Privatize The Colorado River!?!

Our story begins far from the Colorado River and in the fishing town of New Bedford, Massachusetts. Here we learn lessons about the “Tragedy of the Commons” and a nasty new game being played by private equity capitalists. Basically, a public resource gets bought up and milked for private owners and investors, leaving the public fleeced of what was theirs.

The New Bedford story is nicely told in a Netflix 2-season series called “Rotten”, which reveals some disquieting facts about producing and selling the products we consume. “Cod Is Dead” is the 6th episode of the first series. The old-timers in New Bedford all remember a time when the North Atlantic was teeming with cod and a large fishing fleet (1500 boats) was doing quite nicely in financial terms. When the documentary was made that number of boats was down to about 350 and still falling. What happened began as a typical “Tragedy of the Commons” scenario when a seemingly unlimited public resource was there for anybody to harvest without regulation. More boats, more aggressive fishing techniques, and international factory ships gradually depleted the cod population, and the cod fishery began to crash. Something had to be done.

The federal NOAA stepped in and tried without much success to rescue the cod population with fishery councils setting limits on the amount of fishing and catch sizes. Then they partnered up with the Environmental Defense Fund — a previously successful environmental group with a Free Market philosophy and influential corporate and political friends. At the time the EDF was pushing a quota system called “Catch Shares”. It sounded at face value like a very reasonable idea that limited the number of cod that any boat owner could harvest. This was a good idea if you wanted the cod population to rebound, and it worked. But there was a serious unintended (or purposely obscured) problem. The problem was immediately noticed by some EDF and fishery scientists. The quotas could be traded, i.e., bought and sold. That meant that over time struggling small owners would often be forced to sell part or all of their quotas to more wealthy owners who had deep pockets. It does not take much thinking to see where this might end up. So those who understood this problem (and, unlike the EDF, were not taking money from the Koch network, the Walton family, and other wealthy investors, put a critical rule into the draft of the quota regulations. No one entity would be allowed to own more than a certain amount of the quotas. Unfortunately, probably through the finagling of investors, lobbyists and political officials, the critical rule went missing from the final regulations.

So the inevitable happened: A public resource got privatized, big money took over, and many little guys got squeezed out. Wall Street saw dollar signs, a private equity firm bought up all the scallop quotas in the area, and cod fishermen figured it was only a matter of time before they were turned into “share croppers” for big investors in well-appointed glass towers far away. The documentary “Cod Wars” is a rollercoaster ride wherein one thinks one understands the problem, then one is confused and unsure, and then finally sees the whole collection of related problems. I recommend watching it.

With that background, we can now look at something recent from The New York Times that seems like a replay of the same tragedies.

The Colorado River has played a crucial environmental, agricultural and population-sustaining role for a very long time. In 1922 the seven states with access to the Colorado river, after much haggling, hammered out the Colorado River Compact, which apportioned the water rights to the individual states who set up various councils to divvy up their shares of the water. The water was a public resource owned by the public and regulated by the state governments. It must have worked fairly well because it lasted nearly 100 years.

Unfortunately two serious problems jeopardized this historical compact. Firstly climate change resulted in alarming and recurring droughts to the region. Secondly the population and demographics of the region changed, with population increases and a shift away from rural agriculture towards denser urban concentrations. These two problems led to increases in water scarcity until the water of the Colorado River did not even make it to its natural terminus in the Gulf of California from 1998 to 2014. Clearly something had to be done in the face of demand beginning to exceed the supply of water.

Given the laws of supply and demand, the dwindling supply led to an increase in the value of the water. This did not go unnoticed by Wall Street and various private investor entities. The new idea on the horizon was that bringing market forces to bear on the allocation of water would make its use more fair and efficient. We have seen this charade play out in the cod story, and here we go again. The plan of the investors and arbitrage specialists was to create water accounts owned by private nonlocal investors and stored in giant reservoirs like Lake Mead and Lake Powell. When water got scarce cities and agricultural businesses could buy water from the private water accounts. But wait! How could a public resource suddenly become a privately owned resource that had to be bought back, ultimately with public money. Sounds like the few are scamming the many. Same as it ever was.

Here is an excerpt from the NY Times link above. “Private investors would like to bring in or amplify existing elements of Wall Street for the water industry, such as futures markets and trading that occurs in milliseconds. Most would like to see the price of water, long set in quiet by utilities and governments, rise precipitously.”

“Traders could exploit volatility, whether due to drought, failing infrastructure or government restrictions. Water markets have been called a “paradise for arbitrage,” an approach in which professionals use trading speed and access to information for profit. The situation has been compared to the energy markets of the late 1990s, in which firms like Enron made money from shortages (some of which, it turned out, traders engineered themselves).”

This change from the Colorado River Compact to a more market-based system has started (as described in the NY Times article) but it is by no means a done deal yet. Plenty of tense negotiating among environmentalists, lobbyists, state officials and politicians is sure to ensue.

My personal take on both the cod fishery and Colorado River stories can be summarized by two truisms: Power Corrupts; Money Doesn’t Talk, It Swears.

Is this the future you want?

Check out both of the referenced sources for more details.



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