Baker Institute expert examines valuing of groundwater in Texas

Despite the economic and political stakes, debate on how to value groundwater in Texas has been sparse, according to an expert in the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

In a new article, Gabriel Collins, the Baker Botts Fellow in Energy and Environmental Regulatory Affairs at the Baker Institute, sets forth seven methods of economically valuing groundwater in Texas and uses case studies and hypotheticals informed by real data to assess the valuation techniques’ strengths and weaknesses under a range of conditions. “Economic Valuation of Groundwater in Texas,” published this month in Texas Water Journal, also shows how, multiple valuation methods can be combined to render the most credible valuation range for a particular groundwater asset.

“Groundwater valuation is — and will remain — an exercise requiring analysts to make judgment calls for each specific asset and aquifer location being evaluated,” Collins wrote. “But this is true of markets for many illiquid assets whose combined transaction volume is in the hundreds of billions of dollars per year globally, including other forms of real property, such as residential and commercial properties, as well as athletic talent, energy commodities and intangible assets, such as financial derivatives. As long as those appraising water values provide a clear and transparent accounting of their assumptions and analytical inputs, defensible values are eminently achievable.”

Collins cited seven core methods for evaluating the economic value of groundwater in Texas: comparable sales (including market surveys), which entails examining transactions where groundwater was bought or sold to see what values are feasible for a water sale in the area of interest; avoided cost, which values groundwater by seeing how much money a consumer could save by obtaining water from an alternative, cheaper source; land value method, an inductive approach that derives water values by comparing transactions of irrigated and non-irrigated farmland; residual value, which helps assess how much a consumer can pay for water by looking at how much income someone makes from a water-dependent activity, such as growing hay, then subtracting the costs and dividing the remaining net income by the amount of water needed; income capitalization, which also examines capacity to pay for water by converting the income generated by an asset into an estimate of its overall value; net present value valuation, which focuses on assessing an asset’s current value based on its likely future cash flows; and conservation value, which require a multifaceted analysis that considers factors such as ecosystem services value and the costs that aquifer depletion might impose.

Ultimately, useful valuations of groundwater incorporate a number of elements, each of which contributes to the asset’s worth, Collins said. These include, but are not limited to, the capital and recurring operational costs of extracting water; the costs of transporting the water to market; treatment costs (when applicable); and economic benefits that may be conferred simply by having a certain volume of water in place in an aquifer.

Collins’ article also explains how to marshal a wide range of publicly available data resources — including actual water sale and lease contracts — and analytically mesh them to arrive at a defensible valuation range for water assets under various conditions.

“Actionable valuations for water assets can unlock many billions of dollars in currently constrained economic potential, including reserve-backed lending, more sales and leases of water reserves in-situ and potentially enabling equity markets to price in the potentially significant water holdings of multiple publicly traded companies with substantial land footprints in Texas,” Collins concluded.

He conducts a range of globally focused commodity market, energy, water and environmental research. In addition to groundwater valuation in Texas, his current research focuses on oil field water issues, evolutions in the global gasoline market, shifts in China’s domestic oil consumption structure, Texas water governance and the food-water-energy nexus.