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Valuing and Pricing Water
The value of water varies widely according to location and use, among other factors. As a result, the price paid for water in one area may not be a relevant measure of the value of water in another area. In addition, markets for water in most areas are undeveloped and as a result suffer from limited market information regarding the price of water as well as the primary determinants of value. The following sections discuss important factors to consider when valuing water. Researching these factors often uncovers important elements that must be incorporated into the valuation procedure and may even dictate the appropriate valuation method. These factors include: Transferability Physical characteristics and legal requirements play an important role in defining the local market for water. For example legal requirements at the federal, state, or local level can limit the quantity, use and location of a water transfer. In addition, the physical ability to move water is also a critical component. In general, areas with extensive water transport infrastructure provide more opportunities to meet a wider range of demands. In these areas, prices tend to be higher than in markets with limited transportation capabilities. Water Availability Water supplies in most areas are fully appropriated. As a result, securing additional water supplies for new development or augmenting instream flows is often difficult and involves transferring rights from existing users. In areas where water is not fully appropriated or where efficiency gains are possible, the price of water is constrained by the costs of developing new supplies (e.g., the costs of drilling a well or lining a canal). Water Quality Water quality is an important determinant of value. Poor quality water may be unsuitable for some uses and could require treatment before it can be applied to crops or used in production processes. In effect, the quality of the water can limit the potential new uses of the water. Water Quantity The size of the transaction can influence the per unit sale value of water. Typically, transactions involving large quantities of water sell for less on a per unit basis than small water sales because transaction costs are spread over a larger number of acre-feet. Water Right Characteristics Water rights are the most common instrument traded in water markets. The legal characteristics listed on a water right are also important determinants of value. Characteristics such as priority date, annual quantities, instantaneous flow rates, and current use all affect prices. |
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