Now, the Deschutes River Conservancy is turning to a challenge of an entirely different magnitude: reviving the Deschutes itself.

The natural flow of the mainstem Deschutes is 13 times that of Whychus Creek. Twelve times more farmland depends on water from the mainstem than from Whychus. And pressures from urban growth are far greater on the mainstem as well: The river-restoration effort will have to compete for water with the booming cities of Bend and Redmond. Thanks in part to their frequent appearance on Top 10 Best Places to Live in the West lists, these cities have been growing at between 6 and 8 percent a year. That’s a growth rate that, percentage-wise, rivals Las Vegas and Phoenix.

In the past — and in much of the rest of the West — the cities could simply pull more water from the river, or sink another well. But last year, the state of Oregon, recognizing that water in the Upper Deschutes Basin is over-appropriated, announced that it will not issue any new water rights here. Now, new needs can only be met through a Rubik’s Cube-like reshuffling of the existing supply. And while ag-to-urban water transfers are nothing new — farmers and cities on Colorado’s Front Range have been cutting deals for decades — working the environment into that relationship is fairly radical.

It also puts considerable pressure on the irrigation districts, which hold most of the water. That led Steve Johnson, the Central Oregon Irrigation District manager, to seek a better sense of what demands his district will face. Using a quarter-million-dollar grant from the U.S. Interior Department’s "Water 2025" initiative, Johnson and the conservancy spent the past year estimating future needs for both the cities and the river. They then used that information to create a 20-year plan for meeting those needs, while still sustaining farming in the Upper Basin. It is, in effect, a blueprint for avoiding a water war.

Bruce Aylward did much of the work on the plan. Before he came to the conservancy in 2002, Aylward worked as a consulting economist to the World Bank, and he prefaces much of what he says by drawing an x and y axis on the nearest whiteboard. Aylward found that despite the high rates of growth, future urban demands should be relatively small. The real need — nearly three-quarters of total future demand — will be for water to restore the river. He also discovered that an acre of houses uses about a third of the water necessary to irrigate an acre of agricultural land; developing farmland actually frees up water that can go back instream. "In the end," says Aylward, "I had to conclude that sometimes growth is good."

Water does not, however, simply flow from farmland to cities and rivers. Free-market environmental economists have touted water markets as the most efficient way to move water from agriculture to new uses. But unregulated markets are prime habitat for speculators, middlemen and developers with deep pockets — all of whom can drive water prices sky-high. In Reno, Nev., another city that has hit the limits of its available water, housing developers were paying a mind-boggling $50,000 an acre-foot for water rights last year. Under those conditions, people of more modest means — and organizations trying to restore river flows — are simply priced out of the market.

In the Deschutes River Conservancy’s conference room, Aylward pulls the cap off his dry-erase marker for a quick lesson in how to incorporate social and environmental conscience into a water market. "To have people making a profit off a public resource doesn’t really make sense," he says. "But you can design the market to meet societal purposes, rather than just having a market for the sake of having a market."

Earlier this year, Aylward helped create the nonprofit Central Oregon Water Bank, which he now runs out of the conservancy’s offices. Rather than trying to turn a profit on water deals, the state-chartered bank buys water from farmers, pools it together, and then permanently "reallocates" it — at cost, plus transaction fees — to cities and the river.

The crux of that effort was getting farmers to give up water. Again, Steve Johnson’s Central Oregon Irrigation District took the lead. This summer, his district and another local one agreed to relinquish some of their water for reallocation by the bank. It was a perilous step into the unknown: It requires drying up farmland, which potentially hurts the district as well as the farmer, because irrigation districts raise operating revenues through assessment fees on each acre of irrigated land.

But Johnson thinks he’s hit on a way to make it work. When a farmer sells his water, the buyer pays a $1,000-an-acre "exit fee" to the district. That fee goes into an endowment fund and generates interest to replace the lost assessments.

Johnson’s district is starting small: Its board of directors has agreed to allow just 240 acres to go out of production this year. But even that was a huge threshold to cross. "I had to work with my board for six months to show them that whether we like it or not, the cities are gonna grow," says Johnson. "I had a board member tell me, ‘My mind understands and agrees with what you’re saying, but my heart’s telling me something different.’ So there’s a cultural shock and a cultural change that’s still ongoing."

But Deschutes farmers can always find a powerful example of the perils of being unwilling to yield even a little. All they have to do is look just 130 miles down the road. "Unless you want to end up like the Klamath, you have to compromise," Aylward says. "And a compromise where you keep 90 percent of your district intact and your finances look good, as opposed to the wild unknown, with water agents running around and prices going up, isn’t bad."