirrigatelandthat
iscurrentlyindrylandproduction.Suchaninvestmentwouldalsorequiredrillinganewwell
andinstallingirrigationequipment.Otherbuyersarelookingforsmallerquantities,hopingto
expandthenumberofCIAsonacurrentlyirrigatedfield.Sellerstypicallylooktosell
groundwaterrightsfromlandwithpoororgenerallyunproductivesoils,fromodd-shapedfields
thatcannotbeirrigatedwithcenterpivots,orfromlandwheretheyotherwiseunderutilizeits
irrigationrights.Ingeneral,groundwaterrightsaremovingtofarmswithbetterirrigation
technologyandtoproducerswhoaremoretechnologicallysavvy.Tradingactivityandpricing
arelargelyinfluencedbycommoditiesprices,meaningthatmorerecentlytradinghasstagnated
withdepressedcornprices.
BarrierstoTrade
Whileeconomictheorysuggeststhattradingmechanismsforresourcemanagementarehighly
cost-effective,theyarechallengingtoset-upandoperateinpractice(YoungandBrozovic
2016).Fromtheregulatoryperspective,thereissignificantriskanduncertaintyindeveloping
rulesthatreflecthydrologicrelationshipsandneedsforlocaleconomicstability.Theproper
balancebetweenscience-basedandclearrulescanbedifficulttostrike.Someregulatory
agencieshaveunderstandablyfearedtheunintendedconsequencesoftrading,andhave
thereforerespondedbyaddingsuchrestrictiverulesthattradingispracticablyinfeasible.While
thisisnotthecaseintheTwinPlatte,itisimportanttonotethatanyadditionalrules,even
science-based,willthinthemarket.Sometimes,thisoutcomeisdesirable;othertimes,it’s
counterproductive.
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Onthewaterusersend,therearealsoseveralpracticalobstaclestotrading.IntheTwinPlatte,
producershavetroubleidentifyinganinterestedparty,negotiatingaprice,obtainingregulatory
approval,andprotectingsensitivefinancialinformation(YoungandBrozovic2016).
Thefirstandoftenmostsignificantbarriertotradeissimplyidentifyinganotherinterested
party.Mostbuyersandsellersfindoneanotherthroughwordofmouth,callingfriendsand
neighborsortheNRDitself.Asmentioned,thisdecentralizedapproachisoftenreferredtoasa
“coffeeshop”market.Onegroundwatermanagerexpressedthedifficultyoftrading,saying,“I
havenoideawheretopointthem:perhapstoCraigslist,tonewspapers,toneighborsand
friends?There’snomarketplaceforthis.”Unlikeequipment,seeds,andfertilizer,thereisno
centralizeddealerwhereproducerscanacquireorsellwaterrights.
Afterfindinganinterestedpartywithwhichtotrade,pricenegotiationsbegin.Mostfarmers
arewaryofthisprocess,asitrequiresdisclosingpersonalandsensitivefinancialinformation
abouttheirvalueofwater,oftentimestofriends,neighbors,orcommunitymemberswhose
socialcirclesintersecttheirown.Producershavestrongprivacyconcernsregardingtheirdata
andpriceinformation.
Eveniftwopartieshavesuccessfullynegotiatedacontract,thedealisstillcontingenton
regulatoryapproval.Giventhecomplexandnuancednatureoftherules,mostindividuals—
producers,realestateagents,andlawyers—lackthetechnicalexpertisetounderstandand
manuallycheckthepagesofeligibilityrequirementsfortransfers.Asaresult,manydealsare
faultilymatchedandoncesubmitted,failtogainregulatoryapproval.Onefarmerwhohadhad
badexperienceswiththeprocesssaid,“Igotbetterthingstodowithmytimethanmemorize
thoserules.”Thisisespeciallytrueforthemanyproducerswhofarminmultipledistricts,each
withnuancedrulesets.
Most,ifnotall,transfershavehappenedbetweenasinglesellerandsinglebuyer,but
oftentimesthenumberofCIAsavailablefromthesellerisdifferenttothoseneededbythe
buyer.Thisispracticallyquitechallengingandeconomicallyinefficient.These“lumpy”trades
areoftennotconsideredintheoreticalanalyses,butinpracticearecriticalindecision-making
aroundwateruse.
Lastly,whiletherulesforgroundwatertradingintheTPNRDhaveexistedformorethan10
years,severalproducersdon’tknowthattheyexistorwhattradingcoulddofortheirbusiness.
Severalmisconceptionsaboutmarketsemerge,includingthattheyfavoronlylargeproducers
orthatmarketsfavorthebuyerside.Theseexampleslikelycomefrompastexperienceinthe
District,wherethebrokerageofwaterrightsthroughrealestateagents—who,ingeneral,
representlargefarmerswhoarebuyersinthesetransactions—iscommon.
WhiletheNRD’stransferfeesarelowat$200perapplication,transactioncostsarehighfor
trading,particularlyforthetimeandeffortexertedtofindawillingandeligibleparty.While
representationisnotpervasive,thosethatdohirerealestateagentsintheareaarecharged
aboutsevenpercentonthetotalsalesprice,coveredwhollybytheclient(typicallythebuyer).
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Thefollowingsectiondescribeshow“smartmarkets”addresstheseissuesandinsodoing
reducetransactioncostsoftrading.
SmartMarkets
MammothTrading,aprivatecompanythattheauthorfounded,developedandlauncheda
smartmarketintheTwinPlatteNRDinFebruary2014.Thisisthefirstapplicationofasmart
marketforgroundwatertradingintheworld.Fortwoyearsinarow,thesmartmarkethas
successfullyreceivedbidsandoffers,matchedpartiesthroughelectronicclearing,obtained
NRDapproval,andfinalizedthelegalpaperworkandfinancialtransactions.
Toparticipate,aproducerentersabidfororofferofCIAsintothemarket.Fromeachform,the
participant’slegalname,address,contactinformationistaken,alongwiththelegaldescription
oftheproperty,numberofCIAstotransfer,andprice.Sellerssubmittheirfloorprice,ortheir
willingnesstoaccept,indollarsperacre;buyerssubmittheirceilingprice,ortheirwillingnessto
pay,alsoindollarsperacre.Inaddition,sellersindicateverifiablepracticesforhowtheywill
reducetheirirrigatedacreage,whetheritbethroughremovingatowerorendgun,cappinga
well,orotheracceptablepracticetotheTPNRD.
Thelegaldescriptionofthepropertyisusedtoextractfield-levelcharacteristicsthatdetermine
eligibilitytotransfer:SDFs,flowzonesandsubbasins,soiltypesandslopes,andwhetheritlies
withincriticalbufferzones.ParticipantscanenterarangeoranexactquantityofCIAstheywish
totransfer,whichisanotherrequirementthealgorithmconsiderstosatisfymatches.
Importantly,thesmartmarketisanonymousandconfidential.Unlikecoffeeshopmarkets,
bulletinboards,orauctions,participantsdon’tknowthereservationpricesoftheothersinthe
market,ofthepartieswithwhichtheytrade,orevenwithwhomtheytrade.Aftermatchesare
made,MammothTradingworkswiththeTPNRDtoobtainregulatoryapproval.While
MammothTradingshareswiththeTPNRDthesetofbuyer-sellermatchesandtheirrespective
quantitiesofCIAs,itdoesnotsharetheexecutedprices.Toprovidegeneralpriceinformation
toparticipants,MammothTradingdoessharetherangeinper-acrepricesofbidsandoffers
receivedinpreviousyears.Todate,ithasseenpricesrangingaslowas$1,800peracrein2016
andashighas$3,200peracrein2014.Eachyearhasalsohadvariabilitybetweenparticipants,
demonstratinghowthevalueofwaterisvariableoverspaceandtime.
Theanonymityandconfidentialityhavebeenverypositiveaspectsofthesmartmarket.
Producershavesharedthatanonymoustradescanremovetheemotionoutofwaterdeals,
enablingmoretransactions.Smallandruralcommunitiesoftenhavelonghistoriesof
interpersonalrelationships,whichcaneithersweetenorsouradeal.Theanonymityremoves
thebiasinbothdirectionssothatallpartiesareneutraltooneanother.Furthermore,
confidentialityensuresprivacyofpriceinformationnotonlytootherparticipants,butalsoto
theveryentityregulatingthecommodity—theNRDs.Theseareparticularfeaturesofasmart
marketoperatedbyaneutralthird-party,ratherthananNRDoranotherpublicagency.
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Beforelaunching,thesmartmarketwasrigorouslytestedbytheTPNRDBoardofDirectors,
whosemembersranitthroughtwotrialrunstotestitsfunctionalityandaccuracy.Sincelaunch,
themarkethasloweredbarrierstotradebyreducingsearchandcompliancecosts.Insummary,
smartmarketsprovideacentralizedhubfortradingactivity;theyarecustomizabletoreflect
specificregulatoryrulesfortrades;theyautomatetheprocessofregulatorycompliance;and,
operatedbyaneutralthird-party,theycanoffersignificantprivacysafeguards.
V.CaseStudy:MarketImperfections
MarketDesign
Smartmarketshelpreducethebarrierstotrade,buttheyarestillsubjecttothemarketdesign
oftheoperatingjurisdiction,andthereforetoexternallimitations.Intheregulatory
environmentoftheTwinPlatteNRD,whereonlypermanenttransfersareallowed,trading
activityhasstagnatedinrecentyearsandwilllikelycontinuetodrop;therecomesapointat
whichtheavailableCIAshavebeenreallocatedtotheirmostprofitablefields.Afteralmost10
yearsofpermanenttransfers,therearefewerandfewerjointlyprofitabletrades.Itistruethat
changesincropping,commoditiesprices,technology,orproducerbehaviormightredistribute
profitabilityinthefuture,butthechangesarelikelytobemodest.Asaresult,evenasmart
market,whichwillbemostefficientofanymarketmechanismavailable,mighteventuallyput
itselfoutofbusiness.Thisisnotundesirable,butinfactanindicationthatthemarketachieved
itspotentialofreallocatingresourcestotheirmostprofitableusesgiventhecurrentmarket
design.
Asdescribed,verifiabilityofthereductioninconsumptiveuseiscriticaltoanytransfer.For
area-basedtrading,thismeansthattheverifiablepracticescreatelumpinessinsellers’
quantitiesfortrade.Verifiabilitywillcontinuetoplayacrucialrole—andpotentially,a
significantobstacle,duetoimperfectmonitoring—inwatermarketstransactions.
Therearesignificanttradeoffsofmonitoringandenforcement.Moreadvancedmonitoring
enablesmoresophisticatedtradingcontracts,includingleases,futures,andoptions;italso
requiresadditionalresourcesforequipmentandforstafftimeformonitoringandaccounting
purposes,inadditiontoovercomingstrongoppositionforwellmetering.Whilemeteringcanbe
politicallysensitive,itispossiblethattheDistrictmightexperienceadditionaleconomicgains.
Meteringprovidesmonetaryincentivesforreducingconsumptiveusethroughon-farm
conservationmeasuresandadjustmentsattheintensive,ratherthanextensive,margin.
Theoretically,moreflexibilityinmarkettransactionsshouldleadtomoreeconomicallyefficient
outcomes,butthesemustbebalancedbypracticalconstraints.
SlackPermits
ThereisevidencethattheDistrictwaslenientincertifyingirrigatedacres,thoughthiswasalso
togenerategoodwillandbuy-infromproducers.Suchexcessinamarketcanleadtoincreases
inconsumptiveuseorincreasedstreamdepletion.Itisimportanttobeawareofslackpermits
or“paperwater”enteringthemarket,andaddressthemwithgovernmentbuybacks,offsets,or
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unidirectionaltrading.Offsetsandunidirectionaltradingschemesmaynotbeeconomically
efficient,buthelptohedgeagainstuncertaintyandtovoluntarilyretirewaterrights,rather
thanthroughregulations.
VI.CaseStudy:TPNRDPolicyReforms
Inordertoimprovetransfersandmarketactivity,theStateofNebraskamightconsider
enactingclearerlegislationontheseverabilityoflandandwater(surfaceandgroundwater)
rights,andtheprocessestotransferwateruserights.Currently,theprocessislittleunderstood
anddifferentineachNRD.Further,thestateDNRcoulddevelopandmaintainaregistryfor
surfaceandgroundwaterrightsholderssothatverifiabilityofownershipisclear.Thetransfer
processcouldalsobestreamlined;currentlyitcantakeoveramonthtoobtainNRDboard
approvalandfileappropriatedocumentswithcountycourthouses.Instead,allofthe
documentationshouldresidewithinastateregistrymaintainedbyDNR.
Therecouldbesmalloppositionforimprovingmarketactivityamongindividualswhofearthat
marketsenableoutsiderinvestmentandmarketspeculation.However,giventhelocalized
natureofwatermarketrules,thereislittleopportunityforeither.Itappearsthatsuchreforms
havenothappenedyetlargelybecausewatermarketsarenascentanddecentralizedin
Nebraska.Ingeneral,theselegalreformsseemattainable,butwouldrequirebuy-infromNRD
staffandboardmembers.Iftheycanseehowmoretransparentwaterrightsownershipand
streamlinedtransferabilitybenefitboththeirresourcestewardshipgoalsandruraleconomy,
therewouldbelittleopposition.Still,theNebraskaStateLegislatureoperatessuchthata
memberwouldhavetochampionthebill,andsoitwouldrequirefindingamemberespecially
enthusedaboutwatermarkets.
Inadditiontoclearerstatelegislation,theTPNRDcouldalsoconsiderimprovementstoits
tradingrules.Forexample,iftheTPNRDwishedtomovetovolumetricratherthanarea-based
trading,itsBoardofDirectorswouldneedtoconsiderandactuponchangestoitsrulesand
regulations.TheBoardofDirectorsisabodythatislocallyelectedandprimarilycomprisesof
agriculturalproducers.WhiletheBoardhasbeenresponsivetomeetingsitsobligationsfor
instreamflow,thereistypicallyverystrongoppositionamongproducerstowellmeters.Several
producersarguethatwaterappliedisanimperfectmeasureofconsumptiveuseandthat
meteredallocationsstripthemoftheflexibilitytorespondtofield-specificconditions.The
NebraskaWaterBalanceAlliance,aconsortiumofproducers,hasbeenworkingtodemonstrate
reductionsinconsumptiveusethroughmoresophisticatedtechnology.Itisconceivablethat
theTPNRDmaymovetometeredallocationsoraconsumptiveuseapproachinthefuture,but
thiswilllikelytakeseveralyearsandadditionalpressurefromtheStateofNebraskaandthe
FederalFishandWildlifetocontinuereducingstreamdepletion.
VII.Conclusions
Thiscasestudyhasexamineddifferenttypesofmarket-basedmechanismsforwatertrading,
includingbilateralcontracts,brokerage,bulletinboards,auctions,andsmartmarkets.Each
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mechanismrequiresdifferentstartupcostsfordevelopmentandvariesinitstransactioncosts
toparticipants.Smartmarketsarethemostsophisticated,astheycanelectronicallycleara
poolofbuyersandsellersandguaranteeregulatorycompliance.However,theycanrequire
significanttimeandtechnicalexpertisetodevelopdependingonthecomplexityofthetrading
regulations.
Otherconsiderationsinmarketdesign,beyondthemechanismfortrading,werediscussed.In
particular,settingtheregulatorycaponwateruseisanimportantstepbeforeallowingtrading.
Marketsshouldalsoreflectgeophysicalrealitiesandpreventthird-partyimpacts.Markets
cannotfunctionwithoutstrongmonitoringandenforcementofresourceuse.
ThecasestudylookedattheevolutionofgroundwatertradingintheTwinPlatteNatural
ResourcesDistrictinwesternNebraska,whichhasmanagedgroundwaterforthepurposeof
protectinghydrologicallyconnectedhabitatinthePlatteRiver.TheTPNRDhasaunique
approachoftradingarea-basedgroundwaterpermits,whichreducesmonitoringand
enforcementcostsfortheTPNRDstaffandprovidesflexibilitytogroundwaterusers.However,
area-basedtradingmaybeeconomicallyinefficient.TheTPNRDwasthefirstapplicationofa
smartmarketforgroundwatertradingintheworld,reducingtransactionscoststomarket
participantsandstafftimeforregulatoryapproval.
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