Water transfer costs include more than the amount that prospective sellers would be willing to accept for their water. Other associated costs can be a substantial or even the major part of the cost of a water transfer. Mitigation for adverse third-party economic impacts in the area of origin may require payments to local agencies; as a consequence, freeing up water for transfer has at least two cost components.
Purchase prices can be set by a drought-water-bank-type operation or directly negotiated between prospective buyers and sellers. Negotiated prices will fall between the cost to the sellers of foregoing the use of that water and the willingness of the buyers to pay.
The cost to the sellers is affected by the magnitude of the transfer. If available, initial quantities probably involve in-lieu ground water pumping or releases of uncommitted stored water. These sources are likely to be least costly to the sellers in terms of pumping energy or foregone income. Further increments of water likely will involve crop fallowing or switching to lower-water-using crops. These actions result in substantial income losses to sellers and, as a consequence, are likely to require higher water prices to make them palatable.
Higher prices are more likely in a spot market than under a long-term agreement. Spot markets favor the seller; there is little doubt about the buyer's immediate need for the water. Buyers have a certain advantage under long-term agreements. Under long-term agreements the seller is trying to reduce or eliminate the uncertainty of income from water sales and the buyer is not necessarily facing an immediate crisis, but is planning to augment supply reliability. Prices paid by buyers of transferred water reflect the cost of conveyance, which depends upon the facilities used.
The conveyance losses reduce the water delivered compared to the amount purchased. Alternatively, these losses may be thought of as increasing the unit cost of the remaining water to the buyer, that is, as water surcharges. If the transferred water has to be moved across the Delta under controlled flow conditions, a portion of the water must be dedicated to Delta outflow as a means of meeting Delta salinity standards. This is an example of a conveyance loss. Other conveyance losses include evaporation from reservoirs and canals as well as canal seepage.
Water surcharges for environmental mitigation needs, such as increasing stream flows for anadromous fish spawning, can also be a requirement for permitting transfers.
Short-term emergencies generally are characterized by the prospect of large economic losses from unmet demands and the high cost or limited nature of the options to meet those demands or to mitigate the losses. Under these conditions even a relatively small quantity of transferred water can eliminate the most serious impacts of shortage. The willingness of buyers to pay is correspondingly high.