A Free Market Solution To Groundwater Allocation In Georgia

Terry L. Anderson and Pamela S. Snyder

“Georgia coast faces new rules on water use” reads a February 20, 1996 headline from the Atlanta Constitution. The Associated Press article says that South Carolina is threatening to sue Georgia for using too much water from the Floridan Aquifer. In response, Georgia will impose new restrictions on groundwater pumping in 24 coastal counties, especially in the growing Savannah and Brunswick areas.

The restrictions are nothing new to those Georgians who depend on the Floridan Aquifer for their water supply. It is common knowledge that heavy pumping in Savannah has created a cone of depression centered under the city. Saltwater has begun to intrude into the aquifer at Hilton Head Island, South Carolina, Fernandina Beach, Florida, and several coastal counties in Georgia. At Brunswick, brines are being drawn into the aquifer from highly saline geologic units below it. Increased agricultural irrigation in the region is capturing water that would otherwise recharge the aquifer, and increased population along the Georgia coast will contribute to aquifer pressure declines, further worsening the saline intrusion problem.

Overdraft of the aquifer led the state to impose a pumping cap of five million gallons per day in Savannah-Chatham County. Last year, it implemented a policy of refusing to allow any new withdrawals from the aquifer unless they are offset by cutbacks elsewhere. Chatham County also implemented a plan calling for reductions in industrial withdrawals in the Savannah area.

Forcing reductions is a typical response by government when a resource that is held in common by everyone is being depleted. Under Georgia’s reasonable use rule, landowners overlying a groundwater basin may pump from it subject only to “reasonable use” of the water in relation to other pumpers. No one owns quantified property rights to the water. Because Georgia law treats groundwater as a commons, pumpers try to capture as much of the resource as possible for themselves, knowing that if they don’t pump it, someone else will. Overdraft is the natural result, and command and control regulation is government’s traditional answer, since pumpers are not likely to voluntarily reduce their rate of extraction.

But it doesn’t have to be that way. The reasonable use rule is based on a lack of knowledge about groundwater. Like most eastern states, Georgia adopted the rule when groundwater was plentiful and its subterranean movement was beyond the understanding of judges and other decision-makers. Modern hydrology, however, enables us to create accurate models of groundwater aquifers. With this knowledge comes the ability to define property rights in groundwater.

By using time- and place-specific information to establish groundwater rights, and allowing their transfer, efficient use of the aquifer becomes feasible. The race to the pump house created by the rule of capture can become a thing of the past, while users seek the highest and best use of their share of the resource. This paper sets forth a proposal for addressing overdraft in the Upper Floridan Aquifer by privatizing the basin and allowing market forces to enlarge the “pie” through improved efficiency. The first section of the paper briefly discusses the hydrogeology of the aquifer. Section Two outlines the current allocation scheme for groundwater drawn from the aquifer. Section Three sets forth a method for establishing private rights to groundwater, and the final section tailors that proposal to the Floridan Aquifer.

I. A Primer on Hydrogeology of the Floridan Aquifer

For the most part, groundwater does not consist of underground streams and lakes. Rather, groundwater is found in areas where porous materials, such as sand, unconsolidated sediment, or water-bearing rock underlie the surface. Water percolates downward from the earth’s surface until it reaches an impermeable layer. A simple model of an aquifer would be a bowl filled with sand. Water poured onto the sand would percolate downward to the bottom of the bowl, eventually saturating the sand and forming a pool. The top of this pool is known as the water table. If the pool has an impermeable lid on it, it is a confined aquifer. The water table in a confined aquifer is known as the potentiometric surface.

The Floridan aquifer system is composed of the Upper and Lower Floridan aquifers, the former lying on top of the latter with the two separated by a layer of low-permeability rock. The Upper Floridan is confined in much of its area by low-permeability clay. This upper confining unit is overlain by a shallow, unconfined aquifer known as the surficial aquifer. The Upper Floridan aquifer is the preferred water supply simply because depth to the water table ranges from less than 100 feet to 450 below the earth’s surface. The Lower Floridan aquifer is not used as much because it is buried much deeper and contains saltwater in places (Garza and Krause 1992, 22).

In general, the Upper Floridan aquifer is recharged inland, and its water flows eastward toward the coast. Prior to its development, the aquifer discharged its water into creeks and estuaries near Hilton Head Island, South Carolina, as well as in diffuse upward leakage. As of 1992, however, a deep cone of depression in the aquifer under the city of Savannah had reversed the natural hydraulic gradient and pulled the groundwater flow radially from all directions toward the center of the cone. In spite of development of the aquifer in Savannah and other areas of Georgia, South Carolina and Florida, water taken from the aquifer’s storage represents less than two percent of the aquifer’s water budget. The main change in the budget caused by increased pumping consists of changes in the leakage rates through the confining layers at the aquifer’s edges, i.e., saltwater intrusion (Garza and Krause 1992, 23). Pumping from the aquifer has also pulled surface water into the aquifer from streams in the basin (see Guldin 1989, 15).

The amount of water stored in an aquifer, known as groundwater stocks, is important for two reasons. First, stocks determine pumping lift costs — when stocks are plentiful, lift costs are lower because the groundwater is closer to the land surface; when stocks are depleted, pumping costs increase with the distance between the stocks and the surface. Groundwater stocks are also important because they provide a source of insurance against random changes in surface water availability and aquifer recharge. Hence, groundwater stocks can be drawn down or augmented depending on expectations of recharge.

If there is open access to pumping from an aquifer, a race to the pump house, where groundwater is pumped early and fast, results for three reasons. First, this classic “tragedy of the commons¹” occurs because of the rule of capture. In this setting, groundwater not captured now will be used by others. Hence there is little incentive for users to conserve for the future. Second, not only is conserved water unlikely to be available in the future, it will cost more to pump if the water table declines as a result of overdraft. To avoid these higher pumping costs, users again have an incentive to pump now rather than later. Finally, where the aquifer is permeable and lateral movement of water is rapid, pumping at one location can have a direct impact on the water table and water pressure at nearby locations. This happens because pumping creates a cone-shaped depression in the water table around the pump which, in turn, literally sucks water from the surrounding aquifer and can even cause other wells to run dry.

II. Allocation of Groundwater from the Floridan Aquifer

The American reasonable use rule for allocating groundwater was adopted by most eastern states, including Georgia, in the mid-1800s. As stated above, the rule grants overlying landowners co-equal rights to pump groundwater from under their property so long as their use of the water is reasonable in relation to each other. Reasonableness is determined by courts and administrative agencies, and changes with economic and social conditions. As a result, the rule creates uncertainty as to the nature and extent of groundwater rights. This uncertainty is a primary cause of inefficiency in groundwater use, because it essentially renders groundwater a common resource subject to the rule of capture.

Limits on transferability of groundwater rights also discourage efficiency by not allowing water to be allocated to higher valued uses. In reasonable use jurisdictions, groundwater rights generally cannot be transferred to nonriparian land but must be used on overlying lands themselves, and this is the case in Georgia. Groundwater transfers as such are rare, and where they are allowed, they are subject to administrative or judicial review.

In 1972, Georgia implemented a permit system for groundwater users who pump 100,000 gallons or more per day. Unpermitted use constitutes only ten percent of the total in the southeastern portion of the state. Thus, most groundwater use is administratively controlled via permits issued by the Environmental Protection Division of the Georgia Department of Natural Resources. Reasonable use, however, drives the permit system.

Georgia’s Groundwater Use Act of 1972 grants the Environmental Protection Division (EPD) authority to issue regulations governing all aspects of groundwater use in the state, whether permitted or not, and EPD has done so. The regulations set forth EPD’s procedures for granting, denying, conditioning, revoking and modifying permits to withdraw groundwater, and include control measures to protect against salt water encroachment and general adverse effects of groundwater withdrawal. Permits may be subject to well spacing controls, limits on the maximum pumping rate, the pumping level and the amount of groundwater withdrawn. EPD’s controls extend to withdrawal reductions and even curtailment when deemed necessary to protect the water resource.

The 1972 Act also authorizes EPD to develop regional groundwater development and conservation plans for the state’s major aquifers. Recently, EPD has been working on developing such a plan for the Floridan aquifer system. The plan would encompass 24 counties in Georgia’s coastal area, and would discourage any net withdrawal increases, mandate reductions in groundwater pumpage by all industrial groundwater users, encourage additional development of surface water supplies, and promote regional and local water supply planning.

On the local level, Chatham County, largely comprised of the city of Savannah, has begun implementing a Comprehensive Water Supply Management Plan. The plan calls for rate increases on domestic use coupled with public education about conservation, mandatory reductions in industrial use of ten percent by the year 2005, increasing surface water supplies by expanding a local treatment plant, and forcing parks and golf courses to find alternatives to groundwater.

III. Privatizing A Groundwater Basin

Overdraft caused by the tragedy of the commons begs for government intervention in the form of command and control regulation. But privatization offers an alternative means of reducing overdraft by promoting efficiency in groundwater use and removing incentives that cause waste. Convincing all parties to buy into privatization, however, requires demonstrating how market forces can enlarge the pool of available groundwater through improved allocation, and describing the government institutions necessary to facilitate this improvement.

The problem to be addressed by a private groundwater market is that of inducing individuals to pursue an optimal rate of extraction. If a basin were owned by a single individual, he would extract water at a rate that would maximize the basin’s net present value, taking into account the current and future value of groundwater storage and recharge. Though a single owner might take these values into account, multiple pumpers acting independently will only do so if rights to the groundwater stocks and flows are well defined and enforced, and if third-party effects are minimized.

In 1977, Vernon Smith proposed a way of doing this. Smith’s scheme would result in the issuance of a property deed for a share of groundwater from a particular basin to each individual groundwater user i, I = 1, 2 . . . n, for n users in total. Each deed would have two components, one allowing a claim to a percentage of the annual recharge in the basin, and the other to a percentage of the basin’s storage or stock. The property rights would be allocated to individuals in proportion to their pumping rates during a specific base time period (Smith 1977).

To illustrate how these stock and flow rights would work, Smith used the Tucson Basin and 1975 as the base period. Based on that year’s extraction of 224,600 acre feet, each individual’s proportion of stocks and flows, Pi, would be x i / 224,600, where x I is the amount of water used by the individual in 1975. Based on this proportion, Pi, each pumper would receive two rights:

The recharge right would be based on a fraction of a long-run average of the net recharge to the basin that for the Tucson Basin was estimated to be 74.6 thousand acre feet. Therefore, the property right of individual i to the annual recharge would be 74.6 Pi thousand acre feet in perpetuity.
The second property deed would convey a right to a share of the basin’s storage which was approximately 30 million acre feet in 1975. The share of this storage granted to individual i would also be Pi (Smith, 7-10).

The initial allocation of water rights is arbitrary and primarily a question of equity. For example, if policy makers were considering the idea of privatizing a groundwater basin based on average use during the 5 years prior to privatization, a race to the pump house could ensue among pumpers wanting to increase their share of rights. To avoid this race to increase individual rights, water deeds could be based on use over a longer period of time. Or, they could be assigned to landowners in proportion to ownership of land overlying the aquifer.

In order to monitor and enforce property rights, pumps would be metered. Each owner of a right would begin the “water year” with an initial allocation. At the end of the year, an adjustment would be made to the user’s account by subtracting the amount pumped and adding the appropriate share of aggregate recharge². Violations for pumping water in excess of the amount owned would be handled³ with fines or deducted with a penalty from the pumper’s share of subsequent years’ recharge.

In the course of transfers among willing sellers and willing buyers, care must be taken to protect third parties. Limiting transfers to only that amount of water historically consumed would diminish the likelihood of changes in return flow or reduced recharge. Emel (1987) would attach two limits to recharge and storage deeds. The first would place a ceiling on the allowable rate of decline of the basin’s overall water table, and the second would set a maximum, cumulative interference rate among wells. Determination of Emel’s limitations would be made by an administrative agency such as the EPD. Quantification of the limits would provide certainty to groundwater rights by objectively defining the extent of allowable third party impairment, the determination of which is a major hurdle both to efficient groundwater and surface water transfers.

Unitization is an alternative means of achieving efficiency in the face of pumping costs and well interference. Used the by oil and gas industry, unitization provides an opportunity to manage the basin as if it were owned by a single entity. When the owners unitize a reservoir, they agree to develop it as a whole and divide the costs and profits proportionally. This arrangement enables them to obtain the most efficient production from the field by carefully spacing wells and applying a reservoir-specific rate of extraction. By drilling the optimal number of wells in strategic locations over the reservoir, pumping costs and extraction rates can be optimized. Monitoring and enforcement costs are reduced because the resource is recovered from a few, closely controlled wells. Faced with overdraft caused by excessive pumping under the rule of capture, some oil and natural gas producing states have required unitization. As a result of a compulsory unitization statute for oil and gas reservoirs, Louisiana’s oil and gas wells are, on average, one-third more productive than those in Texas, which does not require unitization (Murray and Cross 1992, 1150).

Unitization, coupled with quantified, transferable groundwater rights, could allow for efficient development of groundwater aquifers. While the reduction in the number of wells would require transportation of pumped water to the land on which it is used, this cost would be weighed against the elimination of pumping externalities as well as increased opportunities for users on the periphery of the basin to utilize their rights where reduction of the aquifer’s perimeter would otherwise prohibit it. Moreover, transportation costs might be minimized by use of the existing surface water infrastructure of irrigation districts, ditch companies, municipal facilities and federal water projects.

In the final analysis, assigning private rights should reduce the rate of groundwater extraction simply because the water will have tangible value to individual users, which is not the case under the rule of capture. As producers compare water table declines under a private ownership regime with experiences of uncontrolled pumping, they will observe a new, more conservative behavior. Moreover, because a groundwater market will require definition and enforcement of rights to recharge and storage, and because this definition and enforcement will not eliminate all externalities, there remain many responsibilities for governmental agencies such as the EPD. A private property rights-market regime would place allocation decisions in private hands, generate price information about values in different uses, and encourage mutually beneficial trades. But all of this would depend upon a centralized recording of titles and the protection of third parties. The EPD would have the responsibility for determining levels of existing stocks, recharge rates and consumptive use rates. To guard against pumping and spacial distribution externalities (in the absence of a private unitization agreement), at minimum the EPD would have to provide a hearing process where third parties could challenge market transfers and at maximum would have to determine allowable pumping and interference rates.

IV. A Market Approach for Georgia

Georgia policymakers have a choice in how they deal with overdraft of the Floridan aquifer system. One option is to proceed with command and control regulations specifying how much each user can pump, and allowing little possibility for exchanges among pumpers. The EPD and Chatham County have clearly chosen this option in their proposed groundwater management plans. But the regulatory approach is being abandoned in environmental policy because it does not take advantage of time and place specific information regarding what constitutes the highest and best use of the resource. Oklahoma has passed legislation calling for measurement of groundwater basins and assignment of transferable groundwater rights. Individual groundwater basins in California are asking courts to quantify their groundwater rights and allow their transfer. In at least one basin, adjudication has successfully arrested a severe overdraft problem.

We propose that the State of Georgia follow the lead of other regions by defining property rights to groundwater and facilitating the exchange of those water rights. Not only will a system of well-defined and transferable groundwater rights reduce the regulatory burden of government, it will encourage the efficient use of the Upper Floridan Aquifer as a valuable resource. Government agencies are in the best position to estimate storage, recharge, historic use and consumption, and to set limits on overall water table decline and allowable well interference rates.

Initially, Georgia should work with South Carolina and Florida to establish the amounts of water available to users in each state. Solving the interstate allocation problem will avoid future fights over the aquifer. Once Georgia’s allocation is determined, the state should move toward dividing it among regions. This allocation could be a pro rata share to each region based on aggregate pumping in that region for the period 1980-90. Using a decade of pumping records allows for variations in individual demand and avoids a race to the pump house in an effort to establish exaggerated claims to the aquifer. Where it is apparent that overdraft is a serious problem, a strong case can be made for allotting private rights to recharge only, leaving allocation of storage for later.

With groundwater allocated by region, the state could then encourage each region to submit plans for establishing individual groundwater rights within the region. The reason for encouraging regions to develop their own systems for defining water rights is that cooperation is more likely the smaller and more homogeneous the decision unit. Some regions will be dominated by agricultural users, some by industrial users, and some by municipal users. In each case a different method for defining rights may work better. The key is for the state to require regions to establish individual or small group rights⁴ that are clearly defined and transferable.

Once regional plans for privatization have been approved, the state should record the rights and take on the role of facilitating exchange. The key here is to prevent third-party impairment. Before exchanges are allowed, the state should provide a forum, preferably a hearing process, wherein potentially harmed third-parties can present their cases regarding a proposed transfer. By providing a good hydrological and property rights data base and a hearing process, the state can minimize the likelihood of third-party impairment and reduce transaction costs.

What would privatization mean to a municipal water provider? Initially, the municipality would be involved in the definition of groundwater rights in its subregion of the Upper Floridan Aquifer. This process would rely on historical pumping information, the water table and well interference in the region, the nature and extent of overlying land, and the preferences of the users in equitably defining the rights.

Once the municipality receives its groundwater right, it will seek to optimize its extraction and distribution system in order to maximize the value of the right. Risk considerations will enter into the municipality’s decisions about its rate of extraction, as will the potential to trade a portion of its right. If the municipality is able to increase efficiency to the point of freeing up a portion of its right to sell or lease for valuable consideration, it might approach a broker to find a willing buyer.

If a neighboring paper mill expresses interest in the municipality’s newly conserved water, the parties could enter into a contract for the sale or lease of the water right. Finalization of the transaction would depend on certification by an appropriate entity, either a private regional association or a state agency, that no third parties would be unduly impacted by the change in pumping location. Prior establishment of the allowable rate of regional water table decline and cumulative well interference would make this determination relatively straightforward. Finally, any change of title in the groundwater right would be filed in a credible title depository similar to a county clerk and recorder.

Conclusion

Approaches to groundwater allocation have traditionally begun with central management because policy analysts have assumed that the definition and enforcement of rights are infeasible. But as modern science and technology enable us to track groundwater, reducing groundwater pumping by means of government fiat becomes less acceptable, an archaic and draconian means of dealing with the overdraft problem. As Georgia faces increased scarcity in the Floridan Aquifer system, privatizing the commons offers the best hope for efficiently and equitably allocating this precious resource to its most highly valued uses.

References

Barberis, Julio. 1991. The Development of International Law of Transboundary Groundwater. Natural Resources Journal 31 (Winter): 167-86

Emel, Jacque L. 1987. Groundwater Rights: Definition and Transfer. Natural Resources Journal 27 no. 7 (Summer): 653-73.

Garza, Reggina and Krause, Richard E. 1992. Water-Supply Potential of Major Streams and the Upper Floridan Aquifer in the Vicinity of Savannah, Georgia. U.S. Geological Survey Open File Report 092-629.

Guldin, Richard W. 1989. An Analysis of the Water Situation in the United States: 1989-

2040. USDA Forest Service General Technical Report RM-177.

Hardin, Garrett. 1968. The Tragedy of the Commons. Science 162 (December): 1243-48.

Murray, Paula C., and Cross, Frank B. 1992. The Case for a Texas Compulsory Unitization Statute. Saint Mary’s Law Journal 23: 1099-1154.

Riggs, David W. 1993. Market Incentives for Water Quality: A Case Study of the Tar-

Pamlico River Basin, North Carolina. Clemson, SC: Center for Policy Studies.

Smith, Vernon L. 1977. Water Deeds: A Proposed Solution to the Water Valuation Problem. Arizona Review 26 (January): 7.

Notes

The term “tragedy of the commons” arose from a 1968 Science article by that name authored by Garrett Hardin. It refers to peoples’ incentive to exploit resources that are commonly owned, such as a groundwater basin in which withdrawals are subject to a vague standard of reasonableness rather than based upon clearly defined property rights. The example given in Hardin’s article is one of a pasture open to all. Each herdsman will try to keep as many cattle as possible on the commons, because as a rational being he seeks to maximize his personal gain. In so doing he asks himself, “what is the utility to me of adding one more animal to my herd?” The answer is that the herdsman will enjoy all of the proceeds from the sale of that additional animal while the effect of overgrazing the commons is shared by all. As a result, each and every rational herdsman concludes that the only sensible course is to add another animal to his herd. And another . . . and therein is the tragedy. The commons is overexploited because individuals benefit while the resource as a whole suffers (Hardin 1968). (Back)
Because recharge is random, a running 5-year average could be used and updated annually. If return flows from irrigation were of consequence, they could be figured into the responsible individual’s stock or recharge account. In either case, return flows should be tracked and attributed to individual users to maintain an incentive to reduce consumptive use of each share of the groundwater asset. (Back)
This type of accounting system has been in place since 1978 in the Genevois Basin, which underlies the border area between France and Switzerland. A treaty signed by the Canton of Geneva and the Prefecture of Haute-Savoie created a commission to supervise groundwater use. The commission keeps a complete inventory of public and private pumping installations in the two countries. Each installation has a metering device indicating the volume of water taken by each user. . . . France’s contribution to defraying the recharge costs is assessed by reference to the amount of water taken by French users together with the contribution to the natural recharge of the aquifer made by French territory. . . .The commission has at its disposal a system of control which allows it to know with certainty the intensity of use of the aquifer and thus plan withdrawals rationally with the needs of users in mind (Barberis 1991, 185 emphasis added). (Back)
For an example of how a group of point source polluters organized and implemented a system of tradable pollution rights, with the approval of the U.S. EPA and the North Carolina Department of Environmental Quality, see Riggs (1993). (Back)

Terry L. Anderson is Executive Director and Pamela S. Snyder is a research associate with PERC, a research center located in Bozeman, Montana that provides market solutions to environmental problems. The Georgia Public Policy Foundation is an independent, non-partisan organization dedicated to keeping all Georgians informed about their government and to providing practical ideas on key public policy issues. The Foundation believes in and actively supports private enterprise, limited government and personal responsibility.

Nothing written here is to be construed as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature. Georgia Public Policy Foundation (May 6, 1996) Permission is hereby given to reprint this article, with appropriate credit given.

By Terry L. Anderson and Pamela S. Snyder

I. A Primer on Hydrogeology of the Floridan Aquifer

II. Allocation of Groundwater from the Floridan Aquifer

III. Privatizing A Groundwater Basin

The recharge right would be based on a fraction of a long-run average of the net recharge to the basin that for the Tucson Basin was estimated to be 74.6 thousand acre feet. Therefore, the property right of individual i to the annual recharge would be 74.6 Pi thousand acre feet in perpetuity.
The second property deed would convey a right to a share of the basin’s storage which was approximately 30 million acre feet in 1975. The share of this storage granted to individual i would also be Pi (Smith, 7-10).