What do economic water storage valuations reveal about optimal vs. historical water management?

Abstract

What is the economic value of storing water for future droughts, and what are the consequences of this valuation for water management? One way to answer this question is to ask: ‘what is the valuation, which if used, would maximize a region's economic use of water?’ This prescriptive valuation can be done by linking classical hydro-economic models to global search methods. Another way to answer this question is to ask: ‘what do historical water management operations reveal about water's economic value?’ Indeed, past reservoir uses reveal the empirical inter-temporal valuations of past water managers. Although they may not have been optimized in a formal sense, in mature water resource systems with economic water demands, reservoir storage rules evolve via a socio-political process to embody societies' valuation of water. This empirical, ‘positive’, or descriptive valuation is captured by calibrating a hydro-economic model such that carry-over storage value functions enable simulated storage to match a historical benchmark. This paper compares both valuations for California's Central Valley revealing that carryover storage values derived from historical operations are typically greater than prescribed values. This leads to a greater reliance on groundwater use in historical operations than would have been achieved with system-wide optimization. More generally, comparing the two approaches to water valuations can provide insights into managers' attitudes as well as the impact of regulatory and institutional constraints they have to deal with – and that are not necessarily included in optimization models.