Mojave Alto Subarea Market Indicator: Expect Trends to Continue

In 1996, the Final Judgment in the Mojave River Basin Adjudication established a “physical solution” to address overdraft conditions and ensure that downstream users received sufficient surface or subsurface flow from upstream areas. The basin was divided into five hydrologically-related, but distinct subareas—Alto (Upper Basin), Baja (Lower Basin), Centro (Middle Basin), Este (East Basin), and Oeste (West Basin)—and water supplies within the subareas were apportioned among the producers.

A Base Annual Production (“BAP”) right was established for each producer in the basin. BAP is a producer’s maximum annual production from 1986 to 1990 and is used to determine the producer’s proportional share of the available water supply each year. BAP can be permanently transferred either independently or appurtenant to land.

In the first five years following entry of the judgment, the total BAP in each subarea was ramped down from 100% to 80%, and each year the watermaster evaluates conditions and determines if further ramp down is needed.  The ramped down annual supply is allocated to the producers as Free Production Allowances (“FPA”). FPA specifies the amount of groundwater that a holder can pump without incurring a replenishment obligation. In FY 2017-18, FPA ranged from 40% of BAP to 80% of BAP, depending on the subarea. In the Alto subarea, it was set at 80% for agricultural users and 60% for municipal and industrial users.

Unused FPA can be carried over to the following year. Both FPA and carryover water can be transferred to another water user, who can use it to meet a replenishment obligation or to increase their allowed pumping for that year. Pumpers who produced more than their allowed pumping without acquiring additional FPA or carryover water were assessed a fee of $556/AF. While transfers of BAP, FPA and carryover water occur in all five subareas, the markets are the most robust in the Alto subarea, which includes most of Southern California’s high desert communities. 

Sales of Base Annual Production Rights

 There was just one transfer of 22 AF, completed as part of a real estate transaction in the first half of 2018, which is consistent with an ongoing trend. Generally, the volume of BAP rights traded is small, with spikes in volume driven by the occasional large transaction. (see sales chart).

Because the one transfer reported in the first of half of 2018 was complete as part of a real estate transaction, there is no price information available for the BAP rights. Previously, prices eased to $4,200/AF in the second half of 2017 after dropping to $4,300/AF in the second half of 2016. Previously prices had been sitting around $5,000/AF.

 

 

Leases of Free Production Allowances and Carryover

The volume of leases of FPA and carryover water in the Alto Subarea tends to fluctuate:  high in the first half of the year and low in the second half. Because the Mojave Basin Watermaster operates on a fiscal year, the short-term transfers approved in the first half of the calendar year may reflect efforts to prepare for the new water year.

Leases totaled 16,204 AF in the first half of 2018— which is lowest volume for the first half of the year since 2006, when 11,185 AF were leased. More recently, 18,130 AF were leased in the first half of 2017 and 2,204 AF in the second half of 2017. (see lease chart)

 

 

The average prices for leases of FPA trended upward from the inception of the market through the second half of 2014, when they reached a peak of $368/AF. Since then, they fluctuated near $360/AF, and then jumped to $385/AF in the first half of 2018.

The market continues to be driven by the need for producers to meet their replenishment obligations, rather than any external pressures, so expect trends to continue.

 

Written by Marta L. Weismann