The ability to reallocate water to higher-value uses during drought is an increasingly important ‘soft-path’ tool for managing water resources in an uncertain future. In most of the Western United States, state-level water market institutions that enable reallocation also impose substantial transaction costs on market participants related to regulatory approval and litigation. These transaction costs can be prohibitive for many participants in terms of both costs and lengthy approval periods, limiting transfers and reducing allocation efficiency, particularly during drought crises periods. This manuscript describes a mechanism to reduce transaction costs by adapting an existing form of informal leases to facilitate quicker and less expensive transfers among market participants. Instead of navigating the formal approval process to lease a water right, informal leases are financial contracts for conservation that enable more junior holders of existing rights to divert water during drought, thereby allowing the formal transfer approval process to be bypassed. The informal leasing approach is tested in the Upper Colorado River Basin (UCRB), where drought and institutional barriers to transfers lead to frequent shortages for urban rights holders along Colorado’s Front Range. Informal leases are facilitated via option contracts that include adaptive triggers and that define volumes of additional, compensatory, releases designed to mitigate impacts to instream flows and third parties. Results suggest that more rapid reallocation of water via informal leases could have resulted in up to $222 million in additional benefits for urban rights holders during the historical period 1950 – 2013.

Many water markets in the Western United States (U.S.) have the ability to reallocate water temporarily during drought, often as short-term water rights leases from lower value irrigated activities to higher value urban uses. Regulatory approval of water transfers, however, typically takes time and involves high transaction costs that arise from technical and legal analyses, discouraging short-term leasing. This leads municipalities to protect against drought-related shortfalls by purchasing large volumes of infrequently used permanent water rights. High transaction costs also result in municipal water rights rarely being leased back to irrigators in wet or normal years, reducing agricultural productivity. This research explores the development of a multi-year two-way option (TWO) contract that facilitates leasing from agricultural-to-urban users during drought and leasing from urban-to agricultural users during wet periods. The modeling framework developed to assess performance of the TWO contracts includes consideration of the hydrologic, engineered, and institutional systems governing the South Platte River Basin in Colorado where there is growing competition for water between municipalities (e.g., the city of Boulder) and irrigators. The modeling framework is built around StateMod, a network-based water allocation model used by state regulators to evaluate water rights allocations and potential rights transfers. Results suggest that the TWO contracts could allow municipalities to maintain supply reliability with significantly reduced rights holdings at lower cost, while increasing agricultural productivity in wet and normal years. Additionally, the TWO contracts provide irrigators with additional revenues via net payments of option fees from municipalities.

Water scarcity is a growing problem around the world, and regions such as California are working to develop diversified, interconnected, and flexible water supply portfolios. To meet their resilient water portfolio goals, water utilities and irrigation districts will need to cooperate across scales to finance, build, and operate shared water supply infrastructure. However, planning studies to date have generally focused on partnership-level outcomes (i.e., highly aggregated mean cost-benefit analyses), while ignoring the heterogeneity of benefits, costs, and risks across the individual investing partners. This study contributes an exploratory modeling analysis that tests thousands of alternative water supply investment partnerships in the Central Valley of California, using a high-resolution simulation model to evaluate the effects of new infrastructure on individual water providers. The viability of conveyance and groundwater banking investments are as strongly shaped by partnership design choices (i.e., which water providers are participating, and how do they distribute the project’s debt obligation?) as by extreme hydrologic conditions (i.e., floods and droughts). Importantly, most of the analyzed partnership structures yield highly unequal distributions of water supply and financial risks across the partners, limiting the viability of cooperative partnerships. Partnership viability is especially rare in the absence of groundwater banking facilities, or under dry hydrologic conditions, even under explicitly optimistic assumptions regarding climate change. These results emphasize the importance of high-resolution simulation models and careful partnership structure design when developing resilient water supply portfolios for institutionally complex regions confronting scarcity.

Hydrologic variability can present severe financial challenges for organizations that rely on water for the provision of services, such as water utilities and hydropower producers. While recent decades have seen rapid growth in decision-support innovations aimed at helping utilities manage hydrologic uncertainty for multiple objectives, support for managing the related financial risks remains limited. However, the mathematical similarities between multi-objective reservoir control and financial risk management suggest that the two problems can be approached in a similar manner. This paper demonstrates the utility of Evolutionary Multi-Objective Direct Policy Search (EMODPS) for developing adaptive policies for managing the drought-related financial risk faced by a hydropower producer. These policies dynamically balance a portfolio, consisting of snowpack-based financial hedging contracts, cash reserves, and debt, based on evolving system conditions. Performance is quantified based on four conflicting objectives, representing the classic tradeoff between “risk” and “return” in addition to decision-makers’ unique preferences towards different risk management instruments. The dynamic policies identified here significantly outperform static management formulations that are more typically employed for financial risk applications in the water resources literature. Additionally, this paper combines visual analytics and information theoretic sensitivity analysis to help decision-makers better understand how different candidate policies achieve their comparative advantages through differences in how they adapt to real-time information. The methodology developed in this paper should be applicable to any organization subject to financial risk stemming from hydrology or other environmental variables (e.g., wind speed, insolation), including electric utilities, water utilities, agricultural producers, and renewable energy developers.

Regionalization approaches wherein utilities in close geographic proximity cooperate to manage drought risks and co-invest in new infrastructure are increasingly necessary strategies for leveraging economies of scale to meet growing demands and navigate deeply uncertain risks. Successful regional cooperative investment and management pathways, however, must equitably balance the interests of multiple partners while navigating power relationships between regional actors. In long-term infrastructure planning contexts, this challenge is heightened by the evolving system-state dynamics, which may be fundamentally reshaped by infrastructure investment. This work introduces Equitable, Robust, Adaptive, and Stable Deeply Uncertain Pathways (DU PathwaysERAS), an exploratory modeling framework for developing regional water supply management and infrastructure investment pathways. Our framework explores equity and power relationships within cooperative pathways using multiple rival framings of robustness, each representing a competing hypothesis about how performance objectives should be prioritized. To capture the time-evolving dynamics of infrastructure pathways, DU PathwaysERAS features new tools to measure the adaptive capacity of pathway policies and evaluate time-evolving vulnerability. We demonstrate our framework on a six-utility water supply partnership seeking to develop cooperative infrastructure investment pathways in the Research Triangle, North Carolina. Our results indicate that commonly employed framings of robustness can have large and unintended adverse consequences for regional equity. Results further illustrate that regional and individual vulnerabilities are highly interdependent, emphasizing the need to craft agreements that limit counterparty risks from the actions of cooperating partners. Beyond the Research Triangle, these results are broadly applicable to cooperative water supply infrastructure investment and management globally.

Hydrologic variability poses an important source of financial risk for hydropower-reliant electric utilities, particularly in snow-dominated regions. Drought-related reductions in hydropower production can lead to decreased electricity sales or increased procurement costs to meet firm contractual obligations. This research contributes a methodology for characterizing the tradeoffs between cash flows and debt burden for alternative financial risk management portfolios, and applies it to a hydropower producer in the Sierra Nevada mountains (San Francisco Public Utilities Commission). A newly designed financial contract, based on a snow water equivalent depth (SWE) index, provides payouts to hydropower producers in dry years in return for the producers making payments in wet years. This contract, called a capped contract for differences (CFD), is found to significantly reduce cash flow volatility and is considered within a broader risk management portfolio that also includes reserve funds and debt issuance. Our results show that solutions relying primarily on a reserve fund can manage risk at low cost, but may require a utility to take on significant debt during severe droughts. More risk-averse utilities with less access to debt should combine a reserve fund with the proposed CFD instrument in order to better manage the financial losses associated with extreme droughts. Our results show that the optimal risk management strategies and resulting outcomes are strongly influenced by the utility’s fixed cost burden and by CFD pricing, while interest rates are found to be less important. These results are broadly transferable to hydropower systems in snow-dominated regions facing significant revenue volatility.

Flood impacts to residential properties threaten the resilience of communities and the institutions that support them. These events can cause negative impacts to property-level balance sheets through uninsured damage and property value decreases, which in turn can increase the likelihood of mortgage default and property abandonment. To date, there have been limited attempts to quantify the magnitude and distribution of additional financial consequences that could arise from these processes following flood events. In this work, property-scale financial data, including property sales, mortgage originations, and insurance claims, are used within an analytical framework to quantify flood-related uninsured damages and property value decrease in order to estimate the financial risk that property owners, mortgage lenders, and local governments are exposed to via recovery decisions (i.e., default and/or abandonment). This framework is applied to residential properties in eastern North Carolina following Hurricane Florence (2018). Within the study area, Hurricane Florence generated $366M in observed insured losses and we estimate an additional $1.77B in balance sheet losses (i.e., uninsured damage and property value decrease). In addition, property owners, mortgage lenders, and local governments were exposed to an estimated $562M of risk from the increased likelihood of mortgage default and property abandonment. Areas with lower pre-event property values and lower rates of insurance purchase experienced significantly higher risk of mortgage default and abandonment. The method described provides more highly resolved estimates of how floods can drive systemic financial risk, information that can be useful in developing improved flood resilience strategies.

Urban water utilities, facing rising demands and limited supply expansion options, increasingly partner with neighboring utilities to develop and operate shared infrastructure. Inter-utility agreements can reduce costs via economies of scale and help limit environmental impacts, as substitutes for independent investments in large capital projects. However, unexpected shifts in demand growth or water availability, deviating from projections underpinning cooperative agreements, can introduce both supply and financial risk to utility partners. Risks may also be compounded by asymmetric growth in demand across partners or inflexibility of the agreement structure itself to adapt to changing conditions of supply and demand. This work explores the viability of both fixed and adjustable capacity inter-utility cooperative agreements to mitigate regional water supply and financial risk for utilities that vary in size, growth expectations, and independent infrastructure expansion options. Agreements formalized for a shared regional water treatment plant with fixed or adjustable treatment capacities, coupled with structured financing for partner utilities, are found to significantly improve regional supply reliability and financial outcomes. Regional improvements in performance, however, mask tradeoffs among individual agreement partners. Adjustable treatment capacity allocations add flexibility to inter-utility agreements but can compound the financial risk of each utility as a function of the decision-making of the other partners. Often the sensitivity to partners' decision-making under an adjustable agreement degrades financial performance, relative to agreements with fixed capacities allocated to each partner. Our results demonstrate the significant benefits cooperative agreements offer, providing a template to aid decision-makers in development of water supply partnerships.

The United States (U.S.) West Coast power system is strongly influenced by variability and extremes in air temperatures (which drive electricity demand) and streamflows (which control hydropower availability). As hydroclimate changes across the West Coast, a combination of forces may work in tandem to make its bulk power system more vulnerable to physical reliability issues and market price shocks. In particular, a warmer climate is expected to increase summer cooling (electricity) demands and shift the average timing of peak streamflow (hydropower production) away from summer to the spring and winter, depriving power systems of hydropower when it is needed the most. Here, we investigate how climate change could alter interregional electricity market dynamics on the West Coast, including the potential for hydroclimatic changes in one region (e.g. Pacific Northwest (PNW)) to “spill over” and cause price and reliability risks in another (e.g. California). We find that the most salient hydroclimatic risks for the PNW power system are changes in streamflow, while risks for the California system are driven primarily by changes in summer air temperatures especially extreme heat events that increase peak system demand. Altered timing and amounts of hydropower production in the PNW do alter summer power deliveries into California but show relatively modest potential to impact prices and reliability there. Instead, our results suggest future extreme heat in California could exert a stronger influence on prices and reliability in the PNW, especially if California continues to rely on the PNW for imported power to meet late summer demands.

Regional cooperation among urban water utilities is a powerful mechanism for improving supply reliability and financial stability in urban water supply systems. Through coordinated drought mitigation and joint infrastructure investment, urban water utilities can efficiently exploit existing water supplies and reduce or delay the need for new supply infrastructure. However, cooperative water management brings new challenges for planning and implementation. Rather than accounting for the interests of a single actor, cooperative policies must balance potentially competing interests between cooperating partners. Structural imbalances within a regional system can lead to conflict between cooperating partners that destabilize otherwise robust planning alternatives. This work contributes a new exploratory modeling centered framework for assessing cooperative stability and mapping power relationships in cooperative infrastructure investment and water supply management policies. Our framework uses multi-objective optimization as an exploratory tool to discover how cooperating partners may be incentivized to defect from robust regional water supply partnership opportunities and identifies how the actions of each regional partner shape the vulnerability of its cooperating partners. Our methodology is demonstrated on the Sedento Valley, a highly challenging regional urban water supply benchmarking problem. Our results reveal complex regional power relationships between the region's cooperating partners and suggest ways to improve cooperative stability.