This review is a change of pace for the blog, but I think the topic is important and not without relevance for investors. Susan J. Marks, in her recently released Aqua Shock: The Water Crisis in America (Bloomberg Press, 2009), provides a well-documented account of water as a finite resource. Despite the title, the book is measured in tone, sketching out an array of problems from shortages to contamination and offering a patchwork quilt of responsible solutions.
I was particularly interested in her discussion of legal approaches to water rights and, in that context, T. Boone Pickens’ Mesa Water venture. First of all, it should be noted that in the U.S. the East has a different approach to water rights from the West. Eastern states invoke the English common law notion of riparian rights. That is, if a person owns land that abuts a stream, he has the right to the reasonable use of that stream.
[A personal “midnote.” The picture accompanying this blog is of the stream that both abuts and is part of my property. This stream, euphemistically known on maps as the West River, contributes to the New Haven, CT water supply. The former owner of the property decided that he had a reasonable use of the stream and dug a mammoth pond, admittedly only marginally supplied by the stream. He was never subjected to the “sue me” test, and I’ve been reaping the benefits ever since. I mitigate my very occasional guilt by granting “catch and release” fishermen access to the pond.]
The riparian doctrine is vague (what constitutes reasonable use?), so most eastern states have moved to regulated riparianism where “the state manages the resource in trust for the public through time-limited permits.” (p. 112) In the West, where water is more often in short supply, the dominant legal approach is prior appropriation, which is based on the concept of first in time, first in right. That is, “the first person or group to take a quantity of water and put it to beneficial use has a higher priority of right than a subsequent user.” (p. 108) As you can imagine, there’s lots of adjudication over the claim to “beneficial use.” The prior appropriation doctrine also embraces a “use it or lose it” policy; “if you don’t use your full allocation under your water rights, those rights can be revoked, forfeited, or abandoned.” (p. 129) In brief, it encourages waste.
In some states in the West water is viewed as a commodity that can be freely sold by the property owner. And this brings us to Pickens and his group of Texas Panhandle landowners. Texas law recognizes that a landowner owns everything beneath his property, including oil, gas, water, and minerals. There are some legal limitations regarding the amount of water that can be pumped and to whom it can be sold. In 2002 and 2004 the Panhandle Groundwater Conservation District issued pumping permits to Mesa Water allowing it to transfer water to North Central Texas and San Antonio. As far as I know no one has signed up to buy water and no pipes have been laid. In fact, on the Mesa Water site the most recent press release is from 2005.
Experts predict, however, that plans like Mesa’s will only become more grandiose over time. Will water ever be a tradable commodity like oil or gold? Not likely. Why pay for something that you can get for free from the sky? And despite the water problems in the U.S., the ongoing global shortage of safe drinking water, and the prediction that by 2025 one half of the world’s population will live under conditions of severe water stress, ETFs that focus on water companies in the U.S. have underperformed the S&P 500 year to date and the global water ETFs have just about matched the Vanguard Total World ETF. Investors aren’t yet buying into the water crisis story.