interviews
Water and the American West
by Richard Frank
October 25, 2021
This interview with Richard Frank, professor of environmental practice at the UC Davis School of Law and Director of the California Environmental Law and Policy Center, was conducted and condensed by franknews.
frank | Can you tell me a little bit about the story of water and how it's tied to the West, and to California in particular?
Richard | A friend of mine who's a Court of Appeals Justice here in California wrote an opinion on a water law dispute and started it with the quote, "the history of California is written on its waters." And I think that the point is true of the entire American West.
Water policy and legal issues are inextricably tied to the development of the Western United States; water is the limiting factor in so many ways to settlement, to economic development, to prosperity, and to the environment and environmental preservation.
Can you talk about the difference between groundwater and surface water– and the policies that regulate each?
There are really two types of water when it comes to human consumption. There's surface water: that is the water that is transmitted by lakes, rivers, and streams. Then there is groundwater, and a substantial amount of water that Americans and the American West rely on is groundwater. That is water that is stored in groundwater aquifers, which are naturally occurring groundwater basins. Both groundwater and surface water are critical to the American West and its economy and its culture.
Traditionally a couple of things are important to note, first of all, water is finite. Second, water gets allocated in the Western United States generally at the state level. There's a limited federal role. Primarily, policy decisions about who gets how much water for what purpose are made state by state.
I think allocation is really interesting in that it's more state-level than federal. How was water and the allocation of water in California designed? Is it a public-private combination? What goes on in terms of the infrastructure of water?
Another very good question. The answer is it depends. Most of our water infrastructure is public in nature.
Again, in the American West, the regulation of water rights is generally done at the state level, but the federal government, historically, has a major water footprint in the American West because it has been federal dollars and federal design and management that really controlled much of the major water infrastructure in the American West — you know, Hoover Dam, and the complex system of dams and reservoirs on the Colorado River in California, with the Central Valley Project that was built and managed by the federal government with Shasta Dam on the upper Sacramento River as the centerpiece of that project. But we also have a California State Water Project, the key facility being the Oroville Dam and reservoir on the Southern River that is managed by state water managers. If we were starting over, that kind of parallel system would make no particular engineering or operational sense.
But, we are captive to our history.
And then you have these massive systems of aqueducts and canals that move water from one place to another throughout the American West. They are particularly responsible for moving water from surface water storage facilities to population centers. In the last 50 to 75 years, these population centers have really expanded dramatically, so you need massive infrastructure to deliver water from those storage facilities, the dams, and reservoirs, which generally are located in remote areas to the population centers. So it takes a lot of time and energy to transport the water, from where it is captured and stored to where it is needed for human use.
California has faced continuous drought – what measures is the state taking now to manage water?
Just to frame the issue a little bit — we have, as I mentioned, a growing population in the American Southwest at a time when the amount of available water is shrinking due to drought and due to the impacts of climate change. We have growing human demand for residential and commercial purposes and at the same time, we have a shrinking water supply. That is a huge looming crisis.
And it is beginning to play out in real-time. You see that playing out in real-time. For example, several different states and Mexico rely on Colorado River flows based on an allocation system that was created in the 1920s, which is overly optimistic about the amount of available water. From the 1920s until now, that water supply has decreased, and decreased, and decreased. Now you have interstate agreements, and in the case of Mexico, international agreements that allocate the finite Colorado river water supplies based on faulty, now obsolete, information. It is a real problem.
What measures do you take now, knowing this information?
If you look at the US Drought Monitor, it is obvious the problem is not limited to the Colorado River. We are in a mega-drought, so cutbacks are being imposed by federal and state water agencies to encourage agricultural, urban, and commercial water users to cut their water use and, and stretch finite supplies as much as possible through conservation efforts.
In California, we have the State Water Resources Control Board, the state water regulator in California, and they have issued curtailment orders. Meaning, they have told water rights holders, many of whom have had those water rights for over a hundred years, that, for the first time, the water that they feel they are entitled to, is not available. Local water districts are also issuing water conservation mandates; the San Francisco water department is doing that, in Los Angeles, the metropolitan water district, is urging urban users to curtail their efforts.
And then agriculture. Agricultural users — farmers and ranchers — have had to get water rights in many cases through the federal government, as the federal government is the operator of these water projects. They have contracts with water users, individual farmers, ranchers, or districts, and they are now issuing curtailment orders. They're saying, we know you contracted for X amount of water for this calendar year, but we are telling you because of the drought shortages we don't have that water to supply. Our reservoirs are low at Lake Shasta or at the Oroville Dam.
When you drive from San Francisco to LA on the five, you see a lot of signage from the agricultural farming community about water. There's apparently some frustration about this. What are the other options for them?
About 80% of all human consumed water goes to agriculture. That is by far the biggest component of water use, as opposed to 20% used for urban and commercial, and industrial purposes.
Over the years, ranchers and farmers, and agricultural water districts assumed that the water would always be there — as we all do.
And the farmers and ranchers have, in hindsight, exacerbated the problem by bringing more and more land into production. You see on those drives between San Francisco and Los Angeles, particularly in the San Joaquin Valley, all these orchards are being planted. Orchards are more lucrative crops than row crops — cotton, alfalfa, and rice. But, if you are growing a row crop, you can leave the land fallow in times of drought.
We don't have to plant. If the water stopped there, or if it's too expensive to get, it may make economic sense, but if you have an orchard or a vineyard it's a high value, those are high value crops, you don't have that operational flexibility and they need to be irrigated in wet years and in dry years. Now, you see these orchards, which were only planted a few years ago, are now being uprooted because the farmers realized that they don't have the water necessary to keep those vineyards and orchards alive. For ranchers, the same thing is true with their herds. They don’t have enough water for their livestock.
The water shortage has never been drier than it is right now. Farmers and ranchers are being deprived of water that they traditionally believed was theirs and they're very understandably, very unhappy about it. They see it as a threat to their livelihood and to the livelihood of the folks who work for them. Their anger and frustration are to be expected, but it's nobody's fault.
To say, as some farmers do, that it is mismanagement by state and federal government officials, I think is overly simplistic and misplaced in the face of a mega-drought. Everybody's going to have to sacrifice. Everybody's going to have to be more efficient in how they use water. All sectors are going to need to be more efficient with the water that does exist.
Looking at this percentage breakdown of water use – is it actually important for individual users to change their water habits?
Well, every little bit helps. When you're talking about homeowners, about 70% of urban water use is for outdoor irrigation. So we're talking parks and cemeteries and golf courses and folks' yards. You know, that used to be considered part of that American dream and the California dream — you would have a big lawn in front of your house and behind your house. Truth be told, that has never made much sense in an arid environment. That's where the water savings in urban areas is critical in the way it really involves aesthetics rather than critical human needs, like water for drinking and bathing and sanitation purposes. There is a growing movement away from big lawns, and away from the type of landscaping that you see in the Eastern US — there is no drought in the Eastern United States. As Hurricane Ida and other recent storms have shown, the problem is too much water, or rather than too little in most of the Eastern United States. So it really is a tale of two countries.
We just need to recognize that the American West is an arid region. It has always been an arid region, we can't make the desert bloom with water that doesn't exist. We need to be more efficient in how we allocate those water supplies. And it seems to me in an urban area, the best way to conserve and most effective way is to reduce urban landscaping, which is the major component of urban water use.
You also write about water markets and making them better – for those who don’t know, what is the water market?
Water markets, that is, the voluntary transfer of water between water users, is more robust in some other Western states. Again Arizona and New Mexico come to mind. California somewhat surprisingly is behind the curve. We are in the dark ages compared to other states. Water markets are kind of anecdotal. There is not much of a statewide system. It is done at the local level, through individual transactions without much oversight and without much transparency. And I have concerns about all of those things.
I believe conceptually watermarks are a way to stretch scarce, finite water resources to make water use more efficient. I can, for example, allow farmers or ranchers to sell water to urban uses or commercial usage or factories in times of drought.
Farmers sometimes can make more money by farming water, than they can by farming crops.
There are efficiencies to be gained here.
The problem in my view is really one of transparency. The water markets are not publicly regulated, and some of the people who are engaging in water transactions like it that way, frankly, they want to operate under the radar.
In my opinion, water markets need to be overseen by a public entity rather than private or nonprofit entities. We need oversight and transparency, so that folks like you and myself can follow the markets to see who's selling water to whom, for what purpose, and make sure that those water transfers serve the public interests and not just the private interests.
There have been a number of stories in the New York Times and the Wall Street Journal and the Salt Lake City Tribune about efforts in some parts to privatize water transfer. Hedge fund managers are buying and selling water, as a means of profiting. And it strikes me that when you're talking about an essential public resource — and in California, it is embedded in the law that public water is an inherently public resource, that water is owned by the public and it can be used for private purposes, but it is an inherently public resource — the idea of commoditizing water through the private, opaque markets is very troublesome to me. I think it represents a very dangerous trend and one that needs to be corrected and avoided.
Why is California so behind?
There's no good reason for it. It's largely inexplicable that since the state was created on September 9th, 1860, we've been fighting over water. In the 19th century, it was miners versus farmers ranchers. In the 20th century, with the growth of urban communities, the evolution of California into one of the most populous states with 40 million Californians, it has been a struggle between urban and agricultural uses of water.
In the second half of the 20th century, there was a recognition that some component of water had to be left in streams to protect ecosystems, landscape, and wildlife, including the threatened and endangered wildlife. That suggestion has made agricultural users in California angry. You will see those signs that allude to the idea that food and farming are more important than environmental values. I don't happen to believe that's true. I believe both are critically important to our society. But the advocates for the environment have a proverbial seat at the water table. So that's another demand for water allocation that exists.
Do you maintain optimism?
Yes. I think it's human nature to look on the bright side. I try to do that through research scholarships and teaching. There are models for how we can do this better in the United States. Israel and Saudi Arabia and Singapore are far more efficient with their water policies and efforts. Australia went through a severe megadrought. They came out of it a few years ago, but they used that opportunity to dramatically reform their water allocation systems. That's an additional model. I think most people would agree in hindsight that their previous system was antiquated, and not able to meet the challenges of climate change and the growing water shortage in some parts of the world.
Here in the United States, we can learn from those efforts. There are also some ways to expand the water supply. Desalination for one. Again, Singapore and Saudi Arabia have led the world in terms of removing the salt content from ocean water and increasing water supply that way. In Carlsbad, California, north of San Diego, we have the biggest desalination plant in the United States right now, and that is currently satisfying a significant component of the San Diego metropolitan areas’ water needs. It's more expensive than other water supplies, but the technology is getting more refined, so the cost of desalinated water is coming down at a time when other water supplies, due to shortages and the workings of the free market are going up.
At some point, they're going to meet or get closer. Unlike some of my environmental colleagues, I think desalination is an important part of the equation.
In a proposal that came up in the recall election, one of the candidates was talking about how we just need to build a canal from the Mississippi River to California to take care of all our problems. That ignores political problems associated with that effort, as well as the massive infrastructure costs that would be required to build and maintain a major aqueduct for 2000 miles from the Mississippi to California. That's just not going to happen. Some of those pie in the sky thoughts of how we expand the water supply, I think, are unrealistic.
interviews
The Known Unknowns
by Regina Cai
January 15, 2020
Regina Cai leads financial engineering and financial product design at UMA, a start-up building infrastructure for decentralized financial contracts. Previously, she was an equity derivatives structurer at Goldman Sachs.
frank | Let’s start at the top. In the WIRED article you sent as a brief intro, it begins, "the original blockchain is a decentralized ledger behind the digital currency, Bitcoin." – can you break that down for us. How do blockchain and Bitcoin fit together?
RC | Blockchain is the name of a general class of technologies that people are now building instances of. You can think of someone deploying a blockchain the same way that someone would deploy a spreadsheet.
Spreadsheets are like the name of the general class of technology, but anytime someone sends you an Excel file or a link to a Google Sheet, you can also say they’ve made a spreadsheet. Similarly, there are many deployed blockchains and one particularly successful blockchain is the one that powers Bitcoin.
There are many people who are building different kinds of blockchains. Some blockchains have special features. Some process transactions more quickly than others. Some require people to mine blocks like you do in Bitcoin. But, the basic idea is that a blockchain is this technology in which there's usually an embedded native token. Does that kind of make sense?
Yes. A lot of people in the space also talk about blockchain facilitating a transition away from our current, centralized banking system. How could we transition away from state monitored or state controlled banking systems and currencies to something that's borderless? Can you explain what that transition looks like?
I would think of Bitcoin or any other kind of digital currency as being an alternative way to track how much money someone has. If you have an alternative accounting system or alternative currency, then you have a different way for people to assess how much money other people have. Right now, we track how much money people have based on what central banks and correspondingly, the big system of large banks from each country, have in their ledgers. We use them as the definitive authority on how much money people have. But, I think what this is trying to say is that if we're able to transition trust away from their accounting systems to an alternative accounting system that is secured by a different community, then it means that we don't have to trust that centralized authority.
Different blockchains use different mechanisms to come to consensus on how much money everyone has. Once people believe that the value of money that people have is determined by the blockchain versus the government or versus other centralized authorities, that's when,
There could be other factors that increase adoption, like a richer ecosystem of tools and services, but eventually, I think adoption should reflect that people believe in the veracity of the blockchain.
There is also a future where these coexist. For example, video games are a really great mental model for this. There's no denying that if you're playing Fortnite, and your Fortnite account says that you have X thousand V-Bucks, and another player has twice that number of V-Bucks, that they have more V-Bucks wealth, right?
They have more V-Bucks than you do. You trust the centralized authority of the Fortnite game operator, who tells you how many V-Bucks everyone has. But at the same time, you can't really cash out those V-Bucks for dollars or for euros. So we also trust governments to tell us the dollar or euro balance in everyone's bank accounts.
In this world, even if we have two different accounting systems, they mean different things. V-Bucks don't translate well to dollars or euros because you cannot cash out your V-Bucks, right? You can only pay fiat money for V-Bucks.
The big difference is that with a lot of these cryptocurrencies, exchanges are willing to actually step in and say, yes, you can really go from bitcoin to dollars, back to bitcoin, and so on. They're a venue where people are making a market for bitcoin’s dollar price. As a result, you can somewhat accurately say, "Well, if they have this many bitcoin, that means that their wealth also is increased by the bitcoin dollar price times number of bitcoins they have.”
Now that we have a fiat price for those cryptocurrencies, I think that's the big thing that's driving the narrative of, "It's possible that because we have a linkage between fiat money and cryptocurrency, now, bitcoin or another cryptocurrency can take over as money for everyone across the globe."
What does regulation look like? Given that circulation rates of money are so closely tied to inflation nationally and internationally, how do you foresee regulatory bodies stepping in? What are the regulatory bodies that govern circulation with Bitcoin and other cryptocurrencies?
There have been a few attempts to determine the correct valuation for some cryptocurrencies using a classic monetary economics equation of exchange, where MV = PQ. This basically states that in any period of time, the amount of money that exchanges hands in an economy should equal the general amount spent on goods in the economy (commonly referred to as the GDP of an economy), with any of the factors (money supply, velocity of money, or spending) affecting the price of the cryptocurrency.
In the world of crypto, I'd say it's less that there is/will be a governing body over each of the variables in that equation. Rather, I see more of an effort to identify key factors and players who could influence the velocity of money or the GDP of a crypto-economy. For example, growth in the ecosystem of web applications or physical stores that take bitcoin can affect both.
Some people say that if we have many more fiat to crypto on-ramps, those should affect the velocity of money. Because once people can go from fiat to crypto, circulate that crypto a lot, and then pop that back out into fiat, yes, potentially there could be some influence there without increased spending within the crypto-economy.
It’s not yet clear how it would affect all the other factors in that equation, but exchange volume is something that a lot of people are watching to get a pulse on what the velocity of money is. “Accurate” trading volumes are an area of work for a lot of projects in the analytics, data, and trading space.
Is that the reason there have been such large swings in the Bitcoin market, because the V is not controlled? If, over time, there is more regulation and crypto becomes more mainstream, do you foresee it becoming less of a swing market?
There are so many factors that go into the volatility and the overall trend of the market that it's really hard to say. There are always rumors like, "Oh, well a big whale who happens to own a lot of bitcoin decided to sell half their stake. And that's why bitcoin's down."
There are others who will say, you know, "Oh, well, actually it's just because there's this technical trend that people have been following, and of course, if enough people believe the technical trend and then implement trading strategies to will that into existence, then maybe it's the technical."
The big thing that I want to say about speculators is that I think they tend to manifest themselves more in derivative exchanges like BitMEX or Deribit than they do in spot exchanges like Coinbase. If they do trade in spot exchanges, I think they’re more likely to trade in cryptocurrencies with smaller market caps, or what are called “alt coins”. Because they have lower trading volumes, their prices tend to swing a lot as well.
This is one area where I think decentralized finance projects are trying to find product-market fit. A lot of these projects are trying to create protocols or methods for speculators to get 10x exposure to a cryptocurrency, even if it only goes up by 1x, without relying on a centralized operator like BitMEX or Deribit. The success of these projects is going to depend on finding both retail speculators who want to trade and professional market makers to add liquidity. Right now, though, I think most retail traders are trading in spot markets.
How do you think the government is handling or going to handle the stability and growth of blockchain technology and blockchain finance? Do you think it's going to have a positive or a negative effect on the industry?
Yeah, I think this question is definitely top of mind for anyone who works in decentralized finance. I think I'll segment it again by user base.
For the traditional retail, small, mom and pop buyer, I think they're going to rely a lot on centralized exchanges or centralized custodians to help them manage their crypto exposure. In that case, I think the relationship between the centralized service providers and the government is one that has plenty of lawyers, and some industry bodies that, I would imagine, talk with the government fairly frequently. So I think for many retail people, right now, just because of all the tax and regulatory headaches, are probably going the centralized custodial route.
On the other hand, you have big institutions. For big market makers, trading desks, or asset managers, I'm sure they have teams of lawyers that help them with their regulatory or tax issues, but I’m not sure what their individual, unique, strategies are.
One of the big themes in decentralized finance and decentralized technology in general is moving work that is traditionally done by a centralized service provider to the actual person who owns the cryptocurrency. For example, if you were to trade a U.S. stock, you would typically call or email a custodian who manages your equity position for you, right? On the other hand, with cryptocurrency, you might want to self custody.
That means that instead of asking Coinbase to hold or custody your bitcoin for you, you will hold your bitcoin yourself on a hardware wallet or some other storage method. There are people who say, "well, actually, the government might protect us by monitoring and regulating these centralized service providers", while there are others who say, "actually, I'd rather eschew all of that surveillance and yes, of course, protection, and handle it myself." This line of thinking for the latter represents a mindset shift and maybe part of the overall crypto zeitgeist. An extension of this might say, "if a lot of people think that way, it'll change the way that everyone has to think about regulating centralized custodians", but for right now, my sense is that most retail investors are fairly comfortable using centralized custodians.
I think governments will still have a fairly good handle on supervising custodial services where their purpose is protecting retail investors. On the other hand, regulators also monitor traditional markets for market manipulation.
Those are open questions. I think on that front, preventing market manipulation is probably one of the biggest things that worries regulators, especially since exchanges and markets are where big market makers and institutional finance meet the retail investor. For now, at least you can protect people by making sure that their custodians are actually holding enough bitcoin for them and doing their proper blocking and tackling there. After that, how do you ensure market manipulation isn't happening? I think that's one of the biggest concerns, especially due to the pseudonymous nature of the blockchain.
That was actually my next question. Intuitively this is a market for people who don't have access to current markets, people with bad credit, people without citizenship, et cetera, et cetera. And by that thesis, it's an equalizer. But there is also a concern about financial literacy and / or less understanding of financial institutions, does that leave room for a greater amount of manipulation and with less oversight?
That is definitely part of the narrative around crypto – that it acts as an equalizer. If anyone can access cryptocurrencies, they can participate in this global economy without being bound by their local currency. I think that narrative is really powerful. I think it's really motivating and rallying.
It paints a picture of the vision of the world where a lot of financial risk is unlocked for people. One of the biggest hurdles I think is going to be, again, getting people to transition their wealth and their accounting method from their local currency into a cryptocurrency.
That's where there’s potential for sort-of-centralized cryptocurrencies, such as Central Bank Digital Currencies, or CBDC, to provide local people with access to an internet of blockchains. Having access to many different cryptocurrencies on many different blockchains around the world without forcing them to use something like bitcoin or something with features that a central bank might not find desirable. I think that's why that's such a focus for some central banks. For example, people might want immediate transactions on the blockchain, but if those transactions are publicly visible, you can add privacy layers to ensure that certain kinds of information aren’t made public. CBDCs can give you a lot of blockchain features without having some of the other undesirable features from a government regulatory specific perspective.
Right. That's interesting. What about the addition of corporate actors? Like Facebook and Libra?
I think a lot of people who are currently very busy building their own projects and products on Ethereum or another Layer 1 platform see Libra as a separate Layer 1 project that they don't need to worry too much about.
Because it's an up and coming project for Facebook, eventually they'll want to have projects built on top of their blockchain. But for now, I think Ethereum still has a fairly strong moat of developers who are building projects on top of Ethereum.
For the general public, I think Libra has become top of mind for a lot of people because it’s had so much attention from both regulators and the media.
I think it's a good opportunity for people to realize that a lot of traditional financial services run on fairly old and complicated payment rails.
I think a lot of people have experienced trying to send money from one account to another and having to wait multiple business days, trying to figure out how to get payments stopped or started, and how to freeze a credit card.
Everyone's adding things on: duct tape here, duct tape there, patch here, adding a little feature on top...
It's like the grid.
Exactly. So it's something where I think, especially because it's money, you really don’t want to mess it up. It's shipping hardware, not software. You're shipping software that's going to impact people in very, very real ways. You don't want to move too fast.
That's one of the big criticisms you hear a lot about Libra, that you cannot take Facebook's “move fast and break things” motto and apply that to money. You can't operate that way. I think that's one of the big reasons that traditionally big tech companies haven't really gotten involved in the payment space or tried to become a bank. Both from a regulatory perspective and a company culture and brand perspective, there are a lot of hurdles. I think that cultural point is something that speaks to a lot of builders on bitcoin or ethereum or any other kind of blockchain.
It's really hard to come up with a nice sandbox in which you can really test the success of financial products or financial markets without having real money on the line. How do you do user testing for financial products when you can’t put a lot of real money in them?
Looking at something like Libra, I would say, keep an eye on it but expect it to take a really long time to develop and expect it to have a lot of influence from the government in terms of how development progresses and how they test their products.
I think it's promising that people are using and becoming more interested in blockchain technology, but I think a lot of people are split on whether the interest in that technology is drawn more to Bitcoin and Ethereum, to private or government controlled blockchains, or general cryptocurrency technologies.
On the other hand, it could turn out that this interest in blockchain technology just means that people want to build more things like Libra.
I think it'll be interesting to see whether the people who become interested in the space fall down the rabbit hole to understand more about the technologies underpinning Bitcoin and Ethereum, or they go down the other, more manufactured, rabbit hole of understanding Libra and private blockchains.
That was really, really helpful.
That's awesome. I'm glad I can be helpful.
Would you simply define Defi?
What I mean by “decentralized financial system” is a set of tools and banking products that don't rely on a centralized authority or entity to operate. That can take the form of, on one extreme, pure peer-to-peer risk matching, where individual counterparties find each other and offer financial services to each other. Or something that's a little bit less pure is a peer to contract type of product, where everyone interacts with a smart contract, which you can think of as a trust, but on a blockchain, if you're familiar with traditional trusts in finance.
You have a spectrum of decentralization, from the purest peer-to-peer (p2p) services to more blockchain native or peer-to-contract (p2c) services. I think p2c services are where a lot of the work in Defi is happening, where people are trying to figure out how people can interact with smart contracts to access financial services, and financial risk, without having to rely on a centralized entity.
For example, rather than relying on a centralized bank that's run by a bunch of people, or even an algorithm, to figure out whether or not you can get a loan, what if you could get a loan from a smart contract on the blockchain?
I think right now people are focusing a lot on figuring out what fundamental infrastructure and building blocks need to exist in order to attract more users. If the goal is to get a really liquid set of products for users to access financial services on the blockchain, these products should, in theory, bring them away from traditional centralized financial products they rely on now, which have a whole other list of “duct tape” infrastructure problems we talked about. Lots of people in Defi are trying to decide, what are the different kinds of products that we should offer and what supporting infrastructure and scaffolding is needed to help support those products?
Let's say we have a peer to contract product that’s powered by smart contracts on a blockchain. If we have that, what else do we need?
We probably need market makers. We need arbitrageurs, we need capital providers, all these things that traditionally have existed in fiat that we're trying to attract onto the block chain. Once we have those, can we have the right user experience for people to actually interact with that contract in a really comfortable and easy way? We probably also need front end products, like apps or websites, that people actually want to use day to day. I think Defi is really the set of projects and people that are focused on trying to build all the layers for these kinds of services on the blockchain.