Making an effluent market
Note: This article is a sidebar to this issue's feature story, "Facing the Yuck Factor."
A sprawling town whose population has grown by more than 50 percent since 2000, Prescott Valley, Ariz., is thirsty and lacks a reliable surface water supply. In most of Arizona, such a combination is no barrier to growth. But Prescott Valley lies in one of Arizona's five designated Active Management Areas, where the state seeks to prevent declines in groundwater levels by requiring that well-water use be balanced by recharge into aquifers. Though a great deal of new construction was permitted in and around Prescott Valley before that regulation went into effect in 1999, developers seeking new building permits now have to prove that they can obtain water supplies from sources other than conventional wells.
Among Prescott Valley's arid brown hills, there's no source more tempting than the roughly 2,500 acre-feet of water discharged by the town's sewage treatment plant each year. Most of that water now is poured into the usually dry bed of the Agua Fria River, where it helps to recharge underground supplies. For every acre-foot that soaks into the ground, the Arizona Department of Water Resources allows Prescott Valley to pump an acre-foot of groundwater from its wells. Legally, the state treats the groundwater as the same stuff that's pumped out of the treatment plant, even though it's physically not the same water. A hydrological study has estimated it will take 20 years for the recharged effluent to travel underground to the nearest groundwater well.
Like many other towns and cities in the West, Prescott Valley uses some of its treated wastewater for non-potable purposes: irrigating a golf course, filling a couple of small lakes. But the municipality is exploring a brave new frontier in Western water sales by preparing to hold an auction, scheduled for late October, at which it will sell rights to its future supply of treated effluent - which the state estimates will be 2,724 acre-feet a year. The town could continue to sell small quantities of effluent credits to single buyers, but, like a farmer who sees more current value in his land as a chunk of real estate than as producing fields, it's looking to cash out in hopes of a single big payoff. It will continue to produce and treat wastewater, but how the credits that water represents are sold will be up to private developers or investors.
Prescott Valley officials say they're doing this in part because they sincerely believe in free markets for water. "We're trying to break the cycle of subsidized water resources," says John Munderloh, the town's water resources manager. "Rather than subsidize the right to water, we believe one of the best ways to manage it is to let the market manage it. It's a great incentive to conservation. For the first time in Arizona history, we're trying to let the market determine the value for the water."
Whoever buys the water will, in one sense, only be purchasing paper; Prescott Valley's treated wastewater will continue to pour onto the sands of the Agua Fria, just as it does now. But each acre-foot bought will translate into the right to pump an acre-foot of groundwater elsewhere in the town. In Prescott Valley's booming housing market, that will translate pretty directly into a permit to build.
Yet defining how much all those future water credits are worth now is tricky, since it depends on speculating about how much new construction will take place in town not just in the next few years, but in coming decades. Prescott Valley originally scheduled the wastewater auction for the fall of 2006, but postponed it when it looked as though bids wouldn't rise high enough because new construction in the town had slowed. WestWater Research, a water-marketing consultancy that's running the auction for the town, has since been negotiating with a private investment group that has placed a "price floor" bid for the entire allotment of effluent. That deal has allowed the auctioneers to set a minimum auction bid price of more than $61 million.
"This is an unprecedented auction of both size and type," says WestWater's executive director, Clay Landry, who describes himself as "a rah-rah guy" when it comes to water markets.
Even if Prescott Valley realizes no more than the minimum bid price, a developer would be paying more than $22,500 for the right to pump an acre-foot of groundwater annually for the next 100 years. That's a fortune, when you consider that municipalities in the Phoenix area have recently negotiated deals with nearby Native American communities to buy the use of tribal water for the next century for $1,500 to $1,800 per acre-foot. An acre-foot, or 325,851 gallons, is generally considered to be about the amount a typical American family of four uses annually, so the Phoenix price works out to only $15 to $18 for a family's water for a year - a figure that shows just how cheap, and how subsidized, water is in much of the West.
Prescott Valley doesn't have access to the Central Arizona Project canals that convey huge quantities of Colorado River water to the Phoenix area. If water in Prescott Valley ends up costing at least 12 times more than what it costs in Phoenix, that may be an accurate reflection of the true worth of water in the area - and the higher price may, as Landry suggests, help promote far wiser use.
"When water gets to $22,500 per acre-foot," he says, "lots of conservation features become affordable for new developers."
Beyond free-market ideology, though, Prescott Valley needs the money - now. It's cashing out not just because of an abstract belief in water markets, but because it needs to supply water to all the new developments that have already been permitted. Town officials plan to do that by means of a water pipeline that will carry groundwater 30 miles from the Big Chino Aquifer - a defiantly old-school means of Western water supply that will cost the town at least $78 million.
"We could go out and sell bonds to pay for the pipeline," says Munderloh, "but that would keep us from doing many of the other infrastructure-related things in town, such as building roads."