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5 Legal, Economic, and Other Institutional Considerations Is managed underground storage of recoverable water (MUS) being utilized in circumstances where it is appropriate, given costs and environmental con- cerns, or do institutional barriers impede its use? How are regulatory agencies, courts, and other institutions involved with the development and oversight of MUS facilities? Does this involvement support the safe, efficient, and cost- effective use of MUS technologies, with maximum benefits and minimum costs, balancing the interests of the project proponents, society, and the environment? These questions are critical ones, because MUS has been studied for dec- ades in the water resource management literature and has been successfully im- plemented by multiple jurisdictions. Although the previous chapters have de- scribed the physical challenges associated with MUS, those challenges are not the only impediments to its more widespread implementation. An equal or greater challenge, and the topic of this chapter, is the array of institutional issues associated with MUS. MUS technologies have been applied in a wide range of physical systems (e.g., different aquifer types, different hydrogeological and geochemical condi- tions, and different depths) and for a wide range of purposes (municipal water supply, agricultural and industrial water supply, and even supplies for aquatic habitat) and operational goals (peak and seasonal demands, drought and other emergency supply). As the applications and understanding of MUS to meet different water management goals and water supply needs increase, and the abil- ity to meet technical challenges associated with these technologies improves, MUS is increasingly being considered and applied throughout the United States. The decision to utilize MUS will reflect both technical and institutional considerations. As the technical challenges associated with MUS become more tractable, the institutional issues associated with its implementation rise to equal or even greater prominence. “Institutional issues” refer to topics associated with governance, informed decision making, legal rights and liabilities, economic trade-offs under uncertainty, and so on. As others have recognized, institutions are key elements of water resource management (Blomquist et al., 2004; Ingram et al., 1984; Livingston, 1993; Lord, 1984). At the outset, it should be noted that MUS is likely to be utilized only when it is less costly than alternative means of meeting water demand. As discussed in this chapter, although economic studies have been performed on various as- pects of MUS (e.g., the economics of groundwater use or of artificial recharge), little has been published in terms of formal studies of the economics of MUS versus other forms of water storage and water management. Consequently, ref- erences to MUS as “costly” or “inexpensive” are usually generalities. Whether 181

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182 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER MUS is economically feasible depends on the circumstances of particular loca- tions—not only the technical requirements of a particular MUS project, but the alternatives that are available for water supply and storage and the financial re- sources that can be marshaled. Municipal and industrial suppliers in water-short regions, for example, are able to pay almost any price to meet water demands that are increasing in the face of growing populations or to respond to the mining of groundwater aqui- fers, increasing regulatory constraints on surface water storage, and regional water competition. Furthermore, communities in almost any location have al- ternative means of addressing these water demands, such as conservation meas- ures, pricing practices, or transfers of water from other uses (e.g., retiring of agricultural water rights is occurring across the western United States). Institutional arrangements also determine whether MUS comes within the set of feasible policy options. Institutional constraints affect whether recovered water can be stored underground, that is, whether a legal regime exists that would prohibit or permit this activity. The coordinated actions necessary for implementation of an MUS program are unlikely to occur if rules and organiza- tional arrangements (1) impede or prohibit coordination of actions necessary to divert, impound, treat, recharge, store, protect, and extract water; (2) do not pro- tect those who invest in facilities or who store water now for later recovery; or (3) do not provide or recognize workable and fair methods for distributing the costs of an MUS program among those who benefit from it (Blomquist et al., 2004). Those who would invest in MUS projects need to capture and internalize benefits from their investments. Those who incur costs by participating in an MUS program (e.g., accepting recovered water supplies in lieu of other supply sources to which they also have access) must be able to capture some of the benefits they have provided for others. The assurance of the protection of public health and the environment is also critical in MUS development and operation. Other major institutional considerations in MUS involve the nature of the organizations (public or private) and the allocation of their authority and respon- sibility to capture, convey, manage, store, or sell water; to monitor water re- source conditions and respond to perceived problems; to communicate with the public and other policy makers; and to protect public interests. Like any ap- proach to water management, MUS emerges through the interaction of multiple organizations with diverse interests and responsibilities. The practices of those organizations and the relationships between them shape the implementation and performance of MUS. This chapter provides an overview of the regulatory in- volvement in the development and oversight of these technologies; a discussion of other issues facing institutions in their approach to MUS; and an evaluation of the economic aspects of MUS.

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 183 LAW, REGULATIONS, AND THE MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER At each step in the development and implementation of a water storage and delivery project there are institutional issues to address. One of the reasons for the complexity of the development of MUS systems is that the action of taking water, placing it in storage through a well or recharge basin, storing it under- ground in an aquifer, and removing it from the aquifer (typically through a well) for later use—particularly if that use is for drinking water—involves a range of regulatory programs at the federal, state, and sometimes, local levels. MUS projects are among the most complex to implement, unless a state has addressed these issues in a statutory scheme that was created specifically for the regulation of these projects. Box 5-1 delineates the aspects of MUS activities that may be subject to regulatory oversight. Recharge and recovery projects involve an array of legal issues. Depending on a state’s laws and regulations, MUS projects will be easier or more difficult to develop and implement. States’ legal regimes governing water are infamous for separating water allocation or rights issues from those of water quality. The fundamental concerns of water quantity and water quality laws are usually quite distinct, as are the agencies that administer these laws. Statutory schemes that are specifically directed at MUS projects contain a welcome recognition that these different aspects of water are interrelated and appropriately considered in tandem. While some states have comprehensive regulatory schemes, others have schemes developed for different types of quality concerns or very minimal sys- tems. Any discussion of water quality protection is further complicated because both the federal and the state governments play roles in regulation. Laws allo- cating water quantities among uses and users are discussed in the following sub- section, followed by a discussion of water quality concerns.1 MUS and the Regulation of Water Use Well-understood and characterized rights of water use are essential for MUS projects to be considered feasible options for water management. Most states' water rights systems were developed long before groundwater storage was contemplated. Additionally, competing rights holders will be vigilant to prevent infringement of their rights and will be involved in any proposals that are perceived to affect their water. 1 A very useful review of laws and regulations concerning the aquifer storage and recovery method of MUS was provided by Seerley (2003).

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184 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER BOX 5-1 Aspects of MUS Activities That May Be Overseen by a Regulatory Agency, Depend- ing on laws or regulations applicable at the site Water Quantity-Related Activities • The right or permission to store water within an aquifer, the volume of water that can be stored, and the protection of the stored water from recovery by others) • The timing and rate at which stored water can be recharged to the aquifer to pre- vent impacts to subsurface structures from mounding of water levels or stream accretions resulting from recharge • The right or permission to withdraw the water from storage (this can be particu- larly important in regions where groundwater management or groundwater re- covery activities are restricted due to water quantity-related concerns such as fal- ling groundwater levels, land subsidence, or saltwater intrusion) • The timing and rate at which stored water can be recovered to prevent water quantity-related aquifer management concerns, such as well interference or other impacts of neighboring well users, and stream depletions or other surface water impacts for tributary aquifers • The type of use to which the recovered water can be put Water Quality-Related Activities • Protection of the quality of the native water in the aquifer from impacts by or deg- radation from interactions with the water to be recharged; if recharge is by well injection, this is typically regulated under the federal Underground Injection Con- trol program • Protection of the quality of the water being stored from impacts by or degradation from interactions with the surrounding native water in the storage aquifer, particu- larly if the intended post-recovery use of the stored water is for potable purposes • Protection of the aquifer matrix from physical impacts resulting from chemical in- teractions between the stored and native waters, such as precipitation of metals and resultant clogging of aquifer pore spaces (this can also be viewed as a water quantity-related issue, and regulated by a water resources agency because these impacts can reduce aquifer productivity for other well users) • The construction and maintenance of wells, including well casing and wellhead, to prevent movement of water between aquifers and water and to prevent con- taminants from entering the aquifer unintentionally • The construction and maintenance of surface recharge facilities Land Use • Ownership of and/or access to land for surface recharge • Ownership of and/or access to land for well installation, operation. and mainte- nance, for directionally drilled recharge or dual-purpose recharge and recovery wells, this may also include ownership of land over the entire length of the well • Ownership of and/or access to and permission to use the storage aquifer; In addition, special laws or regulatory programs may address the water quantity and/or water quality aspects of activities involving recycled wastewater, stormwater, desalinized water, or other forms of water reuse.

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 185 Surface Water and Groundwater Rights One set of water rights issues arises out of the presence of dual or multiple water rights systems, which separate the management of surface and groundwa- ter. Separate rules governing surface water and groundwater are common throughout the United States, although the rules in use differ noticeably between the eastern and western states. In the United States, most states east of the Mississippi River pro- vide riparian rights for the use of surface water; that is, they link the use of water to the ownership of land adjacent to that body of water. Another set of rules governs groundwater use rights—by virtue of their land ownership, overlying owners have correlative rights to withdraw water from beneath the land for beneficial uses on the land. Water shortages (relatively rare in the East through most of the nineteenth and twentieth centuries) occasionally caused one land- owner's water use to encroach upon the needs or customary use of another, and these were generally approached through common law remedies. During the latter half of the twentieth century and into the early twenty-first century, eastern states have modified their water rights regimes by requiring state-issued permits limiting water withdrawals to a maximum quantity or rate (e.g., gallons per minute or per day). Furthermore, all eastern states overlying the aquifers of the Coastal Plain—from New Jersey south to Florida—have enacted special regula- tory programs for use in designated locations (which may be called “Capacity Use Areas,” “Critical Areas,” or “Groundwater Management Areas”) where groundwater resources have been overdrafted or where negative impacts such as well interference, seawater intrusion, or land subsidence have necessitated a more active regulatory and regional approach. The legal context for MUS pro- jects in the eastern states is thus comprised of the overlaying of permit systems and critical area designations on the existing riparian rights rules for surface water and correlative rights rules for groundwater. This is of special significance because most MUS projects that have been planned or undertaken along the eastern seaboard of the United States are in the Coastal Plain, where these state-by-state regulatory programs apply. Some of these regulatory regimes include strict limitations on groundwater use in state- designated critical areas and may require consideration of drawdown impacts of one pumper on others within the same area. Often, these regulatory programs restrict withdrawals from designated aquifers, but allow the use of MUS to pro- vide “credits” that project proponents can draw against. Most western states in the United States developed rights to the use of sur- face waters by means of the prior appropriation doctrine. The prior appropria- tion doctrine allocates water on the basis of seniority, or “first in time, first in right,” rather than on the basis of land ownership Through agency-issued per- mits or a process of adjudication, individuals are granted rights to divert from the stream channel and use up to a specific amount of water, usually on an an- nual basis. When shortages occur, those who hold the most senior rights have those rights satisfied first, while those who hold junior rights may not receive

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186 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER any water. States were slower to develop statutory schemes to address the exploitation of groundwater, because it was only with the widespread utilization of pumping that conflicts began to arise. Some states regulated groundwater through the prior appropriation doctrine, requiring permits for withdrawal and protecting other users from excessive withdrawals. Other states permitted landowners unlimited access to the resource. States have also regulated groundwater on a regional scale, through critical area designations or similar means, with more stringent controls in some regions than others. As groundwater is better under- stood and the competition for water increases, there is increasing regulation by states. MUS projects typically involve the movement of surface water into groundwater and thus there is a need to reconcile legal systems that typically do not integrate these differing concerns. In states where rights for use of surface water differ from rights for use of groundwater, some adjustment of water rights rules may be necessary for the holder of a surface water right to be able to le- gally store some of that water underground and pump it out later. By the same token, the rights of a groundwater user to put water into an aquifer, as well as take it out later, may require modification of governing rules. For instance, if an individual or organization already possessing rights to the use of groundwater also participates in an MUS project, the project propo- nent will have to establish how the stored water relates to the rights holder’s other groundwater extractions—that is whether stored water is counted as the “first” water extracted (after which the rights holder can continue to extract whatever other amount of groundwater it has a right to use) or as the “last” wa- ter extracted (in which case a rights holder does not tap its stored water in a given time period unless and until it has already extracted whatever other groundwater it had a right to use) (Shrier, 2004). The implications of the differ- ence are considerable. The former option provides little incentive for the holder of an existing groundwater right to engage in long-term water storage since the stored-water “account” is exhausted first. The latter option provides a consider- able incentive to store water for the long term, but may not account for the bene- fits to other aquifer users that accrue when a rights holder places water into the aquifer and leaves it there for a long period (discussed later in this chapter). Storage and Recovery of Project Water Another set of legal concerns is raised because many MUS projects involve the storage of water imported from another location or produced through purifi- cation processes (e.g., reclaimed wastewater, desalinated ocean or brackish wa- ter). In most states this “project water” is produced and delivered by public or private project operators and does not fall clearly within the riparian, appropriat- ive, or other rights systems that apply to surface water diversions or groundwa- ter extractions. Contracts between project operators and the recipients of the

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 187 project water express rights in the water. These contracts come in such variety that it is difficult to characterize a typical arrangement. Legal Status of Aquifer Storage Space A third major legal issue is unique to underground storage projects and presents novel questions. While ownership of groundwater rights has been developed in western states, there is no readily available reference for ownership or control of aquifer storage rights. Thus, in the absence of a statutory provision, it is often unclear whether aquifer space is owned or controlled by overlying property owners, by owners of water use rights in the aquifer, or by no one at all. In some states, this issue has been addressed by statutory and regulatory schemes providing for MUS, or by court decisions resolving other issues.2 In 1995, the State of Oregon adopted a statute authorizing the state’s Water Re- sources Commission to issue permits for aquifer injection and storage projects, and providing for the state’s departments of Environmental Quality and Human Services to offer comments during the permit review process.3 The statute im- poses water quality standards on the stored water and acknowledges that the water will be retrieved sometime in the future. The Oregon statute does not re- quire that aquifer storage and recovery projects have discharge permits,4 and declares that water stored in ASR projects will not be considered a waste, con- taminant, or pollutant.5 Idaho established through legislative action that the storage of water is a beneficial use, and that permits can be issued for the capture and storage of un- appropriated water, in effect creating a secondary water right.6 Idaho’s approach recognizes that such projects may simply recharge groundwater supplies, whereas Oregon’s approach mandates that water would be retrieved from the aquifer.7 In 2005 the Kansas Division of Water Resources promulgated regulations to establish a permitting process for ASR projects.8 Project applicants must seek and obtain two types of appropriation permits. The first permit is for appropriat- ing the surface water that will be stored underground. The second permit is for 2 California, for example, does not have a statewide approach to groundwater storage, but rights to store water underground and recover it later have been established through adju- dications of pumping rights in several groundwater basins (Bachman et al. 1997; Blomquist, 1992; Blomquist et., 2004; Littleworth and Garner ). 3 Or. Rev. Stat. § 537.534 (2003). 4 Or. Rev. Stat. § 537.532(b) (2003). 5 Or. Rev. Stat. § 537.532(a) (2003). 6 Idaho Code Ann. § 42-234(2) (2006). 7 Idaho Code Ann. § 42-234(1) (2006). 8 Kan. Admin. Regs. § § 5-12-1 et seq.

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188 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER appropriating the stored groundwater—extracting it for use. The Kansas Divi- sion of Water Resources was prompted to enact these new regulations by a demonstration project in the Equus Beds groundwater area of the Little Arkan- sas River in south-central Kansas. Wichita and the Equus Beds Groundwater Management District No. 2 are undertaking the ASR project, with the city as the designated lead local agency (Peck and Rolfs, 2005). Arizona has enacted a comprehensive statute addressing the storage of wa- ter. Arizona Revised Statutes § § 45-801.01 et seq. has a twofold purpose: 1. Protect the general economy and welfare of this state by encouraging the use of renewable water supplies, particularly the state's entitlement to Colorado River water, instead of groundwater through a flexible and effective regulatory program for the underground storage, savings and replenishment of water. 2. Allow for the efficient and cost-effective management of water supplies by allowing the use of storage facilities for filtration and distribution of surface water instead of constructing surface water treatment plants and pipeline distribution systems.9 The storage facilities cannot impair vested water rights, and the applicant for a water storage permit must have a right to the proposed source of water.10 Unlike Oregon, Idaho, and Arizona, California does not have a comprehen- sive act for the underground storage of water. This is in part due to California’s common law treatment of water rights in which a property owner has the right to the surface and everything above or below it. Therefore, storage could be detri- mental to an overlying property owner’s right.11 However, California does rec- ognize the underground storage of water as beneficial use, as depicted in Cali- fornia Water Code, Section 1242: The storing of water underground, including the diversion of streams and the flowing of water on lands necessary to the accomplishment of such storage, constitutes a beneficial use of water if the water so stored is thereafter applied to 12 the beneficial purposes for which the appropriation for storage was made. Texas also uses a common law approach, molded after the Rule of Capture and its treatment of oil and natural gas.13 However, the Texas Water Code con- tains a preliminary regulatory scheme that proposes the investigation of aquifer storage through the issuance of temporary permits for pilot projects: “(a) The commission shall investigate the feasibility of storing appropriated water in 9 Ariz. Rev. Stat. § 45-801.01 (2005). 10 Ariz. Rev. Stat. § 45-803-01(A) (2005); Ariz. Rev. Stat. § 45-831-01(B) (2005). 11 Kiel and Thomas,2003. 12 Cal. Water Code § 1242 (2006). 13 Drummond et al., 2004.

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 189 various types of aquifers around the state by encouraging the issuance of tempo- rary or term permits for demonstration projects for the storage of appropriated water for subsequent retrieval and beneficial use.”14 As these examples and the discussion in the preceding subsections indicate, MUS projects are likely to be governed and affected by a combination of laws in each state, since MUS can involve the use of surface water or other project wa- ters for recharge, the extraction and use of groundwater upon recovery, and the storage of water in the aquifer. A particular project can therefore require per- mits or other regulatory approval from multiple state agencies enforcing differ- ent provisions of state law (not to mention federal approval for injection pro- jects, discussed in greater detail later in this chapter). It may not be necessary to rewrite state water codes in order to facilitate underground water storage, but state policy makers considering the promotion of underground storage are well advised to review current state regulatory requirements and processes in order to assess the extent to which they inhibit the planning, economic feasibility, and practical execution of MUS projects. Several states (Arizona, Colorado, Kansas, Nevada, New Mexico, Oregon, Utah, and Washington) have already modified statutes or regulations to provide for alternative permitting processes for MUS projects or to clarify the water rights aspects of underground storage and recov- ery of water (Shrier, 2004). Additional Considerations Thus, a variety of water rights issues may be triggered by an MUS proposal, with important implications for the prospects of implementing such a plan. When water rights are unquantified or otherwise incompletely specified, or aqui- fer storage rights are unclear, users are less likely to undertake investments in storing water or to exercise restraint in leaving stored water underground. In addition, when water rights are unclear or when differing and contestable claims arise in relation to the same water resource, users bear the additional costs of resolving conflicts and negotiating and/or enforcing solutions about who may do what in relation to which aspects of the resource. Rights to manage stored water, to exclude others from capturing it, or to transfer stored water to others help assure participants that they will maintain control of the water supplies they commit to an MUS project and, thus, be able to recover benefits from the pro- ject. Here too, however, the details of these legal arrangements matter. For ex- ample, in an appropriative rights system, the priority date of stored water may be later than (or “junior” to) that of other water rights holders in the aquifer. If jun- ior users’ rights are subordinated during periods of shortage, such an arrange- ment would provide no incentive to store water for water-short years. 14 Tex. Water Code Ann. § 11.153 (2005).

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190 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER Rules governing water use can have yet another effect on MUS projects. An important advantage of MUS is flexibility in the use of water. Traditional approaches to the allocation of water rights may undermine the flexibility of an MUS project, which treats as interchangeable water derived from alternative sources and withdrawn at times that cannot be specified in advance. The latter point is critically important: even in states where water use rights are quantified and limited, they may be fixed by time period (e.g., a right to use x amount of water per year). The recovery aspect of an MUS project cannot always be so readily fixed—stored water might be drawn on every year at a predictable rate (more likely in the event of an MUS project that is intended to augment supplies using purified wastewater) or might be drawn on only occasionally in response to drought or other interruptions of usual water supply. In the latter type of case, how much groundwater will be extracted and when are necessarily uncertain. Thus, in the same aquifer, some entities may have quantified annual rights of withdrawal while others possess a recognized yet unspecifiable right of with- drawal. The emergence and development of MUS in the United States depends therefore not only on whether states define rights that are secure enough to in- duce individuals to invest in MUS, but also on the ability of institutions to pro- vide some flexibility in using water from different sources and at uneven and not entirely predictable times. Regulation of Public Health and Environmental Concerns MUS systems involve public health and environmental concerns on two levels: impacts to the water being stored and impacts to the water in the storage aquifer. If water is being stored for recovery for potable uses, upon recovery the water will be regulated under various federal or state drinking water protection programs. Notably, there may be little difference between the regulatory ap- proaches to water recovered from underground storage and water recovered from aboveground storage. A greater regulatory emphasis has been placed on the second category of concerns: the impact of the stored water on the aquifer. This is the case if the aquifer being used for storage is defined as a current or future underground source of drinking water (USDW)—generally, groundwater with a total dis- solved solids (TDS) content of less than 10,000 mg/L—and if the water is being stored in the aquifer by means of injection.15 Injection systems are regulated under the federal Safe Drinking Water Act’s (SDWA’s) Underground Injection Control (UIC) Program or similar state programs. 15 There is no federal regulation of aquifer recharge using surface infiltration, although state regulations and/or federal source water protection regulations may apply.

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 191 Federal and State Underground Injection Control Regulations Federal regulation of MUS projects covers those projects that fall under the UIC program. In accordance with the mandate of the Safe Drinking Water Act (SDWA), UIC regulations provide that “no injection shall be authorized by per- mit or rule if it results in the movement of fluid containing any contaminant into Underground Sources of Drinking Water, if the presence of that contaminant may cause a violation of any primary drinking water regulation under 40 CFR part 141 or may adversely affect the health of persons.”16 The U.S. Environmental Protection Agency’s (EPA’s) UIC regulations classify injection wells into five categories. Injection wells that are used for MUS systems are classified as “Class V” wells because they do not fit into Classes I-IV. Examples of Class V wells cited in a 1999 EPA study included agricultural drainage wells, stormwater drainage wells, large-capacity septic systems, sewage treatment effluent wells, aquifer remediation wells, car wash and laundromat effluent wells, saltwater intrusion barrier wells, aquifer recharge and ASR wells, subsidence control wells, and industrial wells (USEPA, 1999). Thus, although most UIC-regulated wells are intended for waste disposal,17 UIC regulations also apply to wells that are used to replenish water in an aquifer (in- cluding ASR wells). The UIC program was developed to prevent endangerment of drinking wa- ter supplies, as explained in Section 1421 (d)(2) of the Safe Drinking Water Act: “Underground injection endangers drinking water sources if such injection may result in the presence in underground water which supplies or can reasonably be expected to supply any public water system of any contaminant, and if the pres- ence of such contaminant may result in such system's not complying with any national primary drinking water regulation or may otherwise adversely affect the health of persons.” The implementing regulations put the burden of proof on the applicant to demonstrate compliance: 40 CFR 144.12(a): No owner or operator shall construct, operate, maintain, con- vert, plug, abandon, or conduct any other injection activity in a manner that al- lows the movement of fluid containing any contaminant into underground sources of drinking water, if the presence of that contaminant may cause a violation of any primary drinking water regulation under 40 CFR part 142 or may otherwise 16 Aquifers that are not underground sources of drinking water are not exempted aquifers. They simply are not subject to the special protection afforded USDWs. 17 Waste disposal appears to have been the principal regulatory concern of the federal UIC program. In its explanation of the purpose for the UIC program, the EPA web site states that “when wells are properly sited, constructed, and operated, underground injection is an effective and environmentally safe method to dispose of wastes” (http://www.epa.gov/ safewater/uic/whatis.html; accessed March 30, 2007). Furthermore, the agencies that administer UIC regulations typically regulate many times more wells intended for waste disposal than MUS wells.

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212 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER attract the funds needed for completion and the transition to full operating status. The next section focuses on the economics of groundwater management. The financing of groundwater management and managed underground storage is discussed fully in Chapter 6. That discussion identifies the critical variables af- fecting financial feasibility and generally characterizes the importance of finan- cial drivers in determining the feasibility of specific managed underground stor- age projects The Economics of Multiple Objectives There are several possible objectives for any project or process of artificial groundwater recharge. First, such recharge is frequently done for the purpose of augmenting the quantity of water in storage. This objective has become increas- ingly attractive as the opportunities for surface water storage have diminished and the environmental and other costs of surface water storage projects have risen. Second, artificial recharge may also be undertaken in an effort to stabilize groundwater levels. Thus, for example, where water tables decline continuously because an aquifer is overdrafted, artificial recharge is one means of augmenting total recharge and either bringing extractions into balance with recharge or nar- rowing the difference between the two. Third, artificial recharge may be used to mitigate or avert some of the costs of persistent overdraft (e.g., land subsidence, seawater intrusion). Fourth, artificial recharge can be used to control the migra- tion of contaminant plumes, thereby protecting the quality of the groundwater. These objectives tend to be interrelated: that is, measures focused on the achievement of one of the objectives often result in the achievement of one or more of the others. This does not mean that all effects of artificial recharge are beneficial. For example, artificial recharge for the purpose of augmenting storage could lead to flooding of basements and other subterranean structures in very wet years or raise water tables to a level where contaminants are mobilized from soil layers near the land surface. In planning for artificial recharge it is important to ac- knowledge explicitly the possibilities for achieving multiple objectives, as well as to account for potential adverse impacts. Ideally, an artificial recharge pro- gram should be planned so that total net benefits, those related to all objectives, are maximized.30 30 There is a substantial literature on the methods of multiobjective planning (e.g., Loucks and van Beek, 2005). It is customary to employ methods that either optimize the mix of emphases on the different objectives or entail achieving a set of targets. Target planning entails the identification of plans that best meet a predetermined mix of objectives or tar- gets. Optimization planning also requires prior knowledge of the decision maker or policy maker’s preferences but requires that these preferences be expressed in terms of objec- tives rather than targets. The goal of optimization planning is to identify the optimal mix of objectives that can be achieved subject to a set of financial and other feasibility constraints.

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 213 As a general rule, MUS will require explicit identification and consideration of all objectives and costs, both actual and potential. Underground storage pro- jects are more likely to be sustainable if they are conceived and operated in fash- ion in which future circumstances have been foreseen and flexibility is main- tained to permit adaptation to circumstances that cannot be foreseen. The quality of water in a given aquifer may not be threatened currently by the proximity of a contaminant plume, for example, but such an eventuality could arise in the fu- ture and the costs of addressing it may be significantly reduced if the recharge system is adaptable and flexible. It is also true that the presence of multiple ob- jectives may make an underground storage project more economically attractive than if there were only a single objective. The conclusion is that for economic reasons and to promote sustainability, underground storage plans should account for all objectives and their costs and benefits. Spillovers and Unmarketed Benefits In modern, highly complex market systems with millions of interrelated ac- tions, market imperfections are common. Such imperfections may introduce significant distortions into observed economic behavior and need to be ac- counted for in designing water supply or water delivery projects, in the eco- nomic analysis of the costs and benefits, and in financing. Two common market imperfections are spillovers—often called “externalities”—and the presence of unmarketed or misvalued benefits. These imperfections are likely to be present with some frequency in MUS projects. Spillovers or externalities are said to occur when an economic transaction results in impacts on a person or persons who are not party to the transaction. There are both negative externalities, which inflict costs on those not party to the transaction, and positive externalities, which confer benefits. The general con- clusions about externalities are quite straightforward. Where external costs are present, the good or service tends to be overproduced or overconsumed relative to what would be economically optimal (e.g., extraction of groundwater by one producer lowers the water table for all others). Where external benefits are pre- sent, the good or service tends to be underproduced relative to what would be economically optimal because of the inability of the private investor to capture all of the returns from the investment (e.g., one producer recharging an aquifer when stored water can be extracted by anyone). Usually, therefore, restraint of pumping or provision of recharge will have to be produced through a public In the case of target planning the goal is to attain the target values without reference to constraints. Optimization planning acknowledges the existence of constraints of all sorts. In general, formal mathematical methods of multiobjective planning require that objectives and constraints be quantified.

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214 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER entity or an institution such as a user cooperative that has the authority to regu- late users’ behavior and/or to tax or otherwise secure payment for the recharge service from all those who benefit. The general remedies for externalities include taxes (and subsidies) and regulations. In general, taxes are the most straightforward and are set at the mar- ginal value (cost) of the external cost. When the tax is added to the unadjusted price, the externality is appropriately reflected in the price and economically efficient levels of production and consumption occur, other things being equal. In some circumstances, appropriate subsidies can accomplish the same thing, encouraging or compensating one who produces a beneficial externality. Regulations can be used to accomplish the same outcomes, but in general they are harder to design, may entail significant enforcement costs if they are to be effective, and are difficult to fashion so that they both are effective and ac- commodate differences in the circumstances of different producers and consum- ers. In principle, regulations are thought to be superior to pricing incentives only in circumstances where it is not possible to measure the magnitude of the spill- over or externality or where the magnitude is so large that catastrophic impacts are a possibility (Baumol and Oates, 1979). In practice, however, regulations are employed more frequently than taxes or price incentives. When markets function reasonably well and imperfections are absent or mi- nor, prices provide an accurate guide to the value of goods and services that are traded in those markets. For goods and services that are not traded in markets, prices are absent and the value of such goods and services is not immediately obvious. Water itself is rarely priced in markets. The prices paid by most water users reflect the costs of capturing, storing, and conveying the water and of treatment in the case of domestic supplies. In other words, since water is not often traded in markets, it tends to be assigned a scarcity value of zero and is treated as if it were a free good. This signals consumers that water is much more freely available than it is in fact. Consumers do not face prices that reflect the true scarcity value of water. This means that water is used in quantities that ex- ceed the economically efficient quantity. Other relevant nonmarketed products include environmental services and environmental amenities. Glennon (2002) documents in detail the connection between groundwater and environmental amenities and services, showing that groundwater depletion has significant adverse impacts on the values of these amenities and services. Glennon also notes that the unmarketed nature of envi- ronmental amenities and services means that there is a tendency to undervalue them or ignore them altogether. Inasmuch as artificial recharge and augmenta- tion of storage may have positive impacts on environmental amenities and ser- vices, it is important to recognize the need to value these and other benefits that may not be traded in markets. The fact that water itself rarely has a market-determined scarcity value means that comprehensive economic valuation of artificial recharge schemes will require the use of alternative valuation methods. Acceptable valuation methodologies exist and are used to value an entire range of unmarketed goods

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 215 and services (NRC, 1997, 2005). These methods include inferential techniques in which the value of a good or service can be inferred indirectly from the be- havior of consumers and survey techniques that query consumers about their valuation of certain nonmarketed amenities. Economic analyses of MUS pro- posals will frequently require the use of such methods to value benefits and costs. Comparative Values and Costs The costs and values of MUS are necessarily relative. The cost competi- tiveness of a given project cannot be determined in any absolute sense. The problem is compounded by the fact that storage capacity is rarely priced accord- ing to its scarcity value. The financial realities of water project construction and operation mean that storage tends to be allocated through long- term contracts that are executed at the outset and rarely renegotiated when they expire (Bain et al., 1966). This financial practice ensures that the project costs or a portion of them are repaid over the life of the project. While there is financial justification for such practices, they have the effect of shielding storage capacity from the economic forces of competition. This means that storage is underpriced or not priced at all and that the financial costs of storage projects understate the eco- nomic costs by a least the scarcity value of the storage. Scarcity costs aside, the relative attractiveness of any storage project will depend on the costs of other alternatives as well as the value of the use to which the water is to be put. Thus, for example, the costs of MUS at the Orange County Water District are in the range of $400-$600 per acre-foot which in any absolute sense appears relatively high. Yet the cost of the cheapest alternative source of water—imported water purchased from the Metropolitan Water Dis- trict of Southern California—is on the order of $650 per acre-foot and the costs of other alternatives, such as seawater desalting, are even higher. In the circum- stances faced by the Orange County Water District, MUS is attractive from a cost standpoint even though the costs of treating the water to be stored are rela- tively high. The relative value of the uses to which the water is put is also important. In the Orange County case, the project is attractive not just because the relative costs are low but because the water is put to domestic, industrial, and commer- cial uses, all of which are relatively high-valued. As a general rule, these uses are valued higher than agricultural uses and many environmental uses, although some environmental uses appear to have sizable values. The Orange County Project would not look so attractive, for example, if the water was to be used to irrigate fodder crops, a relatively low-valued use. In that circumstance the costs would likely be significantly higher than the value of the use and would raise compelling questions about the economic justification of the project. The result is that the attractiveness of any MUS project depends on the costs of alternative sources of supply as well as the value of the product water in its final uses. Fi-

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216 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER nancial considerations are discussed more fully in Chapter 6. For these reasons, it is difficult to make generalizations about the attractive- ness of MUS, since it will depend almost exclusively on local or regional water supply and water use conditions. Nevertheless a few generalizations can be made. Managed underground storage is more likely to be an attractive option when the value of the final use is high. It is likely to be a competitive option where alternative sources of water supply are either unavailable or very costly. It is also likely to be attractive when the costs of treating the original source water to appropriate levels of quality are low. Managed underground storage is likely to be far more attractive in the future because low-cost water supply options are no longer available in many regions and locales and, because high-valued uses are growing in many expanding urban areas and in those regions where source water can be obtained relatively inexpensively and costly treatment can be avoided. Subsidies Frequently, the high costs of providing water supplies or remediating and enhancing water quality result in calls for public subsidy in order to make the project or program “affordable.” Often, advanced techniques of augmenting water supplies such as desalination, wastewater reuse, or groundwater recharge appear very costly in comparison with the costs of established alternative water sources. The relatively higher cost of “new” water invariably leads to demands for public subsidization in order to keep the costs of all water supplies roughly equivalent. From an economic perspective it is important to understand the cir- cumstances in which subsidies are warranted and those in which they are not. The general rule is that where the value of goods and services is totally re- flected in the price, there is no economic justification for subsidization. Never- theless subsidies are used for a variety of purposes. Some subsidies are designed to restrain production, keeping the subsidy-adjusted price higher than would be the case if prices were determined by market forces alone. Other types of subsi- dies lead to prices that are lower than those that would result if market forces were left untouched. In these circumstances, a subsidy simply represents a gift in the form of an artificially low price. Also, there are mechanisms such as average cost31 pricing that keep the price of utility services—electricity, gas and water— lower than they might be otherwise. When subsidies are used to depress artifi- cially the price of some good, that good will be produced and consumed in quantities that are greater than the economically efficient quantity. The justifica- tion for these subsidies invariably rests on social and political, not economic, 31 Average cost is total cost divided by the number of units of output. It is the average cost of producing each unit of output. The marginal cost is the cost of producing one additional unit of output

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 217 grounds. Frequently, for example, subsidies may be required to ensure that a project is financially feasible. As a consequence, where financial feasibility is an overriding concern, subsidies may be common. Subsidies in the context of fi- nancial feasibility are discussed further in Chapter 6. There are certain instances in which subsidies may be justified economi- cally. These are cases where the market-generated price of the good or service does not fully reflect its value. The earlier conclusion that investment in groundwater recharge facilities and operations would be less than optimal if left to the private sector is a case in point. Where groundwater is extracted competi- tively, all extractors benefit from the recharge in the form of reduced levels to the water table and consequent reduced pumping costs. Yet, a purely private entrepreneur cannot capture all the returns from these benefits and thus invests less in the recharge operation than is optimal. In the absence of some other col- lective arrangement that would allow all of the returns to be captured by the investor, subsidizing investment in recharge facilities would be one method of securing more nearly optimal levels of investment. Another pertinent example is the case where an artificial recharge operation augments storage and repels the advance of a contaminant plume thereby protecting the quality of the groundwa- ter for all pumpers. In this instance, protecting its quality for one protects the water quality for all, and the gain in water quality protection cannot be withheld from an extractor who refuses to pay for it. In such instances a subsidy to the recharger that reflects the total benefits from recharge would be economically justified. Alternatively all extractors could be taxed for the amount of the bene- fit. The choice between a public subsidy and an alternative institution would depend in part on which alternative entails the smallest transactions and admin- istrative costs. The conclusion is that subsidies are justifiable on economic grounds in cir- cumstances where market prices do not capture all of the values—both positive and negative—of some good or service. Where subsidies lack an economic justi- fication, they will distort prices and affect the allocation of goods or services in ways that are less than economically optimal. Such subsidies should be estab- lished carefully since in some cases subsidization encourages water use and this may not always be desirable where water is scarce. CONCLUSIONS AND RECOMMENDATIONS Conclusion: Some states have created statutory schemes that are tailored to MUS projects; this approach is desirable because of the novel questions posed. For example, a state may find it desirable that withdrawals from an MUS project be done over a longer time period than a traditional water right might provide or that MUS be allowed despite the junior status of the right’s holder. States can anticipate these adjustments to traditional water rights as appropriate. Recommendation: While a comprehensive approach has advantages, at a minimum states should define property rights in water used for recharge, aquifer

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218 PROSPECTS FOR MANAGED UNDERGROUND STORAGE OF RECOVERABLE WATER storage, and withdrawn water, to provide clarity and assurance to MUS projects. Conclusion: The federal regulatory requirements for MUS are inconsistent with respect to treatment of similar projects. Federal UIC regulation addresses only projects that recharge or dispose of water directly to the subsurface through injection wells, while infiltration projects are regulated by state governments whose regulatory standards may vary. The appropriateness of regulation through the UIC program has been questioned by states with active ASR regula- tory programs. Also, there are inconsistencies between the Clean Water Act and the Safe Drinking Water Act that impact MUS systems. For example, some jurisdictions try to control surface water contamination problems by diverting polluted water from aboveground to groundwater systems. This approach may undermine MUS programs by putting contaminants underground without appro- priate controls. Recommendation: The federal and state regulatory programs should be examined with respect to the need for continued federal involvement in regula- tion, the necessity of a federal baseline for regulation, and the risks presented by inadequate state regulation. A model state code should be drafted that would assist states in developing comprehensive regulatory programs that reflect a sci- entific approach to risk. Conclusion: Regulations are, quite properly, being developed at the state level that will require a certain residence time, travel time, or travel distance for recharge water prior to withdrawal for subsequent use. However, regulations based on attenuation of a single constituent or aquifer type, such as pathogen attenuation in a homogeneous sand aquifer, may not be appropriate for a system concerned with trace organics and metals in a fractured limestone, and vice versa. Such regulations are particularly pertinent for MUS with reclaimed water. Recommendation: Science-based criteria for residence time, travel time, or travel distance regulations for recharge water recovery should be developed. These criteria should consider biological, chemical, and physical characteristics of an MUS system and should incorporate criteria for adequate monitoring. The regulations should allow for the effects of site-specific conditions (e.g., tempera- ture, dissolved oxygen, pH, organic matter, mineralogy) on microbial survival time or inactivation rates and on contaminant attenuation. They should also con- sider the time needed to detect and respond to any water quality problems that may arise. Conclusion: MUS projects can exhibit numerous and complementary eco- nomic benefits, but they also entail costs. Some of those benefits and costs are unlikely to be incorporated in the calculations of individual water users—that is, there may be spillover costs to third parties or spillover benefits that are not given market valuations. Failure to account for all benefits and costs, including ones that may not be reflected in market prices for water, can lead to underin- vestment in groundwater recharge, overconsumption of water supplies, or both.

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LEGAL, ECONOMIC, AND OTHER INSTITUTIONAL CONSIDERATIONS 219 Recommendation: An economic analysis of an MUS project should cap- ture the multiple benefits and costs of the project. MUS projects invariably en- tail the achievement of multiple objectives. Third-party impacts, such as the environmental consequences of utilizing source water, should be included. Conclusion: Water resources development has been characterized by sub- stantial federal and state subsidies. As water shortages intensify, the political pressure for investment in new technologies will increase. Recommendation: Water managers should avoid the introduction of fur- ther distortions in prevailing choices of water technologies. To ensure optimal investment in MUS and other technologies, subsidies should be provided only when there are values that cannot be reflected fully in the price of recovered waters. An example of such a value would be an environmental benefit that accrues to the public at large. In particular, simply lowering costs should not be the justification for providing subsidies for MUS projects. Conclusion: Antidegradation is often the stated goal of water quality poli- cies, including policies that apply to underground storage of water. For any MUS project – including storage of potable water, stormwater, and recycled water – it is important to understand how water quality differences between na- tive groundwater and the stored water will be viewed by regulators who are charged with satisfying those regulatory mandates. In addition to water quality factors, a broader consideration of benefits, costs, and risks would provide a more desirable regulatory approach. Therefore, weighing water quality consid- erations together with water supply concerns, conservation, and public health and safety needs is an essential plan of action. Rigid antidegradation policies can impede MUS projects by imposing costly pretreatment requirements and may have the practical effect of prohibiting MUS even in circumstances where the prospects of endangering human or environmental health are remote and the benefits of water supply augmentation are considerable. Recommendation: State laws and regulations should provide regulatory agencies with discretion to consider weighing the overall benefits of MUS while resolutely protecting groundwater quality. REFERENCES Alley, W. M., and S. A. Leake. 2004. The journey from safe yield to sustainabil- ity. Ground Water 42(1):12-16. Bachman, S., C. Hauge, K. Neese, and A. Saracino. 1997. California Groundwa- ter Management. Sacramento, CA: Groundwater Resources Association of California. Bain, J., R. E. Caves, and J. Margolis. 1966. The Northern California Water Industry. Baltimore, MD.: The Johns Hopkins University Press. Baumol, W. J., and W. E. Oates. 1979. Economics, Environmental Policy, and

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