Weakening Water Rights and Efficient Transfers 1

For more than half a century, in nearly all western states, the regulatory agencies (the State Engineer or equivalent) used impairment of other water rights as the primary criterion for approving or rejecting change applications to move water to higher-valued uses. In recent years, however, protests to change applications have been brought by 'stakeholders' who do not own water rights, but who argue that they are affected by water transfers. Under the impairment rule, these parties do not have statutory standing to protest successfully. But they have brought legal suits to block transfers, and the courts have considered whether additional criteria involving 'impacts on social welfare' are needed to evaluate transfers. State Supreme Court rulings on such suits in Utah and Nevada are reviewed as prototype cases. The Utah court held that additional 'social welfare' criteria must be utilized by the State Engineer in evaluating change applications, whereas the Nevada court held that such criteria were already incorporated in existing water statutes and administrative practice. The critical question raised in the paper is whether existing state regulatory agencies can effectively implement a real 'social welfare' criterion to evaluate change applications. The conclusion is that they probably cannot, and that if they try, water allocations will be politicized to a much greater extent than they are now, and efficient market transfers will be impeded if not completely prevented.