Market Solutions for Conjunctive Management of Surface and Ground Water:...

University of California Santa Barbara

Market Solutions for Conjunctive Management of Surface and Ground Water:

A Case Study of Idaho’s East Snake River Plain

A Group Project submitted towards the requirements for the degree of

Master’s in Environmental Science and Management for the Bren School of Environmental Science & Management

by Bronwyn Green and Justin Derby

Committee in charge: Robert Wilkinson, Thomas Dunne, and Emily Chan

March 2011

Market Solutions for Conjunctive Management of Surface and Ground Water:

A Case Study of Idaho’s East Snake River Plain As authors of this Group Project report, we are proud to archive this report on the Bren School’s website such that the results of our research are available for all to read. Our signatures on the document signify our joint responsibility to fulfill the archiving standards set by the Bren School of Environmental Science & Management.

Bronwyn Green Justin Derby The mission of the Bren School of Environmental Science & Management is to produce professionals with unrivaled training in environmental science and management who will devote their unique skills to the diagnosis, assessment, mitigation, prevention, and remedy of the environmental problems of today and the future. A guiding principal of the School is that the analysis of environmental problems requires quantitative training in more than one discipline and an awareness of the physical, biological, social, political, and economic consequences that arise from scientific or technological decisions. The Group Project is required of all students in the Master’s of Environmental Science and Management (MESM) Program. It is a three‐quarter activity in which small groups of students conduct focused, interdisciplinary research on the scientific, management, and policy dimensions of a specific environmental issue. This Final Group Project Report is authored by MESM students and has been reviewed and approved by:

Robert Wilkinson

Thomas Dunne

Emily Chan

March 2011

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Acknowledgements

We would like to thank those who assisted in this research by acknowledging the following people: Bren School: Tom Dunne (Professor), Emily Chan (Adjunct Professor) Gary Libecap (Professor), Zack Donahue (PhD Candidate) Eco‐Entrepreneurship Advisory Board (Bren School) Terry Uhling (Chairman, Idaho Water Resource Board) Lynn Tominaga (Executive Director, Idaho Ground Water Appropriators) Cindy Yenter (Water Master, District 130, Idaho Dept. of Water Resources) Peter Anderson (Counsel, Trout Unlimited) Zachary Tillman (Program Manager, Deschutes River Conservancy) Instream Exchange LLC: Jake MacArthur, Ryan Smith, Elizabeth Whiteley

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TableofContents

ExecutiveSummary................................................................................................1 Market Solution................................................................................................................................... 1 Idaho Case Study ................................................................................................................................ 2

Introduction ...........................................................................................................4

WaterManagementintheEastSnakeRiverPlain ..................................................5 Water Rights......................................................................................................................................... 5 Prior Appropriations Doctrine ..................................................................................................... 7 Conjunctive Management of Surface and Ground Water.................................................. 7 Market Solutions for Providing Mitigation ............................................................................. 9

MitigationBanking...............................................................................................10 History of Mitigation Banking.....................................................................................................10 Water Mitigation Banking ............................................................................................................12 Existing Water Mitigation Banks...............................................................................................13

NecessaryConditionsforMarketCreation ...........................................................15 General Requirements for a Water Market...........................................................................15 Specific Requirements for a Water Mitigation Bank.........................................................16

HydrologicModel.................................................................................................18 Hydrologic Effect of Ground Water Pumping on Streamflow.......................................18 Modeling Impacts of Ground Water Pumping .....................................................................20

StakeholdersandKeyPlayers...............................................................................23 State Agencies and Elected Officials.........................................................................................23 Irrigation Districts and Canal Companies..............................................................................24 Ground Water Districts and Idaho Groundwater Appropriators................................25 User Groups and Coalitions .........................................................................................................26

LegalProcessforConjunctiveManagement .........................................................27 Delivery Calls .....................................................................................................................................27 Mitigation Plans ................................................................................................................................28 Ongoing Delivery Calls ...................................................................................................................28 Blue Lakes ...........................................................................................................................................29 Snake River .........................................................................................................................................30 Surface Water Coalition................................................................................................................31

Legal Hurdles and Ensuing Challenges...................................................................................32

EconomicsofCurtailments ...................................................................................34 Value of Mitigation Water.............................................................................................................34 Response Functions ........................................................................................................................35 Economic Model ...............................................................................................................................36

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Assumptions .......................................................................................................................................37 Water Valuation Study ..................................................................................................................37 Incorporating Response Functions...........................................................................................39 Total Value of Mitigation Trading to the Economy of the ESRP .................................40

SolvingtheProblem .............................................................................................41 Past and Current Efforts................................................................................................................42 The Comprehensive Aquifer Management Plan .................................................................42 The Conservation Reserve and Enhancement Program..................................................42 Idaho Ground Water Appropriators........................................................................................44

Using a Market Solution ................................................................................................................45 Executed by IGWA or Private Company .................................................................................45 Executed by State Agency.............................................................................................................47

Conclusions ..........................................................................................................48

Appendix..............................................................................................................49 A. Eastern Snake Hydrologic Modeling Committee Members ..................................49 B. Water Valuation Approaches Considered ....................................................................50 C. Deschutes River Mitigation Banking Case Study .......................................................53

Glossary ...............................................................................................................57

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ListofFigures

Figure 1: East Snake Plain Aquifer underlying the East Snake River Plain in Idaho 5 Figure 2: General establishment timeline for different types of water rights .............. 7 Figure 3: Impact of water table on streamflow......................................................................... 8 Figure 4: Effects of ground water pumping on the Snake River.......................................20 Figure 5: East Snake River Plain Model ......................................................................................21 Figure 6: East Snake River Plain counties, surface water, and ground water.......23 Figure 7: Ground water districts of the East Snake River Plain .......................................25 Figure 8: Map of ongoing curtailment areas ............................................................................29 Figure 9: Distribution of crops (in acres) in the East Snake River Plain ......................38 Figure 10: Value of an acrefoot of water for various crops ..............................................39 Figure 11: Maximum and minimum value for mitigation water .....................................40 Figure 12: Cost (in millions of dollars) and crop distribution from curtailment......40 Figure 13: Process for establishing new ground water use in the Deschutes Basin 54 Figure 14: Zones of impact in the Deschutes Basin................................................................55

ListofTables

Table 1: Current water mitigation banks ____________________________________________13 Table 2: Mitigation requirements by ground water district ________________________32 Table 3: Eastern Snake Hydrologic Modeling Committee Members ________________49

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Abstract

Across the Western United States, water resources are becoming increasingly strained, with water demand predicted to outstrip supply in many regions of Arizona, California, Colorado, Idaho, Montana, Nevada, and New Mexico. New water management policies are recognizing the interaction between surface water and ground water supplies, and requiring management across these two types of water sources, referred to as conjunctive management. In order to ensure a net neutral or positive impact on water supplies, water management areas with these policies require mitigation for new withdrawals and for current ground water‐pumping impacts on surface water supplies. Using a market approach by allowing trading through a mitigation bank is the most effective method for supplying water to users in need of mitigation. Water mitigation banks provide a streamlined solution by providing pre‐approved mitigation credits for recharge or in‐stream flow. Every water management area faces a different set of stakeholders, hydrology, economic conditions, and state and local water laws and policies that affect how a mitigation bank would function. This project explores these variables and evaluates opportunities for implementing a mitigation banking solution within the East Snake River Plain Aquifer of Idaho. This analysis illustrates how a mitigation bank can work within current legal constraints to address shortages, and provides suggestions about ways to implement this market solution.

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ExecutiveSummaryWater reliability issues and allocation disputes are becoming commonplace throughout the western United States. Many of these naturally arid regions support substantial agricultural production that consumes much of the available water.1 Demand for water is increasing with rapid population growth and the urbanization of once rural areas. In California, population is expected to increase from 36.7 million in 2005 to 59.5 million in 2050.2 The Natural Resources Defense Council found that by 2050 water demand will outstrip supply in many regions of Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Oklahoma, and Texas.3 In addition to increasing demand for new water rights, the West suffers from overallocation in many of its basins. Within the Sacramento‐San Joaquin Delta Watershed, the face value of all water right permits and licenses is over 245 million acre‐feet per year despite an average natural flow of 29 million acre‐feet per year.4 Similarly the Colorado River Watershed, with 17.5 million acre‐feet per year in water allocations, yields an average flow of only 14.95 million acre‐feet per year.5 These deficits between paper water rights and actual water supply result in unfulfilled water rights and legally injured right holders. Due to water scarcity, increasing demand, and regulatory requirements, some water districts are now placing restrictions on users. Many regions have permanently closed their water sources to new allocations, requiring mitigation for any new withdrawals to ensure a net neutral or positive impact. In Oregon’s Deschutes River Basin, future permits for ground water have been limited to a total of 200 cubic feet per second: current water right applications already exceed this amount.6 Montana State Law requires that water permit applicants seeking to divert from a closed basin must conduct a hydrogeology evaluation, and, if necessary, provide mitigation for any impacts.7 While these actions are intended to limit future water use growth, they will also hinder development in these rapidly urbanizing areas. The pressure of such limitations is creating increasing need for access to mitigation water.

MarketSolutionGiven current strain on water resources in the West and future projections for increased water demand, stringent regulation of water will become essential to a functioning basin. In order to minimize economic losses due to water shortages and to encourage economic growth through efficient development of resources, a solution that efficiently allocates water is critical.

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Mitigation banking is a proven market‐based approach that provides a streamlined process that enables water users to access water in capped or closed basins. Mitigation banks sell pre‐approved water mitigation credits, allowing users to meet the regulatory requirements of the basin through a single transaction. Mitigation banks encourage the highest valued uses of water by providing a marketplace where willing sellers can sell their excess water and willing buyers can purchase it.8 Although water markets provide an elegant solution to the need for water trading and mitigation trading, differences between water basins require that water markets address the specific needs of particular basins. Every basin faces different hydrology, economic conditions, stakeholders, and state and local water laws and policies that affect how a water market would function. In order to understand how these variables, along with other nuanced differences between basins, affect opportunities for establishing water markets to resolve shortages, we performed a detailed analysis of the management area overlying the largest underground aquifer in the western states: The East Snake Plain Aquifer (ESPA).

IdahoCaseStudyThe Idaho case study addresses different ways that water mitigation banking solutions in the East Snake River Plain could reduce economic impacts of cutoffs to ground water users. This case study illustrates how a mitigation market can work within the current legal framework to address shortages, and how the specific and nuanced needs of this area require sophisticated and specialized solutions. Idaho’s East Snake River Plain (ESRP) is a region with significant water resources; however, like many of the Western states, water supplies have been overallocated and the region is now facing shortages, especially in drier years. As a result, some water users with senior water rights are not receiving their full allocations, so water users with junior water rights are having their right to use water suspended. The action of suspending water rights of junior right holders, in the interests of fulfilling senior right allocations within the ESRP, is referred to as curtailment. Arguments about who should be held responsible for shortages–who should and should not have their water rights curtailed–are currently being heard in court. Given the importance of the agricultural sector and other water dependent industries in the area, managing water curtailments so as to minimize economic impacts is of the upmost importance. Currently, cutoffs are distributed based on priority date, so the determination of which users are affected is not based on

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the overall economic impact of suspending particular users. As a result, the distribution of cutoffs could have significant economic implications if users with different values for water are not able to trade their rights to use the resource. In order to restore efficiency to the overall water economy in the ESRP, a water market is necessary to reallocate resources between users with different values for water. Trade would allow users with a lower value for water to discontinue or scale back their operation in order to sell their rights to higher‐value users. This will have a net benefit to both users, while enabling efficient allocation of water resources. In order to develop a water market in the ESRP, one must understand the unique factors that affect local water management. These elements range from the natural hydrology of the region, to the economic importance of water to various users, and to the legal framework that governs water use and transfers within and across various districts. One of the most significant regulations that affect the regions’ water management is Idaho’s policy to manage surface water and ground water as a single system, referred to as conjunctive management. This case study considers all of these elements to determine the feasibility of developing a water market to help solve Idaho’s problem of inefficient distributions of water curtailments, while operating within the current legal framework. Based on political and legal analysis of the ESRP, a mitigation banking option would help ease the economic impact of curtailments and incentivize low‐cost water‐delivery strategies. The Idaho Department of Water Resources (IDWR) is well positioned for implementing this market solution, and they could generate benefits to both their agency and the region as a whole by amending their current rules to allow for additional stakeholders to develop and operate mitigation banks in the ESRP. This solution could be implemented in several different ways. State agencies, non‐profit organizations, or private companies could administer one or more mitigation banks to serve water users who are in jeopardy of having their use curtailed.

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IntroductionMarket mechanisms provide benefits by allowing individuals to solve problems for others while pursuing personal profit. People are continually finding new and creative ways to apply these principles for personal benefit, while creating efficiency in the market and providing goods or services to customers in need. Recent conservation regulations have created the need for a new product: mitigation. In the context of conservation, mitigation refers to actions that compensate for the negative impacts from land and resource use. This report investigates one of the largest resource conservation issues facing the Western United States, the management of water resources, and considers the potential benefits of applying market solutions to ease recent challenges. Our analysis investigates the problems faced in a large region of Idaho, the East Snake River Plain (ESRP), where progressive water management policies are creating requirements for junior water rights holders to mitigate the impacts of their water use on senior water rights holders. We propose that water mitigation banking is a mechanism that could help provide a mitigation solution to junior rights holders and result in the most efficient allocation of water resources. In order to effectively address the political and economic feasibility of providing a water mitigation banking solution in the ESRP, one must understand the water management area’s unique characteristics that determine water supply and demand. This analysis considers the following elements to determine if the ESRP can support and would benefit from a mitigation banking solution:

1. Physical limits and regulatory requirements that create the need for mitigation

2. General conditions that are necessary for a successful mitigation market and mitigation banking solution

3. How surface and ground water systems interact, and how management across these systems does or does not take this interaction into account

4. Institutional layout of the region, including the various stakeholders and how they interact with each other

5. Successes and challenges of past and present management activities 6. Legal framework that governs water resources, including current legal

disputes and their impacts on future water management After providing this background about the ESRP, we estimate the value of water across the region and quantify the benefits of water mitigation trading. Finally, we present several options for implementing a mitigation market that addresses the needs of the ESRP. All of the options we present would significantly reduce the negative economic impacts of ongoing curtailments.

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WaterManagementintheEastSnakeRiverPlainUnderlying the East Snake River Plain (ESRP) is the East Snake Plain Aquifer (ESPA), which supports the ESRP’s water‐dependent economy. The ESPA is the largest aquifer in the Western states, spanning over 10,000 square miles (see Figure 1). The economy of the ESRP is responsible for producing 21 percent of Idaho’s goods and services at $10 billion annually;9 however, with current water shortages 200,000 irrigated acres of farmland are in jeopardy of facing curtailments.10 Southeast Idaho receives little rainfall, so farmers rely heavily on irrigation water from the surface and ground water supplies, which are fed by runoff from the winter snowpack in the surrounding mountains.11 These supplies were adequate when Euroamerican people first started settling in the ESRP, and the valley expanded as a vast agricultural region. Gradually, as more farmers settled in the area, the ESRP reached its capacity for sustainable water withdrawals. Once it was overextended, the Idaho Department of Water Resources (IDWR) had to start addressing shortages by cutting off use by the least‐senior users.12

WaterRightsA water right is the legal right to capture and use water from a source, such as a river, stream, pond, or aquifer. There are three classes of water rights in the ESRP: (1) surface water rights, (2) ground water rights, and (3) reservoir water rights. Each water right contains the following information: owner, amount of water, priority date, season when the right can be used, and plans of use (e.g., irrigation, municipal, etc).13 This information was either defined when the right

Figure 1: East Snake Plain Aquifer underlying the East Snake River Plain in Idaho

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was initially processed and documented by the state or during the adjudication process in which undocumented water use was legally defined through court proceedings.14 Water management agencies use this information–especially the priority date and plans for use–to manage all rights in terms of seniority and beneficial use. The three classes of water rights are defined as follows:

1. Surface water rights: These rights allow users to draw directly from natural aboveground sources of water, such as rivers, springs, lakes, and wetlands. These rights tend to be the oldest and most senior in the ESRP.15

2. Ground water rights: These rights allow users to pump water from ground water aquifers underlying their land. The ground water rights in the ESRP were recently defined, following a 1987 court decision to adjudicate all ground water rights in the Snake River Basin.16

3. Reservoir water rights: These rights assign ownership to the use of water stored in the reservoir system. There are nine reservoirs totaling over four million acre‐feet, which are filled prior to the irrigation season in the winter and spring. The reservoirs are: American Falls, Grassy Lake, Henry’s Lake, Island Park, Jackson Lake, Lake Walcott, Palisades, and Prairie.17

In Idaho, water rights are usufructuary: the state retains ownership over the actual water, but the water right holders have the right to use the water to their respective benefit.18 The state defines the following uses as beneficial:19

Aesthetics Aquatic Life Commercial Cooling Domestic Fire Protection Fish Propagation

Ground Water Recharge Industrial Irrigation Manufacturing Mining Municipal Navigation & Transportation

Power Recreational Use Stock Watering Water Quality Control Wildlife

All water rights are subject to forfeiture or abandonment. The dictum, “use it or lose it,” applies: the holder must put the water to beneficial use or will lose the right.20 Such forfeiture clauses are intended to guard against non‐use, waste, and speculation. As a result, rights in Idaho must be used at least every five years or face forfeiture. Exceptions to forfeiture include temporary reductions during drought emergencies and leases to the state water bank or local rental pools.21

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PriorAppropriationsDoctrineThe central component of Idaho’s water management is the Prior Appropriations Doctrine, which decrees that the oldest right is most senior. Under this system a water user files with the state for recognition of his right to use water for a particular beneficial use, such as agriculture, industrial, or residential. Once his right is recognized it has seniority over all subsequent water rights. Subsequent users can establish their own water rights, but their use cannot impair use by any previously established users.22 This doctrine derives from original Miner’s Rights and follows the saying, “first in time, first in right.”23 Until May 20, 1971, water rights were appropriated through historic use: users established rights by putting water to beneficial use, and the date of first use determined priority.24 After May 20, 1971, IDWR assumed administrative control over the allocation of rights.25 For all rights after this date the filing dates determine priority. Seniority of rights is determined chronologically, so any earlier use trumps a later use and is considered a senior right. Junior rights are secondary and get fulfilled after senior rights. During drought years, when demand exceeds supply, junior rights may go unfilled.

Figure 2: General establishment timeline for different types of water rights

The different types of water users in the ESRP established their rights in different time periods (see Figure 2).26 The first water rights in the ESRP were established in the late 1800’s and early to mid 1900’s, and they pertained to the use of water from the Snake River and its tributaries. In general, surface water rights were established before irrigation pumps and wells were available for ground water pumping. From the mid 1900’s onward, and especially in the period from 1950 to the early 1980’s, water users established rights to ground water of the ESPA. Also, in the period between 1950 and 1970, spring users established their rights to naturally occurring springs that are fed by the area’s rich ground water supplies. The result of these various periods of establishment is that some user groups tend to be more senior than other groups.27

ConjunctiveManagementofSurfaceandGroundWaterInitially, surface and ground water were managed separately across the ESRP, but there is an interaction between the two water sources. When water tables are high, ground water recharges rivers and streams; however, when they are

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low, water from the river may flow out to the ground water, reducing the total volume of the river and its capacity to transport water downstream (see Figure 3).28 This interaction is especially strong in the ESRP because the plain is underlain by basalt, which is highly porous and has high hydraulic conductivity.29 This means that ground water pumping–which inherently lowers the water table–strongly impacts streamflow, and therefore should be managed in conjunction with surface water.

Figure 3: Impact of water table on streamflow30

When water shortages from overallocation began to occur, the IDWR recognized the impacts of ground water on streamflow and started to implement new rules to address the problem. First, in 1992, they capped withdrawals from the aquifer, discontinuing the issuance of any new rights to pump ground water.31 Next, in 1994, IDWR implemented new rules that addressed the need to manage the two water types in conjunction with each other, a strategy termed conjunctive management.32 Conjunctive management is the coordinated management of both surface and ground water as a single, hydrologically connected system.33 This approach is necessary when these two sub‐systems are strongly linked, either by geomorphology and natural processes or by management objectives and water needs.34 Conjunctive management strives to balance storage, timing and accessibility of both sub‐systems, but it is a challenging undertaking due to uncertainty and interconnectivity on both spatial and temporal scales.35 Conjunctive management recognizes the interconnectivity of surface and ground water, and addresses the effects of ground water pumping on surface flows. In the case of Idaho, conjunctive management rules hold ground water pumpers accountable for their impacts to surface water rights holders, thus subjecting them to curtailments based on the injury they impart to senior users.36 When a ground water pumper receives a curtailment call he has two options: stop pumping water or mitigate his impact.37 Mitigation, in this case, means financially compensating the senior water user who is impacted or supplying water directly to the senior user. Ground water users who are at risk of curtailment have consolidated and sought water security by providing

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mitigation plans in lieu of future curtailment. In theory, mitigation plans offer various means of delivering water to senior users, including ground water recharge through targeted fallowing or delivery of reservoir water. Unfortunately these plans have presented ongoing issues as coalitions of senior right holders have attacked the timing, quality, legitimacy, reliability, and feasibility of the intended mitigation water.38 These mitigation plans are critical because they are the only means that ground water users have to continue pumping ground water to sustain their livelihoods.39

MarketSolutionsforProvidingMitigationMitigation markets and mitigation banking are tools that allow users to compensate for their negative impacts by contributing to improvements somewhere else in a given system. These concepts have been applied to environmental mitigation for preserving wetlands and other wildlife habitats, and now water management agencies are starting to use them to address shortages in interconnected water systems. Given that water mitigation markets and water mitigation banks are relatively new concepts, they currently encompass several different definitions. For the purpose of this analysis these two terms are defined as: Water mitigation market: A market in which users are allowed to trade water for mitigation purposes. The existence of a market allows for organizations to enter the market to address the needs of water users. Water mitigation bank: An entity that acquires water rights that can be used for mitigation, and then separates and sells the mitigation credits associated with those rights to ground water users who need to mitigate their impacts on the aquifer. Mitigation banks operate within a mitigation market to provide mitigation water to users. In the ESRP, a water mitigation market would help ground water users who are at risk of curtailment by allowing access to mitigation water so that they could continue ground water pumping; meanwhile, water mitigation banks would provide direct access to mitigation water by acquiring water rights or developing mitigation projects, and then selling the mitigation credits that are tied to these rights. A mitigation bank in the ESRP would purchase or lease water that can be used to compensate senior users who are impacted by decreased flows. The bank would complete the process of getting the water approved by IDWR for use as mitigation water, and then sell the credits to various users across the ESRP who are in danger of curtailment and want to ensure continued ground water pumping.

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MitigationBankingMitigation refers to a general requirement to preserve natural resources through compensation or preservation in one area of a given system to offset resource use or degradation in another area. Areas in need of preserving natural resources have started to implement mitigation requirements, which have given financial value to undervalued public resources such as biodiversity and species habitat. Mitigation banks address the needs of individuals and organizations that must provide mitigation for their activity; they achieve this by developing large‐scale mitigation solutions and selling credits for this work to those in need of mitigation. They can take advantage of economies of scale for projects that were previously subject to inefficient bureaucracy and bottleneck regulation. While water mitigation banks have been recently developed to tackle water management issues, mitigation banking has traditionally been used in the context of endangered species habitat and wetlands under the parameters of Federal Acts such as the Clean Water Act (CWA) and Endangered Species Act (ESA).40 Similar to traditional banking institutions, mitigation banks and water banks have the following attributes:

• Allow for deposits and withdrawals • Serve multiple buyers and sellers • Promote regulatory efficiency • Reduce regulatory risk • Reduce transaction costs

These elements enable mitigation banks and water banks to add value by providing many of the same services as traditional banking institutions, but with their currency in credits and their reserves in natural resources. Mitigation banks manage the collection and enhancement of natural resources, the application and approval process for these assets to meet mitigation requirements, and the distribution of these resource values through creation and sale of the associated credits.

HistoryofMitigationBankingThe mitigation banking concept has its roots in the 1970s enactment of the Clean Water Act and its Section 404 permit program.41 The 404 permit program provides protection for wetlands and waters of the US and is administered by the US Army Corps of Engineers (USACE). If a government or private project impacts designated wetland habitat, compensatory mitigation for the project is required before that project can be permitted. By the 1980s the USACE began accepting applications for wetland mitigation banks when project‐by‐project

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mitigation efforts proved ineffective due to the expensive and time‐consuming nature of wetland restoration.42 The mitigation banking model is beneficial to developers and project proponents because it enables them to purchase 404 credits that are readily available through the mitigation bank. The effectiveness of the mitigation banking concept was also demonstrated when it was used to meet the requirements of the 1973 Endangered Species Act. The ESA’s goal is to protect endangered and listed species habitat and provide programs for the ultimate conservation of these species.43 The law requires that unavoidable impacts to listed species be minimized or mitigated through sections 7 or 10 of the ESA with oversight from the US Fish and Wildlife Service (USFWS) and National Oceanic and Atmospheric Association (NOAA).44 By 1995, the California Resource Agency and the California EPA issued an official policy on conservation banks, allowing groups to purchase larger tracts of species habitat for compensatory mitigation and to sell smaller representative pieces of the habitat to proponents of smaller projects.45 This allows new projects easy access to mitigation, while ensuring habitat protection for the listed and endangered species they impact. Conceptually, a mitigation bank holds a collection of permits to be used for projects that require a mitigation element. These permits or “credits” represent particular resources, such as acres of endangered species habitat or acres of restored wetland. For the credits to have value there must be a limited supply of the natural resource, thus creating demand for the permits/credits. Bank operators secure permits for resource enhancement projects, and then bank the endowed credits for future sale to projects requiring mitigation for resource impacts. This solution allows developers to focus on their core development activities rather than being diverted into focusing on conservation or enhancement activities. There are two major ecological advantages to mitigation banking solutions: (1) they insure no immediate net loss of habitat, and (2) they enable larger‐scale conservation or restoration projects. In a mitigation banking scenario conservation and restoration projects are completed in advance of the pending impacts from a developer or project proponent. Consequently there is not an immediate net loss of habitat when a development project breaks ground. Without the option of a mitigation bank, a developer or project proponent will often commit to on‐site mitigation, resulting in crude efforts such as a few acres of wetland next to a freeway. The mitigation bank entitlement process allows for rigorous ecological oversight and thus the underlying conservation projects will have much greater potential for success.

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WaterMitigationBankingUnregulated ground water pumping represents one of the greatest challenges facing water basins in the West. Some basins and water management areas are tackling this problem by establishing clear legal precedent that junior ground water rights holders must mitigate for the injury their pumping imposes on senior surface water rights holders.46 To tackle this complex issue, several basins launched pilot water banks to mitigate the impact of ground water withdrawal on surface water rights.47 At their core, water mitigation banks function via a cap‐and‐trade mechanism. Basins that are capped, or fully appropriated, no longer issue new water rights without mitigation water. Thus, any new water user must offset or mitigate his use by purchasing mitigation water, which returns water to the river or aquifer to ensure a net neutral or positive impact on existing water supplies.48 The three types of buyers in need of mitigation water are:49

1. New ground water applicants in a capped water market who are required to offset the potential impact on existing rights holders in order to establish new rights. These applicants could range from agricultural users to growing municipalities and new developments.

2. Existing junior ground water or surface water rights holders who face a regulatory need to mitigate their impact on senior surface water rights holders in order to continue withdrawals.

3. Previously exempt well holders who are now in need of mitigation. Outside of New Mexico, all Western states maintain exempt well statutes allowing wells under a certain size to be drilled without a permit or mitigation. However, the impact to senior water rights holders forced many areas to regulate exempt wells and require mitigation.

The types of buyers that exist in a particular market depend on the regulations that are in place in that basin. The primary type of buyers that water mitigation banks are beginning to serve is the first type: new ground water applicants in need of mitigation. When a basin is capped new users are the first ones to face mitigation needs because mitigation water is necessary to establish new rights. The second and third types of users do not need mitigation water until specific regulations require that existing water users mitigate for their impacts, such as in the case of the new conjunctive management rules in the ESRP.

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ExistingWaterMitigationBanksCurrently, there are seven active water mitigation banks operating in four states, with three proposed banks under consideration (see Table 1). These banks have unique market structures to tailor conjunctive management to the nuances of individual water management areas. Different types of organizations, varying from government agencies to private companies and non‐profit organizations, run these banks.

Table 1: Current water mitigation banks50

Project Name ST Current Status

Bank Entity

Product / Currency

Contract Type

Central KS water bank association KS Active Gov Rights Lease Central Platte Water Bank NE Active Gov Credits Sale French Valley Ditch Co water bank MT Proposed Private Credits Both Salar Properties Water Resources Project and Proposed Water Bank MT Proposed Private Both Both Deschutes Water Alliance Bank OR Active Non-profit Credits Both Water Rights Services OR Active Private Credits Sale Dungeness watershed WA Proposed Non-profit Credits Sale Lower Kittitas county water exchange WA Active Gov Credits Sale Upper Kittitas water exchange WA Active Gov Credits Sale Walla Walla water exchange WA Active Non-profit Credits Sale We selected the Deschutes Water Alliance Bank as a model for banking opportunities in the ESRP because it successfully addresses the effects of conjunctive water use in a constrained basin in Oregon through trading of mitigation water. The Deschutes Water Alliance formed in 2004, and its water mitigation bank serves as the primary mechanism for trading mitigation water to meet the requirements of the Deschutes Ground Water Mitigation Program. The program was established in 2002 to maintain and restore instream flows while allowing for continued existing uses and economic growth through ground water development.51 In 1998 the Oregon Department of Water Resources stopped processing ground water right applications due to the impact of ground water withdrawals on surface flows of scenic waterways,52 effectively placing a cap on withdrawals from the aquifer. The following Deschutes Ground Water Mitigation Program was developed to provide new water users with opportunities to develop new ground water rights while adhering to program rules that ensure there is a net positive impact on scenic surface flows. The program requires that anybody who wishes to establish a new water right must provide mitigation for the impacts of his use on the local water supply. The Deschutes Water Alliance Bank serves new water right applicants by providing pre‐approved mitigation credits so

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these customers can move forward in the ground water right application process. According to the five‐year review of this program, it has proven to be highly successful, with mitigation credits exceeding demand and instream flow requirements being met or exceeded in almost all cases.53 In addition, an independent survey found that participants in the Ground Water Mitigation Program believe that the program is a better alternative to a total moratorium or an unregulated basin.54 The success of this program is directly attributable to the availability of credits through the Deschutes Water Alliance Mitigation Bank to meet mitigation requirements. Given the proven success of this bank we performed a thorough analysis of their history and methods (see Appendix C) to understand how a mitigation banking solution could be applied in the ESRP. We suggest applying a modified version of the model from the Deschutes Water Alliance Bank for a mitigation bank in the ESRP. This bank operates by creating mitigation credits from both water rights and approved water leases, and the bank has approval to administer the sale of these credits to water users in need of mitigation. There are many differences between the Deschutes River Basin and the ESRP—including what type of water projects can be used for mitigation, how water rights are transferred across the basin, and what type of users need to mitigate for their impacts—so the model would have to be altered to fit the needs of the ESRP. However, the primary structure of the model could be applied in the ESRP to allow mitigation banks to enter the market and address the specific needs of the area.

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NecessaryConditionsforMarketCreationThere are several elements that are necessary in the legal structure of a water management area in order to enable viability of a market solution while also allowing a mitigation bank to address water management problems.

GeneralRequirementsforaWaterMarketThe four primary attributes necessary for the viability of a water market are:

1. Adjudicated: All water rights, including ground water rights, must be clearly and legally defined in terms of priority date and quantity and timing of water use. This requirement has been met in the ESRP. In 1982, an Idaho State Supreme Court ruling revealed that more paper water rights existed than actual water in parts of the Snake River.55 As a result, the state negotiated a settlement that included the requirement to adjudicate the entire Snake River Basin. The Fifth District Court began lengthy adjudication hearings in 1987.56 Currently, over 133,000 of more than 150,000 claims have been adjudicated,57 which includes all water rights in the ESRP.58

2. Capped: The water management area must be closed to administering new water rights so that new users need to purchase existing rights rather than establish new rights to the aquifer and increase strain on the water supply. In 1992, IDWR placed a moratorium on new withdrawals from the ESPA, which is still in effect today.59

3. Enforced: There must be a mechanism to ensure that only allocated water is being used. IDWR established ground water measurement districts to monitor and report ground water pumping across the ESRP. Later they replaced these districts with water districts that were set up specifically to monitor and enforce ground water pumping rules, especially those related to conjunctive management.60

4. Tradable: Water rights and/or leases must be transferable between users. IDWR allows trading of water rights and leases through different platforms with varying degrees of government intervention.61 The traditional method of review‐and‐transfer for a fee provides the means of permanent water right transfers for both surface and ground water.62 Additionally, both surface and ground water users can lease water through the Idaho Water Supply Bank, which allows users to deposit unused water rights while maintaining their beneficial use status and providing an option for other farmers to lease the unused rights. Surface

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water users can also trade leases through the Upper Snake Rental Pool in order to hedge against future drought.63

The ESRP meets all of the base requirements, so a water market could allow users to trade water that is needed for mitigation; however, the complexity of the mitigation process makes it difficult for an individual user to access mitigation water and convert it to mitigation credit. This problem could be alleviated through the development of a water mitigation bank.

SpecificRequirementsforaWaterMitigationBankCurrently there are seven water mitigation banks in four states experimenting with unique market structures to address conjunctive management needs.64 Although every water basin has different laws, regulations, and physical dynamics, there are commonalities between all of the basins that currently support mitigation banks. From our assessment of how water mitigation banks operate, we identified the following three essential factors for a mitigation bank to be successful:

1. Mitigation Requirement: Clear regulation mandating mitigation for new water use or for existing impacts in a given region is the basis for a mitigation bank. These regulations create the demand for mitigation water. In the ESRP, the new conjunctive management rules create regulatory‐driven need for mitigation water by ground water pumpers.

2. Hydrologic Model: The water management area needs a transparent and accepted hydrologic model that defines how water moves through the system. This model should quantify ground water pumping impacts on surface flows so that the water management agency can determine both appropriate mitigation requirements for curtailed users and accepted mitigation actions for recharging the system. The model needs to be scientifically defensible and generally accepted by stakeholders. IDWR has a comprehensive model of the ESRP that serves this purpose.

3. Banking Instrument: Any region utilizing a mitigation banking strategy must have a standardized methodology or platform for creating and permitting a bank and associated mitigation credits. A banking instrument must exist to streamline the process of developing a bank to encourage the most efficient and cost‐effective mitigation solutions to address water issues. The bank needs to have authorization to parse a larger mitigation effort into standardized mitigation credits. IDWR currently allows water districts to submit mitigation plans to the water management agency for approval, but does not allow entities outside of ground water districts to create mitigation plans.

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The ESRP meets the first two requirements, but the region does not have a banking instrument to allow for mitigation banks: there is no system for creating mitigation credits and no provision for submission of mitigation plans by entities other than ground water districts. The region has a regulatory‐induced demand for mitigation water and a detailed model that explains how ground water pumping impacts surface flows throughout the basin. If IDWR were to implement a program that allows for an entity to secure mitigation water and sell credits to that water, the ESRP would have all the elements necessary for a successful water mitigation banking solution.

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HydrologicModelWhen managing surface and ground water conjunctively, understanding the hydrology of the area and how various water use impacts the water supply is important. In the ESRP, ground water users are held accountable for their impacts on surface water users. In order to hold them responsible, water managers need to know what the impact of each user’s pumping is on the river, springs, and ground water supplies. The effects of ground water pumping do not have a one‐to‐one impact on streamflow, and there are a number of factors that affect the actual ratio of impact, including distance from the river, geological structure, and aquifer connectivity.

HydrologicEffectofGroundWaterPumpingonStreamflowThe dynamics of the hydrologic system are important in determining how to implement curtailments and trading programs across the ESRP. Currently, water rights holders are required to account for how much their trade impacts both the streamflow and surrounding users in order to get approval for their trade. An understanding of the physical dynamics and how that translates into regulatory requirements is required in order to implement a trading market. The interaction between ground water pumping and streamflow is highly important when implementing a water trading system across these two water resources. The Snake River that runs across southern Idaho relies heavily on recharge from the surrounding ground water reserves. As those reserves are depleted through ground water pumping, the flow in the Snake River is reduced. In fact, heavily pumped areas may even draw water away from the river into the underground aquifer, instead of having the reverse relationship. Although these overall effects are well understood, it is difficult to measure exactly how much impact specific ground water pumping activities have on the river because there are numerous factors in the interaction between the two water supplies. The primary factors that determine the degree of impact from ground water pumping on streamflow are:65

1. Distance between the well and the river: The impact of ground water pumping is correlated to the distance of the well from the river: wells that are close to the river have a large impact soon after pumping begins, while wells farther away have smaller impacts that occur over a longer time horizon.

2. Interconnection between the aquifer and the river: The degree of the connection between the river and the aquifer is a significant element in the interaction. Elements include the relative altitude and the substructure of the river and aquifer. For example, if the aquifer is below

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the river and the river lining has low permeability, there will be little interaction between the two water sources.

3. Physical characteristics of the aquifer: The geological structure of the aquifer also determines pumping effects on streamflow. Aquifers composed of highly porous material are more transmissive than those composed of less porous material; thus, the more porous the aquifer the faster impacts from pumping will propagate through the system. Additionally, aquifers that are either close to the surface or limited in storage capacity have more immediate impacts than those that are deeper underground or lager.

4. Rate of ground water pumping: Increased rate of ground water pumping is directly proportional to the resulting rate of decrease in streamflow. The exception to this rule is water that is not consumptively used. For instance, eventually, flood irrigation may result in some degree of recharge to the system.

The impacts from these factors are very difficult to measure. Some of the difficulty lies in the fact that the effects of pumping are distributed in all directions, and do not necessarily follow underground flows. Additionally, the effects can lag significantly behind the actual ground water pumping, in some cases affecting streamflow decades after water has been withdrawn from the aquifer.66 Theoretical and numerical models are used to estimate the effects of ground water pumping on streamflow, since direct measurement of the influence of individual pumped wells is rarely possible due to interference from surrounding wells. Theoretical models require a number of simplifying assumptions that may not apply to a particular aquifer and river. In the case that these assumptions are violated, numerical models can be used to estimate effects.67 IDWR is continually refining numerical models to measure effects of ground water pumping in the ESRP. These models generate response functions, which describe the impact of specific wells on overall streamflow, based on the physical characteristics of the system. For management purposes, IDWR clustered areas with similar interactions to develop a map of response functions, which uses the average response across similar geographic regions. These average response functions are then used to explain the impacts of ground water pumping in a particular area on the river and the springs. Mapping response functions assists in determining how to account for varying impacts when trading water rights across the ESPA.68

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ModelingImpactsofGroundWaterPumpingEach ground water well has a different level of impact on the various reaches of the river. Figure 4 shows how ground water pumping from five different ground water well locations in the ESRP impacts streamflow in two reaches of the Snake River: the Thousand Springs reach and the American Falls reach. This figure illustrates model predictions of impacts from ground water pumping on the two reaches over a 100‐year period, and how continuous pumping over that period would translate to river flow reductions. Each graph in Figure 4 corresponds to a specific well location. The vertical axes represent the percentage of ground water pumping that is estimated to be depleted from spring discharges in either the Thousand Springs reach or the American Falls reach, while the horizontal axes represents the time of continuous pumping in years.69

Figure 4: Effects of ground water pumping on the Snake River

This analysis shows that there is much greater impact, over a shorter time horizon, when the well is closer to the river reach being considered. It also shows that some impacts are gradual, so they do not immediately impact the river. These varying impacts need to be considered by water managers when determining how to implement a management plan that accounts for the impacts of specific ground water pumpers on senior water rights holders.

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Given variable impacts from ground water pumping at different locations, IDWR and other water management agencies decided they needed a comprehensive hydrologic model that explains impacts of ground water use on other water resources in the ESRP in order to be effective in conjunctively managing the ESRP’s surface water and ground water supplies. The effort was funded by the State of Idaho, Idaho Power, the U.S. Bureau of Reclamation, and the U.S. Geological Survey, and then executed by the Idaho Water Resources Research Institute and the University of Idaho.70 The resulting Enhanced Snake River Plain Model (ESRPM) is a numerical ground water flow model that maps out the impact of 11,451 distinct one‐mile by one‐mile plots in the ESRP on 11 different reaches of the Snake River.71 Figure 5 shows a representation of the model grid of the ESRP, with many of the river reaches of concern indicated in grey. For each plot, the model explains approximately how much impact ground water pumping has on various reaches of the river. This information is used to estimate the relative impact of specific ground water pumpers on specific senior surface water users who are not receiving their full allocation.

Figure 5: East Snake River Plain Model72

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Many stakeholders, including scientists, engineers, and private water user groups, participated in overseeing the refinement of the ESRPM by participating in the Eastern Snake Hydrologic Modeling Committee (ESHMC) (see Appendix A). Wide participation ensured that all major parties that are impacted by use of the model could have input in the process, while having an opportunity to observe and understand the technical basis underlying the model.73 Including multiple stakeholders has helped minimize opposition to the scientific application of the hydrologic model.74

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StakeholdersandKeyPlayersThe ESRP is a large area with numerous stakeholders and regulatory agencies that interact to manage the water resources of the area (see Figure 6). The surface and ground water supplies support a variety of user groups, including agricultural users, trout farms, and power generators. The surface supplies are managed at different levels and stages by IDWR, geographically defined water districts, and numerous irrigation districts and canal companies. Ground water supplies are managed by IDWR and recently formed ground water districts. Additionally, constituent user groups form coalitions that work together to approach common problems.75

Figure 6: East Snake River Plain counties, surface water, and ground water76

StateAgenciesandElectedOfficialsIDWR is the state regulatory agency that promulgates all of the rules and regulations for both surface water and ground water management. It also forms districts that are responsible for management and enforcement across the state.

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The Director of IDWR has primary discretion in the administration of delivery calls and the approval of mitigation plans.77 The Idaho Water Resource Board (IWRB) is group operating within the IDWR, made up of eight members who are appointed by the Governor for four‐year terms. Specific duties and oversight include comprehensive basin planning, protected rivers designations, minimum stream flow program, water project financing, water supply banks and water rentals. The board has been instrumental in creating and managing the Comprehensive Aquifer Management Plan (CAMP), which outlines needs and methods for reducing stress on the aquifer, as well as providing funding for certain mitigation activities.78 IDWR formed water districts to manage different geographic regions across the state of Idaho.79 Their primary role is to distribute surface water from different sources to the water delivery agencies that service surface users. This responsibility includes determining how much water needs to be delivered to different users based on priority dates and cutoffs. Because the flow is variable, especially in summer, these figures can change daily. When the river does not have enough flow to meet the demand, water districts consider whether or not water users have storage water they can access. The water districts track flow, water supply, and diversions, and align that information with water rights to determine who is qualified to receive water distributions at any given time.80 Water Districts Number 120 and 130 were established in 2001, with Districts Number 100, 110, and 140 following in later years, to address specific problems related to conjunctive management of surface and ground water. The Districts provide administration of water rights, specifically addressing issues of conjunctive management of senior and junior surface and ground water rights. Acting watermasters for these districts, under the authority and direct supervision of the Director of IDWR, are charged with enforcing curtailments, measuring diversions, and managing geographically defined areas, including enforcing stipulated agreements and approved mitigation plans.81

IrrigationDistrictsandCanalCompaniesIrrigation districts and canal companies are both organizations that own and operate water delivery systems to service their members. They also represent their members’ interests in water supply issues. Generally speaking, every surface water right holder receives water deliveries from one of these two types of entities. Irrigation districts are public entities that distribute water to the users in their district, according to their water rights. The districts are set up such that each

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member has one vote, regardless of the size of his water right. The reason for this system is that most irrigation districts were set up when Swedish immigrants moved to the area, and they tended to design institutions with one vote per member.82 Canal companies are private entities, and they are organized with their users as shareholders: each shareholder votes proportional to his share of the company. People with a more corporate approach, generally form the Midwest, set up these companies. Some canal companies later banded together to form larger groups in order to pool funds to pay for reservoirs.83

GroundWaterDistrictsandIdahoGroundwaterAppropriators

Figure 7: Ground water districts of the East Snake River Plain84

Ground water districts were created more recently, following the 1995 Ground Water District Act. This Act allows ground water pumpers to organize into districts that have the authority to serve their members in several different capacities, including representing members in legal matters and providing mitigation plans to address curtailment orders.85 These districts modeled

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themselves after irrigation districts and function similarly in terms of organization and voting rights.86 Since 1995, nine ground water districts have been formed, but there are still geographic areas without ground water districts with unaffiliated ground water pumpers (see Figure 7).87 Idaho Groundwater Appropriators (IGWA) is an organization that is comprised of ground water districts, irrigation districts, municipal providers, and commercial and industrial water users. IGWA was formed to represent the legal interests of ground water users, challenging delivery calls and submitting mitigation plans to IDWR. IGWA is private organization paid for by members in the form of annual assessment fees. All members, regardless of water right seniority, pay IGWA based on water diversions. IGWA uses the funds to litigate and appeal IDWR decisions as well as procure mitigation.88

UserGroupsandCoalitionsThe primary water user groups include agricultural users, trout farms, and Idaho Power. Agricultural users vary in both degree of seniority and type of water source. Many use surface rights and belong to the corresponding irrigation districts or canal companies that manage their deliveries. There are also a number of agricultural users with ground water rights, and they often belong to the corresponding ground water districts for their area. The Surface Water Coalition (SWC) is a group of irrigation districts that are regularly impacted by decreased flows in the Snake River. The Coalition is made up of the A&B Irrigation District, American Falls Reservoir District #2, Burley Irrigation District, Milner Irrigation District, Minidoka Irrigation District, North Side Canal Company, and Twin Falls Canal Company. The SWC represents those parties holding one or more senior water rights who are suffering injury from ground water pumping by junior rights holders. They are active in fighting to ensure that senior rights holders in their respective districts receive their full allocation of water. The SWC is the delivery call proponent for the largest of the three major ongoing delivery calls in the ESPA: the SWC Delivery call.89

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LegalProcessforConjunctiveManagementThe legal underpinnings of the management issues surrounding the ESPA can be traced to Idaho’s Conjunctive Management Rules (“CM Rules”). The CM Rules are administrated under the Idaho Administrative Procedures Act: 37.03.11 ‐ Rules for Conjunctive Management of Surface and Ground Water Resources.90 These rules were adopted in October of 1994 with the intention of recognizing the hydrologic connection between surface‐water and ground water and managing resulting disputes between right holders.91

DeliveryCallsThe dispute process begins with a delivery call. Rule 10.04 of the CM Rules defines a delivery call as: “A request from the holder of a water right for administration of water rights under the prior appropriation doctrine”.92 A senior priority water right holder (petitioner) makes a delivery call, alleging that his senior right is suffering material injury on account of water diversions by a junior‐priority ground water right holder (respondent). Upon receiving the delivery call from the petitioner, the IDWR Director evaluates whether the petitioner is suffering material injury and whether the current water diversions are in accordance with the law. The Director will consider a number of factors including water volumes, costs, and timing of the diversion. The Director will also consider the extent to which the petitioner could use alternate means of meeting their diversion right.93 If material injury is established, then the Director will either regulate water diversions by forcing, in order of priority, junior‐priority ground water users to cease pumping of ground water, referred to as curtailment, or allow out‐of‐priority diversion of water by junior‐priority ground water users pursuant to an approved mitigation plan. In the instance of curtailment, the Director is authorized to phase the cutoffs over five years to reduce economic hardship.94 Using the best available scientific models, the Director must establish which junior right holders within what districts are causing the material injury (CM Rule 40). In practice, the director also considers a “trim‐line” which cuts off those junior water rights holders whose diversions of ground water contribute less than ten percent to the impacts of the senior right holder. For instance, if a farmer further up the aquifer ceases pumping and leaves 100 acre feet of water in the ground, at least 10 acre feet of that water must be able to reach the petitioner/senior user’s point of diversion.95 If an order for curtailment is made, the Director will regulate the diversion and use of ground water in accordance with his findings. If a junior right holder is a

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participant in a Director‐approved mitigation plan, then the water master will allow ground water pumping to continue out of priority. This rule of enforcement requires a water master to monitor water diversion and intervene when pumping needs to be ceased.96

MitigationPlansCurtailment of ground water is not a popular option so ground water districts utilize CM Rule 43, which allows out‐of‐priority diversions of water pursuant to an accepted mitigation plan. A mitigation plan is a contract and strategy that identifies means of delivering water of acceptable timing and quality to the petitioner of a delivery call in lieu of curtailment.97 A mitigation plan often covers many users and is submitted by a ground water district as an umbrella policy. User specific mitigation plans are not allowed in order to avoid the administrative burden of so many plans.98 As a member of a ground water district, or even an unincorporated ground water management area, a participant can opt‐in to a plan to avoid the burden of curtailing use. If a junior right holder on the curtailment list is not covered by a plan then the water master has the authority to shut down that user’s ground water pumping.99

OngoingDeliveryCallsCurrently there are three major ongoing delivery calls within the ESPA (see Figure 8). Each delivery call has its own stakeholders, nuances, and hurdles to overcome. Two of the calls, referred to collectively as the “Spring Users’ Calls”, are calls made by senior priority right holders who divert from separate reaches of the Thousand Springs area of the Snake River. The petitioners in both cases are private Trout Farm companies that utilize water from natural springs emanating from the canyon walls below Milner Dam. The over‐pumping of ground water has depleted flows to the numerous springs found throughout the area and presented a unique challenge for mitigation given the superior water quality of spring discharge. The third delivery call is being made by a coalition of surface water users who suffer injury in the American Falls area where the aquifer and river are hydraulically connected. The magnitude of the call changes annually based upon expected snowpack and predicted runoff.100 The three delivery calls were made in 2005 and resulted in the following orders issued by the Director soon after. While the orders were made six years ago and have been challenged repeatedly during that time, the orders remain largely intact today and continue to drive mitigation demand within the basin.101

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Figure 8: Map of ongoing curtailment areas

Blue Lakes

On March 22, 2005 Gregory Kaslo of Blue Lakes Trout Farm, Inc. stated in a letter to then IDWR Director Karl Dreher, that Blue Lakes was receiving a range of 111 cubic feet per second (cfs) to 137.7 cfs of spring water. By standards of appropriative rights Blue Lakes Trout has 3 water rights totaling 197 cfs, suggesting at least a 59.36 cfs shortfall. The three rights are as follows:

36‐02356A / May 29, 1958 / Fish Propagation / 99.83 cfs 36‐07210 / Nov 17, 1971 / Fish Propagation / 45 cfs 36‐07427 / Dec 28, 1973 / Fish Propagation / 52.23 cfs

The delivery call from Blue Lakes called for immediate action by the Director to administer rights within the ESPA to satisfy Blue Lakes’ legal rights to water flow. Following the delivery call, Director Karl Dreher issued an Order dated May 19, 2005 validating the delivery calls claim to material injury to Blue Lakes’ most junior right of 52.23 cfs. Based on a review of records of historical seasonal flow charts from the time of appropriation for the individual water rights, it was determined that right 36‐07427, with priority date Dec 1973 cannot be fulfilled

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based on the current estimates of maximum average (149.45 cfs). These rights are “not quantity entitlements that are guaranteed to be available to Blue Lakes Trout”, but rather authorized maximum diversion rates. 102 The May 2005 Order determined that both Water District 120, and Water District 130 have rights that are junior in priority to Blue Lakes’ water rights and “divert from ground water that is hydraulically connected through the source for Blue Lakes’ water rights.”103 IDWR determined that Water District 130 is within the ten percent trim line and thus within the impact area of the delivery call. Water District 120 on the other hand was determined to fall outside of that trim line and therefore not endure any curtailment measures by the Director.104 Using the IDWR approved ESPA hydrological model known as the “ESPAM”, the Department identified 57,220 irrigated acres that need to cease irrigation to increase the discharge to Blue Lakes by an average 51 cfs at steady state conditions.105 Pursuant to the directors discretion as outlined in CM Rules the Order installs a phased curtailment of 10, 20, 30, 40, 51 cfs per year to 2009.106 This means an initial curtailment within Water District 130 of junior rights with priority dates later than July 1987 and steady progress to curtailment of all rights with priority dates later than Dec 1973.

Snake River

On May 2, 2005 Larry Cope, of Clear Springs Foods, Inc. stated in 2 separate letters to the Director of IDWR that discharges from springs directly benefiting Snake River Farm and Crystal Springs Farm were suffering material injury. Both farms are aquaculture trout facilities owned by Clear Springs Foods, Inc. The rights for Snake River Farm are as follows:

1. 36‐02703 / Nov 1933 / Fish Propagation / 40 cfs 2. 36‐02048 / Mar 1938 / Fish Propagation / 20cfs 3. 36‐04013C / Nov 1940 / Fish Propagation / 14 cfs 4. 36‐04013A / Sept 1955 / Fish Propagation / 15 cfs 5. 36‐04013B / Feb 1964 / Fish Propagation / 27 cfs 6. 36‐07148 / Jan 1971 / Fish Propagation / 1.67 cfs

The combined total is 117.67 cfs to be diverted for purposes of fish propagation by Snake River Farm. The rights for Crystal Springs Farm are as follows:

1. 36‐07083 / July 1969 / Fish propagation / 300 cfs 2. 36‐07568 / Sept 1975 / Fish Propagation / 200 cfs

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The combined use total is not 500 cfs, but rather 335.10 cfs to be diverted for purposes of fish propagation by Crystal Springs Farm.107 In the case of Snake River Farm, Director Dreher issued in an Order on July 8, 2005 that stated that the historical flow numbers and water rights are accurate and Clear Springs Farms, Inc. is suffering material injury to its rights pertaining to Snake River Farm.108 It was determined that the maximum flow averages were 93.18 cfs, which is 24.5 cfs less than the 117.67 cfs rights to which the farm is entitled. Snake River Farm rights 36‐04013B of 27 cfs and 36‐07148 of 1.67 cfs could not be fulfilled based on maximum flow.109 In the case of Crystal Springs Farm, the Director determined that Crystal Springs was receiving less than its legal allocation. However, it was also determined that the petitioner had not gone to reasonable effort and expense to meet its need given a readily assessable diversion strategy. By diverting water from an extended collection canal near the Crystal Springs Farm’s point of diversion, the Director determined that the farm could achieve its legal allocation.110 This remains an important determination by the Director, emphasizing the Director’s discretion in administering water rights subject to a delivery call. In this case, curtailment of ground water would provide insignificant relief to the Crystal Springs call compared to encouraging sensible diversion techniques. Despite the Crystal Springs Farm determination, junior ground water users are still subject to the Snake River Farm determination so curtailment applies. Based on the ESPAM model, 38 cfs is needed at the Snake River Farms point of diversion. The Director mandated a phased curtailment over 5 years of 8, 16, 23, 31, 38 cfs. This means a curtailment within a portion of District 130 of junior rights with priority dates later than Feb 1964. The curtailment would affect 52,470 irrigated acres and a smaller portion of District 130 according to the model and trim‐line determination. It should be noted that the impact area of Clear Springs is geographically smaller than the Blue Lakes call.

Surface Water Coalition

On January 14, 2005 the IDWR Director received a delivery call from the collection of irrigation districts and canal companies below American Falls that make up the Surface Water Coalition (SWC). The Letter stated that based upon 6 years of U.S. Bureau of Reclamation data there has been a 30% reduction in reach gains to the Snake River between Blackfoot and Neeley. The loss equates to nearly 600,000 acre‐feet of surface flows annually. The delivery call identified 3,000 persons or entities holding junior ground water rights that were specifically causing material injury to the senior rights held by the SWC.111

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The Director issued an Order on May 2, 2005 in response to the SWC delivery call. The Order determined that senior rights held by the SWC were suffering material injury as a result of depletions caused by the diversion of junior priority ground water rights. The members of the SWC hold numerous water rights to surface flow, reservoir storage, and supplemental ground water, all with priority dates as far back as 1900. 112 With a so many factors determining surface flow and reservoir storage in a given year it was questionable what year to use as a baseline for the satisfactory fulfillment of senior users’ water rights. After reviewing diversion records over a fifteen‐year period and selecting the year with the smallest annual diversion and full head gate delivery, the Director determined that 1995 would be used as a minimum diversion baseline to determine shortages to the SWC. Based on this methodology, 2005 predicted shortages would result in the curtailing of 22,660 and 58,150 irrigated acres within Water Districts 120 and 130 respectively. This would ultimately increase reach gains by 79,800 acre‐feet and 21,200 acre‐feet over time. The resulting break down, in acre‐feet required of each ground water district in 2005, is shown in Table 2.

Table 2: Mitigation requirements by ground water district113

Ground Water District Mitigation Requirement North Snake 2,400 AF Magic Valley 17,800 AF Aberdeen‐American Falls 58,700 AF Bingham 14,900 AF Bonneville‐Jefferson 7,200 AF

LegalHurdlesandEnsuingChallengesSince the Orders pertaining to the Spring Users and SWC delivery calls were made in 2005, the Orders have been challenged and appealed by both the delivery call petitioners (Blue Lakes, Clear Springs, SWC) and the respondents (ground water districts and IGWA). The petitioners seek to restore their legally rightful water flows and maintain water security into the future. The respondents, while acknowledging their impacts on the ESPA, seek to maintain their livelihoods and fight to preserve Idaho’s agricultural economy. IDWR and its Director are required under the rules of Conjunctive Management to make hard decisions that may diminish a stakeholder’s welfare. Each stakeholder has utilized various legal discrepancies to their advantage and as a result has helped define Idaho state water law and Conjunctive Management methodology. 114

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The Surface Water Coalition and Spring Users have worked to strictly interpret the Prior Appropriation Doctrine as a means of enhancing their own water rights. However, the Idaho Legislature enacted the Ground Water Act of 1951 which stated: “while the doctrine of ‘first in time is first in right’ is recognized, a reasonable exercise of this right shall not block full economic development of underground water resources.”115 This decree is echoed by the Conjunctive Management Rules which state “An appropriator is not entitled to command the entirety of large volumes of water in a surface or ground water source to support his appropriation contrary to the public policy of reasonable use of water.”116 This caveat created a pragmatic limit on curtailment and the use of prior appropriation within conjunctive management. 117 Ongoing legal disputes still persist with cases in the District Courts and the Idaho Supreme Court. The first case to make it to the Supreme Court was American Calls Reservoir District No. 2 vs. Idaho Department of Water Resources:118 it was settled in 2007. The Idaho Supreme Court ruled that the CM Rules were valid and constitutional, overturning a previous decision by a District Court that determined the CM Rules were facially unconstitutional. Recent cases have debated a range of issues including the methodology of determining shortfall through Reasonable In‐Season Demand (RISD), how seasonal variability factors into delivery calls, who must determine injury or lack thereof, what constitutes an essential use by senior right holders, and the use and accuracy of the ESPA ground water model.119 The challenge and appeal process has defined many elements of conjunctive management and its application. This process is continuing to shape these management activities, with three pending cases expected in the Idaho Supreme Court this spring.120 As these cases are settled, clearer guidelines for conjunctive management are emerging.

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EconomicsofCurtailmentsMarket solutions are based on the concept that allowing trade between users that place different values on goods and services can benefit all parties. Water mitigation markets work by reallocating mitigation water to those who hold the highest value for the resource, while allowing users who have the least value for the resource to sell their water for mitigation purposes. Because of the complexity of the ESPA system and the economics of the region, water users across the ESRP hold significantly different values for mitigation water. As a result, many individual water users in the region would benefit through mitigation trading, and the ESRP as a whole would experience large aggregate economic benefits from mitigation trading.

ValueofMitigationWaterThere are two primary factors that determine the value of mitigation water to various users across the ESRP: the direct value of water use to particular users and the response functions–defined by the hydrologic model–that determine mitigation requirements for those users. The direct value of an acre‐foot of water to different users depends on the economic value they generate by using that water. If a user were to have his water right curtailed, his net financial loss would be equivalent to the value he places on the water associated with his rights. As a result, he would be willing to pay any amount under his direct value for the water to obtain mitigation so that he could continue pumping ground water. Conversely, a water rights holder who has not been curtailed would be willing to sell his water to other users for mitigation at any amount above his direct value for the water. Response functions are also a primary determinant in the value of mitigation water because they determine how many acre‐feet of mitigation water ground water pumpers need to deliver to senior users to compensate for their impacts on senior users’ rights.121 Impacts vary greatly across the ESPA, so ground water pumpers may face significantly different mitigation requirements. This means that two farmers at different locations, facing curtailments for the same amount of water use, may have to deliver different amounts of water to a senior user to have their rights to pump ground water restored. As a result, they will place different values on an acre‐foot of mitigation water, based solely on the response function used to calculate their impact to the senior user. Additionally, response functions determine the recharge value of retiring a valid water right, so they are used to determine the value of mitigation water toward a particular delivery call. This means they also determine the price at which water rights holders with valid water rights are willing to sell their rights for mitigation purposes.

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In combination, direct values for water use and response functions determine the supply and demand for mitigation water: the price at which water users in danger of curtailment are willing to pay and the price at which water users with valid rights are willing to sell. Given that multiple factors impact water values to different users, great disparities in the value of mitigation water exist between users across the ESPA. This means trading across the basin would bring financial benefits to both buyers and sellers of mitigation water, resulting in large aggregate economic benefits to the region as a whole.

ResponseFunctionsWhen there is a delivery call by a senior user, IDWR uses response functions to determine how many ground water users need to be curtailed to maintain aquifer levels that will ensure full water delivery to the senior users. Prior appropriations doctrine determines which users to curtail.122 The watermaster approaches a delivery call by considering the amount of flow that needs to be restored to the surface water system and the level of impact each ground water pumper has on that senior user. He starts by looking at the most junior user and calculating the value of his curtailment in terms of water delivery to the senior user, based on the response function for his location of use. The watermaster applies the calculated impact towards the delivery call, and then moves on to the next most junior user and repeats this process. He continues this process until the cumulative total of calculated impacts reaches the total amount of water required by the delivery call.123 Response functions in most areas show fairly low impacts of ground water pumping on streamflow. According to Allan Wylie, Technical Hydrologist at IDWR, the vast majority of ground water pumpers within a curtailment zone land in the 10 to 20 percent impact range. There are few ground water users with greater than 20 percent impact, and only a few with 40 to 50 percent impact. Curtailment zones are determined by response functions as well, and the borders are drawn such that ground water pumpers with less than a 10 percent impact on the delivery call are not included in the curtailment.124 The result of the curtailment process, combined with low calculated impacts, is that significantly more water use is curtailed than is delivered to a legally injured senior user. This becomes clear when considering how a single ground water right is handled in the curtailment process. A curtailed ground water pumper whose right is for 10 acre‐feet of water per year, and whose calculated impact on a senior user is 10 percent, will have his full 10 acre‐foot right suspended; however, cutting off his right will only account for 1 acre‐foot toward the delivery call. When aggregating all of the ground water pumping

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rights that are required to satisfy a delivery call, the amount of water use that needs to be suspended constitutes significantly more water than is delivered to the senior user. The mitigation process is converse to the curtailment process. Since ground water users need to mitigate for their calculated impacts, they need to provide the amount of water equivalent to the calculated impacts on senior users to have their full rights restored.125 This means that a ground water user with a 10 percent impact only needs to deliver 1 acre‐foot of water to the impacted senior user to have a 10 acre‐foot right restored. As a result, ground water pumpers with low calculated impacts on the aquifer place a high value on mitigation water.

EconomicModelIn order to gain a general understanding of the economic value of mitigation trading in the ESRP, we developed a simple model of the region and performed an analysis of the financial impacts of curtailments to ground water pumpers. We considered the potential economic impact of cutoffs that would result if ground water users were not able to mitigate for their impacts and compared that to the economic impact after incorporating mitigation trading. The difference between the two scenarios represents the overall opportunity for reducing the aggregate cost of curtailments across the basin through mitigation trading: this figure also represents the gains from trade following the curtailment. Even using highly conservative methods for our analysis, the results showed even greater gains from trade than we initially expected. This analysis considers the combination of two ongoing spring water delivery calls–the Blue Lakes Delivery Call and the Snake River Delivery Call–and estimates the net economic gains from mitigation trading that are available in the ESRP following the calls. First, we performed a water valuation study that estimated the direct value placed on water by different types of users. Using those values, we calculated the cost of curtailment to different types of users. Next, we incorporated average response functions across counties to calculate the overall amount of rights that would be curtailed. We translated that into the aggregate cost of the curtailment. By subtracting out the costs associated with making the trades, we determined the total financial gains to the ESRP from mitigation trading. Our model included a number of simplifying assumptions and is intended only to provide an illustrative example of the benefits from a mitigation market. The evaluation only considers farmland in the ESRP, and it applies curtailments purely to agricultural users. As a result, the estimates for the overall value of

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trading in the ESRP are highly conservative, and serve simply as a tool to understand how curtailments impact individuals and the region in general. The model could more accurately capture the dynamics of the system and generate more precise figures through: (1) refinement of existing elements, and (2) incorporation of more elements, such as spatially accurate response functions and more exact water use distribution data.

Assumptions

In order to perform this analysis we made simplifying assumptions about the market and farmer behavior. Our assumptions are:

1. All water rights considered in this analysis are used for agriculture, and all water transfers are between agricultural users. This assumption results in a very conservative estimate of curtailment costs because cutoffs to higher‐value water users, such as dairy farms, are not considered.

2. A farmer with valid water rights will either sell all of his rights and transition to dry‐farming wheat, or he will sell none of his rights and continue farming his current crop. This means farmers do not have the option to sell a portion of their rights and use the remaining portion to continue irrigated farming, generating lower yields of current crops or shifting to lower water‐use crops.

3. Water trades are based on total allocation rather than consumptive use. This means a one acre‐foot water right can be traded as one acre‐foot of water instead of a discounted amount representing the amount that is consumptively used by plants.

4. Curtailments will impact all types of crops equally. In other words, the seniority of ground water rights is evenly distributed between farms with various crop types, and crop types are evenly distributed between farms that use ground water and surface water.

5. Each water user’s rights are either entirely curtailed or remain valid. Any farmer with a valid water right can sell his water for mitigation.

6. All crops have the same season length and complete three cycles per year.

Water Valuation Study

The first step to understanding the market is to determine the value of water to individual users across the basin. We considered a number of different methods

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to calculate water values for the primary agricultural users who are in jeopardy of losing their water right to a curtailment call (see Appendix B). We selected the income capitalization approach because it is based on real, measureable data, which is available from online sources. Since agricultural data was not available by region we gathered county‐level data for all of the counties that lie within the basin, and aggregated the data. We used data from the National Agricultural Statistics Service website, and pulled the number of acres in production for each type of crop in each county of the ESRP. Looking only at crops with over 90,000 acres of production in the ESRP, we found the following distribution (see Figure 9):126

Figure 9: Distribution of crops (in acres) in the East Snake River Plain

Next we calculated the value of water for each crop type by using the income capitalization approach. We determined the opportunity cost of a farmer’s time by using the income capitalization approach for dry farmed wheat. To do this we multiplied the crop yield by the crop value to calculate the total revenue per acre of wheat. Then we researched the costs associated with farming wheat, and subtracted that from the revenue. We used the remaining value to represent the cost of farming to the farmer in terms of time and labor. In the next step we applied the same method to the remaining crops, but included the cost of farming to the farmer–this cost represents the opportunity cost of farming–in the cost calculation. In this case we subtracted out all of the costs except for water; thus, the remaining value represents the value of the water used to farm one acre of the crop. The calculation for each crop is as follows (on a per acre basis): Value of water = (Crop yield × Price per unit) ‐ Input costs ‐ Cost to farm Next we divided the value of water per acre of crops grown by the water needs of the crop to obtain the value per acre‐foot of water. The results are as follows (see Figure 10):

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Figure 10: Value of an acrefoot of water for various crops

Potatoes have the highest per‐acre‐foot value for water, while wheat has the lowest. The implications of this are that potato farmers who face a curtailment call are going to want to purchase water for a total cost below $114.61 per acre‐foot. Additionally, wheat farmers with water available will be willing to sell water for a price above $19.63 per acre‐foot. This means there are gains from trade if the transaction costs do not exceed the gain. There are also gains to be made from trading water between farms with the various other crops as well, since they all have different values. Although we have not considered the cost of trading in this portion of the analysis, we have included it in the calculations below that consider overall gains from trade when considering all factors.

Incorporating Response Functions

Incorporating response functions allowed us to calculate the cost of curtailment to users across the ESRP. We calculated the largest difference in the value for mitigation water by considering two farmers in the region who have the maximum and minimum value for mitigation water. Since potato farmers hold the highest direct value for water use, and ground water users with a 10 percent impact have the highest value for mitigation, the maximum value of mitigation water would be held by a farmer with these attributes. According to our water valuation study, a potato farmer would value an acre‐foot of water around $115, and a 10 percent impact means that 1 acre‐foot of mitigation water would translate to 10 acre feet of restored pumping rights. Thus, this farmer would value 1 acre‐foot of mitigation water at $1150. On the opposite end of the spectrum, a wheat farmer who values an acre‐foot of water around $20, and has a 50 percent impact with 1 acre‐foot of mitigation water translating to 2 acre‐feet of restored pumping rights, has a total value for an acre‐foot of mitigation water of $40. The difference in value for mitigation water of these two farmers is $1110 (see Figure 11).

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Figure 11: Maximum and minimum value for mitigation water

Given the value of mitigation water to the two farmers in this analysis, we can predict the behavior of each party if there were a mitigation market. As long as the price for mitigation water remains below $115, the potato farmer would choose to use his water to grow crops if his rights remain valid or buy mitigation water if his rights are curtailed. Assuming the value of mitigation water is above $20, the wheat farmer would choose to sell his water if his rights remain valid or discontinue water use if his right is curtailed. This perspective helps explain the general pattern of who will buy and sell mitigation water across the ESRP.

Total Value of Mitigation Trading to the Economy of the ESRP

For the final piece of our analysis we calculated the total value of mitigation trading to the economy of the ESRP. We considered the aggregate cost of curtailment across the region, incorporating both direct value of water to individual users and average calculated impacts for different counties. Our model shows that, without trading, the economic impacts of curtailment from just the two ongoing spring delivery calls amount to 20.4 million dollars of economic losses. However, when including the opportunity to trade mitigation water, our model shows a 3.8 million‐dollar economic loss with a 0.4 million‐dollar cost of trading. The overall value of mitigation trading is equivalent to the value restored to the economy, which is the total cost without trade minus the total cost with trade minus the transaction costs. From our analysis, the overall value of a mitigation trading market that serves just the two spring delivery calls is 16.2 million dollars (see Figure 12).

Figure 12: Cost (in millions of dollars) and crop distribution from curtailment

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SolvingtheProblemThe solution to curtailment calls involves two primary actions: (1) water rights with the lowest cost and highest impact on senior users’ rights need to be retired so that senior users do not face injury and/or (2) senior users need to be directly compensated for their injury. Executing these actions can be achieved in several ways, depending on funding sources and political willingness. In the case of injury to surface water users, there are several options for resolving the problem. First, surface water users could be directly compensated with monetary payments. Second, water from elsewhere in the system could be delivered to these users to compensate for their loss: this water could come from reservoir rights, other surface water rights, or piped ground water. Third, surface flows could be restored so that these users are no longer facing injury. This flow restoration entails retiring or reducing ground water pumping rights that are impacting surface water rights or executing ground water recharge projects so that pumping impacts do not propagate through the system. For a long‐term solution, some entity could purchase permanent rights to any of the water that would compensate or prevent injury to surface water users and retire the use of these rights. Anther option would be to implement regulations that require users to adjust to reduced water rights. Injury to spring water rights holders is more difficult to resolve because there are fewer options available. Spring users generally refuse to accept surface water in exchange for reduced spring discharges due to water quality concerns. As a result, the only solutions are direct compensation and/or restoration of spring water discharges. Spring users have refused direct compensation, leaving ground water recharge as the only option for resolution. Approaches that would restore spring discharges include discontinuing ground water pumping with heavy impacts to the springs and executing recharge projects with water of adequate quality. Again, a long‐term solution would require permanent acquisition of the water rights needed to achieve these results. IDWR can pursue these solutions through two primary avenues. If there are public funds available, IDWR could directly purchase and retire targeted water rights or execute a recharge project. In the case where funds are unavailable, IDWR will need to rely on the curtailment process to determine who needs to curtail use or pay for mitigation activities. In order to ensure reasonable allocation of the resource after responsibility is determined, a trading mechanism is necessary. The trading platform could be implemented and managed by state agencies, private entities, or non‐profit organizations, each with slightly different results.

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PastandCurrentEffortsThe three most notable efforts in addressing the problems water users face from curtailments include: (1) the state’s Comprehensive Aquifer Management Plan, which aims to reduce shortages across the basin by reducing net withdrawals by 600,000 acre‐feet annually, (2) the Federal Conservation Reserve and Enhancement Program, which allocates funds to farmers in constrained water basins for fallowing their fields, and (3) Idaho Groundwater Appropriators’ mitigation efforts, which aim to provide mitigation water for curtailed users.

The Comprehensive Aquifer Management Plan

In April 2006, the Idaho State Legislature passed a resolution requiring the Idaho Water Resource Board (IWRB) to compose a comprehensive management plan for the ESPA.127 The legislature called for the plan in order to address declining aquifer levels, reduced instream flows, and inadequate water supply for fulfilling appropriated rights. One of the key goals of this plan is to create alternatives to administrative curtailments.128 The resulting Eastern Snake River Plain Comprehensive Aquifer Management Plan (CAMP) was passed into law in 2009.129 CAMP aims to reduce aggregate water withdrawals across the ESPA by 600,000 acre‐feet by 2030 in order to protect the aquifer and provide reliable water to users.130 The primary methods for meeting this goal include reducing demand for water, converting users from ground water to surface water, and executing aquifer recharge projects.131 Unfortunately, CAMP has proven ineffective due to lack of funding. The first ten‐year phase of the plan, which was intended to produce a 200,000 to 300,000 acre‐foot change in the ESPA, was estimated to cost $70 million to $100 million. CAMP hoped to obtain the funds from state, federal, and private sources, as well as from water users in the ESRP.132 In 2009 the State Legislature approved the initial $2 million in state funding for the project, but in 2010 they determined that the funds were not available.133 IDWR has not been able to secure other sources of funds to implement CAMP.134

The Conservation Reserve and Enhancement Program

The Conservation Reserve Enhancement Program (CREP) is a federally funded program that seeks to conserve water in the ESPA through the retirement of irrigated farmland. The program is funded by the U.S. Department of Agriculture (USDA) and has a goal specific to Idaho for the enrollment of 100,000 acres. The total authorized federal expenditure for CREP in the state of Idaho is $183 million with a State contribution of approximately $74 million for a total of $257 million.135

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CREP pays land owners a per acre value to take the land out of agricultural production. Landowners must qualify by owning land with eligible soil types and conservation values. CREP pays landowners $50 per acre per year of land enrolled up to a cap of $50,000 per landowner.136 This can be an attractive option for a landowner, depending on commodity prices and the land’s highest and best use. CREP has become a critical element of the ground water users’ annual mitigation plan. Acres of farmland that are enrolled in CREP have been offered toward a mitigation plan as a ground water recharge effort. IGWA further incentivizes CREP’s use as a mitigation strategy by providing an added bonus of $30 per acre to those farmers within the ESPA who enroll. This added contribution equates to a $3,000,000 commitment.137 The SWC has argued that only IGWA’s proportionate contribution to the funds supporting CREP should be considered in determining mitigation credit for the recharge. Contrary to SWC’s position, IDWR determined that all acreage enrolled in CREP should be considered for mitigation since CREP’s federal objectives are being met and mitigation credits are not being sought by USDA.138 While the CREP program has provided numerous benefits to the aquifer, the program has its limits. CREP offers a perverse incentive to take advantage of the system, with farmers enrolling in CREP when there is a chance of being curtailed, and then pulling out of CREP if their rights are not on the curtailment list that year.139 CREP could reduce this problem by mandating longer enrollment periods to keep farmers from gaming the system. The other shortfall of CREP is that the program does not pay enough to draw an adequate number of farmers in the program. IGWA offered a partial solution by offering the additional $30 per acre put into the CREP program, but that has not been enough to solve the overall problem in the aquifer. Additionally, in recent years commodity prices have rallied and farmers have become anxious to pull land out of the CREP program and put the acreage back into production. Functionally the CREP program combined with IGWA’s contribution has provided services akin to a non‐profit mitigation bank. CREP pays a range of ground water users for their rights on an annual basis, and then IGWA packages the rights into a greater mitigation solution. Although IGWA’s use of federally funded projects toward providing mitigation for private individuals may be questionable, both IGWA and federal objectives are accomplished.

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Idaho Ground Water Appropriators

Idaho Ground Water Appropriators (IGWA) was formed in an effort to consolidate ground water districts and un‐affiliated ground water users under a common umbrella mitigation policy to protect their interests. IGWA collects fees from its members to fund its mitigation efforts and legal operations. For their contribution every member of IGWA is protected under a mitigation plan regardless of the priority date assigned to that member’s water rights.140 To date there have been several methods employed by IGWA to create replacement water for its mitigation plans. CREP enrollment, as discussed above, is a means of meeting the delivery call through aquifer recharge. IGWA has worked hard to encourage the program, offering additional incentives on top of CREP payments. In addition to the acreage enrolled in CREP, some ground water users have provided voluntary fallowing of irrigated acreage to the larger mitigation effort.141 IGWA has also provided aquifer recharge through conversion projects that allow ground water pumpers to leave their water in the ground in exchange for surface water supplies. These projects involve pumping surface water from the river to ground water users for irrigation in lieu of ground water.142 This strategy requires IGWA to buy reservoir water in the North Snake Rental Pool, pay a canal company to transfer the water to the diversion site, and then pay for any pumping or diversion costs for getting the water to the farmers.143 Surface flow improvements from both CREP and conversion strategies depend on the locations of participating ground water users in relation to the points of diversion for corresponding surface water delivery calls. The ESPAM model shows that the recharge of ground water—from either fallowing or conversion projects—provides comparatively small amounts of water to the springs and reaches of the river from which the delivery calls originate. Therefore, water delivery mechanisms with direct or higher impact to surface flows may prove to be more cost effective. A more direct strategy was employed in the spring of 2008 when the Idaho Water Resource Board acquired Pristine Springs, an aquaculture and ranching operation with 25 cfs of spring water rights, located near the Blue Lakes trout farm. 15 cfs of the water was used to directly replace spring water shortfall in the Blue Lakes Delivery Call. IGWA currently leases the 15 cfs on an annual basis as part of its ongoing mitigation strategy. IGWA continues to search for willing sellers of direct water supply, but not all users have a willingness to sell at the prices IGWA is willing to pay.144

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IGWA has been successful in mitigating for surface water delivery calls, although the required timing for meeting these mitigation requirements has caused tension. In the case of the Surface Water Coalition (SWC) Call, IGWA has been able to purchase water from irrigation districts and deliver it to the SWC. This water is in the same system and is easily transferrable downstream. The primary difficulty in handling surface calls is that the mitigation requirement must be met prior to determination of water supply for the season. In 2009 this problem resulted in ground water users having to lease tens of thousands of acre‐feet of storage water for mitigation purposes, but never needing the water due to high water supply resulting in flood conditions. The reservoir filled and its water was released downriver – useless in the following year of curtailment. Currently IGWA seeks greater certainty in the shortfall determinations so a lasting mitigation plan can be developed.145

UsingaMarketSolutionAfter a comprehensive review of the ESPA’s conjunctive management process and current mitigation strategies, we have concluded that IDWR could realize benefits for both their agency and the region as a whole by exploring mitigation banking solutions for the ESPA. The conjunctive management process creates the need for mitigation water. Currently, junior right holders at risk of curtailment are limited in their options for securing mitigation: they must rely on federal programs and the efforts of their ground water districts. IGWA is making formidable strides toward lasting mitigation plans, but senior water users continually attack IGWA’s efforts. Mitigation banking would encourage additional mitigation plan providers to put forward unique and cost‐effective mitigation solutions that are more palatable to stakeholders.

Executed by IGWA or Private Company

Allowing mitigation banking will encourage IGWA and private entities to seek out mitigation solutions on behalf of ground water users. A formal mitigation banking program will encourage outside entities to: (1) specialize in providing low‐cost mitigation solutions, (2) reduce transaction costs by streamlining the mitigation process, (3) take accountability for mitigation plan monitoring and enforcement, and (4) assume the risk associated with determining mitigation needs and costs. Mitigation banks would specialize in developing mitigation plans and managing the mitigation entitlement process. As specialists, they would actively track and identify mitigation opportunities such as willing sellers of water rights or opportunities for recharge projects. A bank could incorporate expertise in restoration and recharge projects or in utilizing the ESPA hydrologic ground

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water model to identify mitigation opportunities. These specializations will enable banks to seek out and secure mitigation water at the lowest cost. Mitigation banks will be able to reduce transaction costs associated with the mitigation process through their familiarity with legal and procedural requirements for developing mitigation plans. Banks will become familiar with the water right transfer process, including title search, due diligence, hydrologic analysis, and application for transfer. They will also develop deep understanding of what elements are necessary in a mitigation plan in order for IDWR to approve the plan and for senior rights holders to be satisfied with the mitigation it provides. This knowledge will help banks develop robust plans that meet requirements to make it through the approval process and avoid litigation. Financial liability for failure of mitigation plans falls on mitigation banks, creating incentive for banks to ensure the viability of their mitigation efforts. Under current conditions, if a mitigation plan is determined to be in default—due to illegal diversions or some other violation—the farmers and junior right holders relying on that plan suffer the consequence of curtailment. If a mitigation bank were liable for a default it would be accountable for ensuring the effectiveness of the plan. The bank is incentivized to actively maintain and monitor its mitigation activities, and report any illegal activity. This shifts the risk of faulty mitigation plans from farmers to mitigation banks, and reduces the burden of mitigation plan monitoring and enforcement by IDWR. Mitigation banks also assume the financial risk associated with predicting both demand for mitigation credits and cost of mitigation projects. Water availability is highly variable, and as a result so are mitigation needs. Mitigation banks develop projects prior to selling the resulting mitigation credits, and therefore they need to estimate the demand for mitigation credits. Banks face the risk that there is insufficient demand for the mitigation credits they develop. Additionally, the cost of large‐scale mitigation solutions may be difficult to predict. In the case of a private banking solution, mitigation banks would be motivated to assume these risks in exchange for the profit potential of selling mitigation credits.

The Model

IDWR should consider adopting a mitigation banking model akin to the Deschutes River Basin (see Appendix C). Comparable to IDWR’s administration of the Conjunctive Management Rules, Oregon Water Resources Department (OWRD) administers a regulatory‐induced cap on new ground water permits. An applicant for a permit to pump ground water has the option of either undertaking a mitigation project of his own or purchasing credit from a mitigation bank. This has led to private and non‐profit entities creating large‐scale mitigation projects that undergo an approval process by OWRD and the

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Water Resource Council. This gives agencies control and discretion in approving credible banks that will provide the greatest benefit to the basin. A certification or charter process similar to OWRD’s would allow IDWR to require banks to incorporate elements that are necessary for long‐term feasibility and probable success of their mitigation efforts. A board of stakeholders could weigh‐in on the decision and implement standards accepted by all parties. Allowing more parties to participate in the process could reduce the number of legal challenges that occur at the outset of the annual mitigation plan submittal to IDWR. Chartered mitigation banks would seek credits from the board based on recharge, conversion, leasing, or other means of delivering water to impacted senior water right holders. The bank would be awarded mitigation credits based on the calculated flow restoration to a particular delivery call by the mitigation effort. The mitigation credits would be specific to one or several delivery calls, depending on how much flow they restore to different reaches of the river. The number of credits received would depend on the level of impact at each mitigation site. With a proper credit accounting system and preliminary IDWR certification, credits would serve as a valuable source of ensured mitigation.

Executed by State Agency

The mitigation banking strategy could also be adopted and applied by a state agency. IDWR could acquire appropriate water rights for mitigation purposes, and then sell off the credits for this mitigation effort. The agency would need to hire staff that is dedicated to seeking out and securing mitigation water, and then use an appropriate method for distributing the mitigation credit. This could involve setting up a department that allows individuals to purchase credits, or simply selling the mitigation water to IGWA or ground water districts to meet mitigation requirements of entire districts. This method has already been applied once in the ESPA. The Pristine Springs transaction and resulting mitigation solution is illustrative of how a banking program might work. The Idaho Water Resource Board purchased Pristine Springs and is now leasing the water to IGWA as part of a mitigation plan for the Blue Lakes delivery call. If private mitigation banking had been an option, Pristine Springs could have sought a banking charter and then created a mitigation bank based upon their water rights or sold their right to an existing mitigation bank. That scenario may have saved the IWRB from investing capital to purchase the property while allowing the right holder to receive the mitigation value for his assets.

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ConclusionsAfter reviewing the many dimensions of water resource management in the ESRP, we have concluded that a water mitigation banking solution could be applied within the current legal confines to ensure efficient allocation of the existing water resources. The ESRP meets all of the legal and regulatory requirements for an effective mitigation banking solution, but it does not include a provision allowing for this trading platform. IDWR could open the state to mitigation trading by changing mitigation rules to allow for entities other than ground water districts to develop mitigation plans and to allow for mitigation plans to be translated into sellable permits or credits. This would entice entrepreneurs to pursue businesses in mitigation banking, seeking out the lowest‐cost sources of mitigation and serving ground water pumpers who need mitigation credit. IDWR could implement a mitigation banking solution that is directly administered through their office or allow for the development of private and non‐profit mitigation banks. A public bank would help secure water for mitigation, which could be used by ground water districts or broken up and sold to individual buyers. Allowing for a private mitigation banking solution will create additional benefits by shifting financial risk and liability to outside organizations, while allowing these organizations to take on the role of specializing in developing innovative mitigation strategies. Based on the proven success of mitigation banking in efficiently allocating limited resources, and the ESRP’s clear need for managing the economic consequences of curtailments, both IDWR and the ESRP would benefit from implementing a water mitigation program that would help minimize the costs of curtailments and restore efficient water allocation to the region.

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Appendix

A. EasternSnakeHydrologicModelingCommitteeMembersThe East Snake Hydrologic Modeling Committee (ESHMC) oversaw the refinement of the hydrologic model for the ESRP. This committee included members from a number of different agencies, organizations, and user groups. Table 3 shows all of the members and the organizations that they represent.

Table 3: Eastern Snake Hydrologic Modeling Committee Members146

Member Organization Allan Wylie Idaho Department of Water Resources Bryan Kenworthy US Fish and Wildlife Service Bryce Contor Idaho Water Resources Research Institute (Idaho Falls) Chuck Brendecke Hydrosphere Resource Consultants Chuck Brockway Brockway Engineering, PLLC Dar Crammond US Fish and Wildlife Service Dave Blew Idaho Power Company Dennis McGrane Principal, Leonard Rice Engineers, Inc. Gary Johnson Idaho Water Resources Research Institute (Idaho Falls) Greg Clark US Geological Survey Greg Moore Idaho Water Resources Research Institute (Idaho Falls) Greg Sullivan Spronk Water Engineering, Inc Gregg S. Ten Eyck Leonard Rice Engineers, Inc. J.D. May May, Sudweeks & Browning, LLP Jack Harrison HyQual Jeff Sondrup Idaho National Laboratory Jennifer Johnson US Bureau of Reclamation Jim Bartolino US Geological Survey Jim Brannon Leonard Rice Engineers John Koreny HDR, Inc Jon Bowling Idaho Power Company Jon Gould Ringert Clark, Chartered Lawyers Ken Skinner US Geological Survey Linda Lemmon Idaho Aquaculture Association and Thousand Springs Water Users Assc Lyle Swank Idaho Department of Water Resources Mike Beus US Bureau of Reclamation Mike McVay Idaho Department of Water Resources Rick Allen University of Idaho ‐ Kimberly Research Station Rick Raymondi Idaho Department of Water Resources Roger Warner Rocky Mountain Environmental Sean Vincent Idaho Department of Water Resources Sharon Parkinson US Bureau of Reclamation Stacey Taylor Idaho Water Resources Research Institute (Idaho Falls) Tom Wood Idaho Ntional Laboratory Willem Schreuder Principia Mathmatica

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B. WaterValuationApproachesConsideredIn order to determining the value of water to farmers with various crop types we performed a water valuation study. We considered three different valuation methods to estimate the value of water: contingent valuation, hedonic pricing, and income capitalization. After considering all three methods we selected income capitalization, for the reasons explained below.

Contingent Valuation Method

Prior to rejecting the contingent valuation method we analyzed its strengths and weaknesses, and considered what technique we would use within the method. This method would allow us to capture water values, as reported directly by farmers; however, this approach has a number of shortcoming and biases, while survey data collection is time consuming and difficult. As a result we opted against this method. The primary strength of the contingent valuation method is its capability to measure all types of market and non‐market values placed on water by farmers. Using this method we would be able to ascertain both the price at which farmers are willing to sell water and the price at which they would want to buy additional water. The method acknowledges that farmers appreciate how they value water and how they value the opportunity cost of the time they spend farming, so their reported figures would presumably include these effects.147 Unfortunately, the contingent valuation method has a number of weaknesses and potential biases that would impact this analysis. Curtailments are highly controversial and farmers are upset that they may be facing additional costs that they do not feel are justified. As a result, survey respondents may be inclined to make protest bids, stating that they are not willing to pay for water that they should not be losing in the first place. In order to reduce the incidence of protest bids we could use dichotomous choice or a payment card so that we present a range of reasonable options to respondents, and have them select from those; however, these methods will introduce starting point bias. In addition to these problems, we will also face framing effects since this is a delicate topic and the survey will be perceived in different ways, depending on how we present it. There may also be payment vehicle bias since many farmers feel this is a coercive ruling, and they would rather pay for a legal battle to reverse the ruling rather than pay for the additional water they need. Lastly, there may be self‐selection bias because farmers who are interested in this sort of solution – those with high interest in buying or selling water – are most likely to participate in the survey.148

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If we had used the contingent valuation method, we would have designed the survey to capture both the buying and selling price of water with minimal respondent time. We would first interview several farmers to get a general sense of what figures make sense for water prices and to determine the best way to frame the question. We would then design a payment card so that farmers could select both a buying price and a selling price for their water. We would also collect general questions about the respondent and his farm, including farm size, crop type, current water allocation, and water right seniority. This information would enable us to determine the value of water to different farms with different crop types, and thus identify the value that could be added to the market by changing the allocation. Given the sensitive nature of the curtailment issues, data collection would be extremely difficult and time consuming. We presume that we would have a low response rate, and we would spend a lot of time convincing respondents that this survey is worthwhile and would not affect current attempts to reverse the existing law. Since we were working in a limited time frame with limited resources, we concluded that we would not be able to complete a contingent valuation survey in the time available. This, along with the numerous weaknesses and biases associated with the method, led us to reject the contingent valuation method for our analysis.

Hedonic Pricing Method

The hedonic pricing method is appealing because it does not involve a survey and can be performed on existing data. Additionally, the data are from real transactions, so we know it reflects the true willingness to pay. In order to use this method we would collect price information for agricultural land sales, with and without attached water rights. We would also consider some other variables such as soil type, farm size, and crop type. Using this information we would run a regression to see what attributes affect the value of the land, paying particular attention to the value of the attached water right. From this we could see the value of a water right in terms of a full transfer of ownership, and from there we could deduce the value of annual and longer term leases. The general problems with this approach are that it assumes a constant hedonic price and there may be omitted variable bias or multicollinearity. Additionally, this method requires that significant data are available and accurate. In order to have sufficient data we would need to consider farm sales over an extended period, but the value of water to farmers may have changed over that same period. This would introduce some level of bias into the sample. Another potential problem would be selecting the wrong functional form or including the wrong variables in our analysis, which would also introduce bias into the analysis. Lastly, the purchase of farmland with water rights may not be driven by

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the desire to continue farming.149 Many agricultural properties have been converted for other uses, such as residential. These uses place a completely different value on the water right, but at the time of sale it is not evident that the buyer is basing his decision on changing the use of the land. Although the hedonic pricing method is a viable option, and one we may consider using to compare with the results from this analysis in the future, we have decided not to use it. First, it would be difficult and time consuming to obtain all of the data we need, including tying the variables we are interested in to the land sales that occurred in the ESRP area. Second, there are still biases associated with this data, so it is not necessarily the best tool for this analysis.

Income Capitalization Approach

The income capitalization approach is also an appealing method that does not involve a survey, and is based on real existing data. As an agricultural input, water’s value is based on the revenue is can generate by supporting different crops. Thus, the value of water to a particular farmer could be based on a number of different factors, such as his crop type, soil type, farm size, average yield, and crop value. This approach entails calculating the total value of the crop output, and then subtracting the value of the various inputs aside from water to determine the remaining value that can be attributed to water.150 Although this method still suffers from some weaknesses, its strengths greatly outweigh them for this particular analysis. The primary weakness is that it assumes that all inputs are accounted for, but it is difficult to capture some of the costs accurately. The most difficult cost in this particular analysis is the opportunity cost of a farmer’s time. We have used the income capitalization approach with dry farming of wheat to capture this cost. The primary strength of the income capitalization approach is that it is based on real data, readily available from credible sources. Given the amount of high‐quality data in the agricultural industry, and our ability to find county‐level data for the ESRP, we have opted to use the income capitalization approach for our analysis.

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C. DeschutesRiverMitigationBankingCaseStudyWritten by Jake McArthur The Deschutes River Basin encompasses over 10,700 square miles and is the second largest watershed in Oregon. Major tributaries to the Deschutes River include the Crooked River, the Metolius River, and the Warm Springs River. At Madras, OR, the main stem of the Deschutes River has an annual average flow of over 3.3 million acre‐feet per year (AF/yr) while the Crooked and Metolius Rivers each contribute over a million AF/yr to that flow. A number of large reservoirs provide surface water storage in the watershed, including the 150,000 AF Prineville Reservoir, the 535,000 AF Lake Billy Chinook, and the 200,000 AF Wickiup Reservoir. The size of the Deschutes aquifer is estimated at 60 million AF.151 From 1993 to 2001, the USGS conducted a hydrological study within the Deschutes Groundwater Study Area, including 4500 square miles of the Upper Deschutes Basin. The study found that a majority of recharge water originates on the eastern boundary of the basin as precipitation in the Cascade Range. The average rate of annual recharge is 3500 ft3/s within the basin. About half of the ground water in the upper basin discharges to spring‐fed streams, including the Upper Metolius River. The remainder of the ground water in the basin discharges into the Lake Billy Chinook and near the confluence of the Metolius, Crooked, and Deschutes Rivers. Ground water discharge accounts for almost all of the summer and fall flow of the Deschutes River at Madras. Of greatest significance, the study found that ground water and surface flows are directly hydraulically connected.152 As a result of the ground water study, the Oregon Water Resources Department (OWRD) determined that ground water use within the Study Area violates the Scenic Waterway Act. The Scenic Waterway Act requires the rejection of any ground water permit that “individually or cumulatively reduces streamflow by 1% of average daily flow or 1 cfs, whichever is less.”153 As a result of this decision, the OWRD stopped processing new ground water permits. In light of rapid growth in the area, the OWRD organized stakeholder meetings in order to devise a solution that would fulfill the Act’s requirements while still allowing growth in the basin. Eventually, four years of meetings resulted in the adoption of the Deschutes Ground Water Mitigation Rules, Division 505, and the Deschutes Basin Mitigation Bank and Mitigation Credit Rules, Division 521, by the Water Resources Commission in 2002.

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Legal Structure

Within the Deschutes Basin, surface water rights are fully appropriated and adjudicated. Some surface water rights face curtailment, based on seniority, during the low‐flow summer months, but the mitigation program does not address curtailment proceedings. In 2002, the Oregon Water Resources Department (OWRD) adopted the rules to establish mitigation in the Deschutes Basin. All new permitted ground water uses, within the Deschutes Groundwater Study Area plus a large portion of Crook County, must supply mitigation in order to secure a permit. According to Oregon Statute 537.545, the following new appropriations are exempt from permits, and therefore, mitigation requirements: “stockwatering purposes; watering any lawn or noncommercial garden not exceeding one‐half acre in area; watering the lawns, grounds and fields not exceeding 10 acres in area of schools located within a critical ground water area established pursuant to ORS 537.730 to 537.740; single or group domestic purposes in an amount not exceeding 15,000 gallons a day; down‐hole heat exchange purposes; any single industrial or commercial purpose in an amount not exceeding 5,000 gallons a day.” From 2004‐2006, homeowners in the Deschutes Basin drilled more than 461 permit‐exempt wells.154 Such exemptions are expected to expand to 20.7% of total consumptive use of water by 2025.155 For permits that require mitigation, applicants have two options – undertake a mitigation project themselves or purchase a mitigation credit. Figure 13 illustrates the process for establishing a new ground water permit in the Deschutes Basin. Mitigation water can be provided through instream leases, time‐limited instream transfers, permanent instream transfers, allocations of conserved water, aquifer recharge and releases of stored water. Only mitigation

Figure 13: Process for establishing new ground water use in the Deschutes Basin

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banks can use instream leases and time‐limited instream transfers for mitigation. To date, only instream leases and permanent instream transfers have been used to provide mitigation water. During the application process, the OWRD determines the consumptive use of an applicant’s proposal, the potential yield of a proposed mitigation project, and where the impact of the new permit will occur. The OWRD establishes the applicant’s consumptive use through USGS guidelines and the quantity of water that a mitigation project produces. Mitigation water must be provided in a 1:1 ratio for the determined consumptive use. For temporary mitigation credits created from instream leases, one mitigation credit must be held in reserve for each that is used. For this specific case, the ratio of mitigation to use is effectively 2:1. The OWRD determines the zone of impact through guidelines based upon the 2001 USGS hydrological study. The applicant must then provide mitigation water in the same zone of impact. There are seven zones of impact located in the following general areas: the Deschutes Basin above Lake Billy Chinook, the Middle Deschutes River, the Crooked River, the Whychus Creek, the Upper Deschutes River, the Little Deschutes River, and the Metolius River. Figure 14 illustrates these different zones.

Figure 14: Zones of impact in the Deschutes Basin156

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Mitigation Banks

In order to establish a mitigation bank, an applicant must have a mitigation bank charter with the OWRD that has been approved by the Water Resources Commission. The charter explicitly states what type of credits the bank can hold. A bank can potentially hold permanent credits from instream transfers and conserved water projects, performance dependent credits from storage release or aquifer recharge projects, or temporary credits from instream leases and time‐limited instream transfers. Currently, the Deschutes Water Alliance Water Bank can hold permanent credits from instream transfers and temporary credits from instream leases. DWA has provided all of the credits in the general zone of impact, which includes the cities of Bend and Redmond. These credits are sold at a fixed price. The Central Oregon Irrigation District has provided the water for DWA’s permanent credits and is a member of the Alliance. The Deschutes Irrigation Mitigation Bank is a private mitigation bank selling credits outside of the general zone of impact. Deschutes Irrigation can hold permanent credits from instream transfers only. The current mitigation program is due to sunset in 2014, but stakeholders believe that the program will continue beyond that time. The program contains a 200 cfs cap on permits and final orders. Final orders have five years to provide mitigation in order to have a permit issued. To date, permits account for approximately 74 cfs and final orders account for 56 cfs, or a total of ~130 cfs against the cap.157 Applications in process account for the remaining ~70 cfs under the cap. History shows that many applications get withdrawn or reduced and that speculation may be occurring. Therefore, some room under the cap should still exist. Through 2007, 85 permits and final orders provided more than 75% of the mitigation water to quasi‐municipal and municipal needs.

Conclusion

The Deschutes Ground Water Mitigation Program has been successful in the trial period. The five‐year review found that the mitigation credits for sale have exceeded demand, and that instream flow requirements are being met or exceeded in almost all cases. The OWRD created a model to determine the impacts of the program on instream flow in comparison to modeled historic flow. This model showed that streamflow increased at four of eight gauge sites, decreased by 0.36% at one gauge site, and did not change at three gauge sites. On the Deschutes River, upstream of Bend, the instream flow in 2007 exceeded historic flows by 27.3 cfs.158 In addition, an independent survey found that participants in the Ground Water Mitigation Program believe that the program is preferable to a total moratorium or an unregulated basin. Respondents in the survey also noted that the program would benefit from better program information and a simplified and speedier application process.159

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GlossaryAdjudication: A court action that defines existing water rights in terms of quantity, use, and seniority. In a fully adjudicated basin, all rights are defined.

Aquifer: An area underground where the geology creates an underground reservoir of water that can yield a useable quantity of water.

Beneficial Use: Each state determines what uses of water are considered beneficial. These uses can include irrigation, urban use, industrial use, hydropower, aquaculture, and more. In Idaho, if a water right is not used beneficially for five years, the right to use it may be terminated. Conjunctive Management: The management of surface water supplies and ground water supplies in conjunction with each other, considering the hydrologic interaction between the two. Curtailment: When referring to a water management area, the process of suspending the water rights for a portion of the water rights holders in the management area. When referring to a single water rights holder, curtailment refers to the full suspension of his right to use the water allocated in his right.

Delivery Call: A legal action pursued by a senior user when he is at risk of receiving less than his full delivery of water. MORE DETAILS

Ground water (or groundwater): Water supplies that are located beneath the surface of the Earth, including water contained in underground aquifers. Hydrology: The study of the distribution and movement of water around the Earth, including water at the surface, underground, and in the atmosphere.

Mitigation: Compensating for impacts caused by a particular action. In the case of the ESRP, compensating a senior water user who is impacted by a ground water pumper through financial means or by supplying an equivalent quantity of water for which the ground water pumper is held responsible to the senior user.

Mitigation Bank: An entity that acquires assets that fulfill mitigation requirements, and sells the credits to users in need of mitigation. In water, an entity that sells pre‐approved water mitigation credits, allowing new users to meet the regulatory requirements of the basin through a single transaction. Priority Date: The date at which a water right was established. This date determines a water user’s seniority level relative to other water users.

Surface Water: Water supplies that are available at the surface from sources such as rivers, springs, lakes, and wetlands.

Water Right: A legally defined right to divert water from a particular source and put it to beneficial use. In Idaho rights contains the following information: owner, quantity, priority date, season of use, and plans of use.

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1 Climate Change, Water and Risk: Current Water Demands Are Not Sustainable. Natural Resources Defense Council, 2010. 2 California Water Plan, Update 2009: Imperative to Act. California Department of Water Resources, 2009: 2-7. 3 Climate Change, Water and Risk: Current Water Demands Are Not Sustainable. Natural Resources Defense Council, 2010. 4 Water Rights Within The Bay/Delta Watershed. State Water Resources Control Board, 2008: 2-3. 5 Pontius, Dale. Colorado River Basin Study. Western Water Policy Review Advisory Committee, 1997: 8. 6 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 7. 7 Bates, Sarah. Blueprint for a Ground Water Mitigation Exchange Pilot Project in Montana. Trout Unlimited, 2009. 8 Nathaniel Carroll and Jessica Fox and Ricardo Bayon. Conservation & Biodiversity Banking (Earthscan, 2008), 9-8. 9 Idaho Water Resources Board, Eastern Snake Plain Aquifer: Comprehensive Aquifer Management Plan, January 2009 10 Idaho Department of Water Resources Legal Actions http://www.idwr.idaho.gov/AboutIDWR/legal.htm 11 Idaho Water Resources Board Eastern Snake Plain Aquifer (ESPA) Comprehensive Aquifer Management Plan, January 2009 12 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 13 IDWR, Water Rights and Adjudication Search, at http://www.idwr.idaho.gov/apps/ExtSearch/SearchWRAJ.asp 14 IDWR, Water Rights and Adjudication Search, at http://www.idwr.idaho.gov/apps/ExtSearch/SearchWRAJ.asp 15 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 16 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 17 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 18 Idaho Statutes, §42-101 19 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 20 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 21 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 22 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 23 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 24 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 25 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 26 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 27 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 28 USGS, “Effects of Ground Water Development on Ground Water Flow to and From Surface Water Bodies”, http://pubs.usgs.gov/circ/circ1186/html/gw_effect.html 29 Idaho Water Resource Institute, “Snake River Basin Surface Ground Water Interaction”, http://www.if.uidaho.edu/~johnson/ifiwrri/sr3/home.html 30 USGS, “Effects of Ground Water Development on Ground Water Flow to and From Surface Water Bodies”, http://pubs.usgs.gov/circ/circ1186/html/gw_effect.html 31 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 32 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 33 Dudley, Toccoy and Alan Fulton. “Conjunctive Water Management: What is it? Why Consider it? What are the Challenges?”(article from series on groundwater and water wells in the northern Sacramento Valley, 2005-2006), http://www.glenncountywater.org/water_education.aspx 34 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 35 National Science & Technology Center Bureau of Land Management “Western States Water Laws-Idaho Water Rights Fact Sheet”, August 2001 36 Idaho Department of Water Resources, Legal Actions, http://www.idwr.idaho.gov/AboutIDWR/legal.htm 37 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 40. 38 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 39 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 40 Nathaniel Carroll and Jessica Fox and Ricardo Bayon, Conservation & Biodiversity Banking (Earthscan, 2008), 9-8

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41 Nathaniel Carroll and Jessica Fox and Ricardo Bayon, Conservation & Biodiversity Banking (Earthscan, 2008), 9-8 42 Nathaniel Carroll and Jessica Fox and Ricardo Bayon, Conservation & Biodiversity Banking (Earthscan, 2008), 9-8 43 Nathaniel Carroll and Jessica Fox and Ricardo Bayon, Conservation & Biodiversity Banking (Earthscan, 2008), 9-8 44 Nathaniel Carroll and Jessica Fox and Ricardo Bayon, Conservation & Biodiversity Banking (Earthscan, 2008), 9-8 45 Nathaniel Carroll and Jessica Fox and Ricardo Bayon, Conservation & Biodiversity Banking (Earthscan, 2008), 9-8 46 AN ACT REVISITING WATER LAWS IN CLOSED BASINS, HB0831.04, 2007. 47 WesWater Research LLC, “2010 Analysis of Water Banks in the United States.” 48 WesWater Research LLC, “2010 Analysis of Water Banks in the United States.” 49 WesWater Research LLC, “2010 Analysis of Water Banks in the United States.” 50 WesWater Research LLC, “2010 Analysis of Water Banks in the United States.” 51 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 28-29. 52 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 4. 53 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 28-29. 54 Eva Lieberherr. “Acceptability of Market-based Approaches to Water Management: An analysis of the Deschutes Ground Water Mitigation Program.” (Report, Institute for Water and Watersheds, 2008), 12. 55Idaho Department of Water Resources, Adjudication, http://www.idwr.idaho.gov/WaterManagement/AdjudicationBureau/default.htm 56 Idaho Department of Water Resources, Adjudication, http://www.idwr.idaho.gov/WaterManagement/AdjudicationBureau/default.htm 57 Idaho Department of Water Resources, Adjudication, http://www.idwr.idaho.gov/WaterManagement/AdjudicationBureau/default.htm 58 Idaho Department of Water Resources, Adjudication, http://www.idwr.idaho.gov/WaterManagement/AdjudicationBureau/default.htm 59 BA. Contor, et al. “Enhanced Snake Plain Aquifer Model Final Report”, July 2006, available at http://www.if.uidaho.edu/~johnson/FinalReport_ESPAM1_1.pdf 60 Idaho Department of Water Resources Water Districts & Other Water-Related Districts, http://www.idwr.idaho.gov/WaterManagement/WaterRelatedDistricts/wm-district.htm 61 Idaho Department of Water Resources Water Rights http://www.idwr.idaho.gov/WaterManagement/WaterRights/ 62 Idaho Department of Water Resources Water Rights http://www.idwr.idaho.gov/WaterManagement/WaterRights/ 63 Idaho Department of Water Resources Water Rights http://www.idwr.idaho.gov/WaterManagement/WaterRights/ 64 WestWater Research LLC, “2010 Analysis of Water Banks in the United States.” 65 Johnson, Gary, Dr., Donna Cosgrove, and Mark Lovell, “Snake River Basin, Surface Water - Ground Water Interaction,” http://www.if.uidaho.edu/~johnson/ifiwrri/sr3/home.html. 66 Johnson, Gary, Dr., Donna Cosgrove, and Mark Lovell, “Snake River Basin, Surface Water - Ground Water Interaction,” http://www.if.uidaho.edu/~johnson/ifiwrri/sr3/home.html. 67 Johnson, Gary, Dr., Donna Cosgrove, and Mark Lovell, “Snake River Basin, Surface Water - Ground Water Interaction,” http://www.if.uidaho.edu/~johnson/ifiwrri/sr3/home.html. 68 Johnson, Gary, Dr., Donna Cosgrove, “Aquifer Management Zones Based on Simulated Surface-Water Response Functions,” Journal of Water Resources Planning and Management 131 (2005): 89-101. 69 Johnson, Gary, Dr., Donna Cosgrove, and Mark Lovell, “Snake River Basin, Surface Water - Ground Water Interaction,” http://www.if.uidaho.edu/~johnson/ifiwrri/sr3/home.html. 70 BA. Contor, et al. “Enhanced Snake Plain Aquifer Model Final Report”, July 2006, available at http://www.if.uidaho.edu/~johnson/FinalReport_ESPAM1_1.pdf 71 BA. Contor, et al. “Enhanced Snake Plain Aquifer Model Final Report”, July 2006, available at http://www.if.uidaho.edu/~johnson/FinalReport_ESPAM1_1.pdf 72 Johnson, Gary, Dr., Donna Cosgrove, and Mark Lovell, “Snake River Basin, Surface Water - Ground Water Interaction,” http://www.if.uidaho.edu/~johnson/ifiwrri/sr3/home.html. 73 BA. Contor, et al. “Enhanced Snake Plain Aquifer Model Final Report”, July 2006, available at http://www.if.uidaho.edu/~johnson/FinalReport_ESPAM1_1.pdf 74 Allan Wylie (hydrogeologist) in interview with engineer January 2011 75 Idaho Department of Water Resources Water Management, http://www.idwr.idaho.gov/WaterManagement/default.htm 76 Idaho Water Resources Board, Eastern Snake Plain Aquifer: Comprehensive Aquifer Management Plan, January 2009 77 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 20 78 Idaho Water Resource Board History and Responsibility http://www.idwr.idaho.gov/waterboard/ 79 Idaho Department of Water Resources Water Districts & Other Water-Related Districts, http://www.idwr.idaho.gov/WaterManagement/WaterRelatedDistricts/wm-district.htm 80 Lyle Swank (Water Master District 1) in interview with administrator, January 2011 81 Order in the matter of distribution of water to Blue Lakes Trout Farm. May 19, 2005 82 Lyle Swank (Water Master District 1) in interview with administrator, January 2011 83 Lyle Swank (Water Master District 1) in interview with administrator, January 2011 84 Map Available at http://www.idwr.idaho.gov/WaterManagement/WaterRelatedDistricts/PDFs/GWD%20WEB%20Map.pdf

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85 Idaho Department of Water Resources Water Districts & Other Water-Related Districts, http://www.idwr.idaho.gov/WaterManagement/WaterRelatedDistricts/wm-district.htm 86 Idaho Department of Water Resources Water Districts & Other Water-Related Districts, http://www.idwr.idaho.gov/WaterManagement/WaterRelatedDistricts/wm-district.htm 87 Idaho Department of Water Resources Water Districts & Other Water-Related Districts, http://www.idwr.idaho.gov/WaterManagement/WaterRelatedDistricts/wm-district.htm 88 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 89 Final Order Approving Mitigation Credits Regarding SWC Delivery Call. Dated July, 19, 2010 90 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 10 91 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 10 92 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 20 93 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 42 94 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 40 95 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 96 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 40.2 97 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 43 98 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 99 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 43 100 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 101 Idaho Department of Water Resources Legal Actions http://www.idwr.idaho.gov/AboutIDWR/legal.htm 102 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 (11) 103 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 (9) 104 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 (15) 105 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 (17) 106 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 (17) 107 Order in the matter of Distribution of Water to Snake River Farm and Crystal Springs Farm. July 8,2005 108 Order in the matter of Distribution of Water to Snake River Farm and Crystal Springs Farm. July 8,2005 109 Order in the matter of Distribution of Water to Snake River Farm and Crystal Springs Farm. July 8,2005 110 Order in the matter of Distribution of Water to Snake River Farm and Crystal Springs Farm. July 8,2005 111 Amended Order in the matter of Distribution of Water to the Surface Water Coalition. May 2,2005 112 Amended Order in the matter of Distribution of Water to the Surface Water Coalition. May 2,2005 113 Amended Order in the matter of Distribution of Water to the Surface Water Coalition. May 2,2005 114 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 115 The Ground Water Act of 1951( I.C. SS 42-226) 116 IDAPA 27 Title 03 Chapter11. Rules for Conjunctive Management of Surface and Ground Water Resources. Rule 20.03 117 Randall C. Budge, et. al “Ground Water and Surface Water Conjunctive Management Contentions,” The Water Report, no. 64 (2009) 118 American Falls Resevoir Dist. No. 2 vs. Idaho Dept. Of Water Resources. 143 Idaho 862, 154 P.2d 443 (2007) 119 Idaho Department of Water Resources Legal Actions http://www.idwr.idaho.gov/AboutIDWR/legal.htm 120 Idaho Department of Water Resources Legal Actions http://www.idwr.idaho.gov/AboutIDWR/legal.htm 121 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 122 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 123 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 124 Interview with Allan Wylie, Technical Hydrologist at IDWR. January 2010. 125 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 126 NASS website at http://www.agcensus.usda.gov/ 127 Idaho Water Resources Board Eastern Snake Plain Aquifer (ESPA) Comprehensive Aquifer Management Plan, January 2009 128 Idaho Water Resources Board Eastern Snake Plain Aquifer (ESPA) Comprehensive Aquifer Management Plan, January 2009 129 Idaho Department of Water Resources. Water Resources Board http://www.idwr.idaho.gov/waterboard/WaterPlanning/CAMP/ESPA/ 130 Idaho Water Resources Board Eastern Snake Plain Aquifer (ESPA) Comprehensive Aquifer Management Plan, January 2009 131 Idaho Water Resources Board Eastern Snake Plain Aquifer (ESPA) Comprehensive Aquifer Management Plan, January 2009 132 Idaho Water Resources Board Eastern Snake Plain Aquifer (ESPA) Comprehensive Aquifer Management Plan, January 2009 133 Laura Lundquist, “Aquifer Management Plan Dead in the Water,” Magic Valley News, Jan 17, 2011 134 Interview with Craig Evans, Director of Bingham Ground Water District, January 2011 135 Final Order Approving Mitigation Credits Regarding SWC Delivery Call. Dated July, 19, 2010 136 Final Order Approving Mitigation Credits Regarding SWC Delivery Call. Dated July, 19, 2010 137 Final Order Approving Mitigation Credits Regarding SWC Delivery Call. Dated July, 19, 2010 138 Idaho Department of Water Resources Legal Actions http://www.idwr.idaho.gov/AboutIDWR/legal.htm 139 IGWA Memo: Lynn Tominaga To Demand Reduction Subcommittee CAMP. August 3, 2009 140 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 141 Final Order Approving Mitigation Credits Regarding SWC Delivery Call. Dated July, 19, 2010

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142 Idaho Department of Water Resources Legal Actions http://www.idwr.idaho.gov/AboutIDWR/legal.htm 143 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 144 Order in the matter of Distribution of Water to Blue Lakes Trout Farm. May 19, 2005 145 Cindy Yenter (Water Master District 130) in interview with administrator, January 2011 146 Idaho Department of Water Resources Eastern Snake Plain Aquifer Model, http://www.idwr.idaho.gov/WaterInformation/projects/espam/ 147 Groeneveld R. Class Lectures. ESM 245: Cost-Benefit Analysis. Bren School of Environmental Science and Management, University of California, Santa Barbara, CA. Fall 2010. 148 Groeneveld R. Class Lectures. ESM 245: Cost-Benefit Analysis. Bren School of Environmental Science and Management, University of California, Santa Barbara, CA. Fall 2010. 149 Groeneveld R. Class Lectures. ESM 245: Cost-Benefit Analysis. Bren School of Environmental Science and Management, University of California, Santa Barbara, CA. Fall 2010. 150 Young R. Determining the Economic Value of Water: Concepts and Methods. RFF Press. February 9, 2005. 151 M.L. Shelton. “Ground-Water Management in Basalts.” Ground Water 20, no. 4 (1982): 86. 152 Marshall W. Gannett, Kenneth E. Lite Jr., David S. Morgan, Charles A. Collins. “Ground-Water Hydrology of the Upper Deschutes Basin, Oregon.” (Water-Resources Investigations Report, USGS, 2001), 1-2. 153 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 3-4. 154 Sarah Bates. “Blueprint for a Ground Water Mitigation Exchange Pilot Project in Montana.” (Report, Trout Unlimited, 2009), 15. 155 Bruce Aylward, David Newton. “Long-Range Water Resources Management in Central Oregon: Balancing Supply and Demand in the Deschutes Basin.” (Final Report, Deschutes Water Alliance, 2006), 14. 156 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 21. 157 Zack Tillman (Deschutes River Conservancy) in interview with program manager, January 2011 158 “Deschutes Ground Water Mitigation Program.” (Five-Year Program Evaluation Report, State of Oregon Water Resources Department, 2008), 28-29. 159 Eva Lieberherr. “Acceptability of Market-based Approaches to Water Management: An analysis of the Deschutes Ground Water Mitigation Program.” (Report, Institute for Water and Watersheds, 2008), 12.

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