The problem of high costs to move water from one use in one place to another use or another place of use has long been thought to create important inefficiencies and mis-allocations. Recently, there has also been additional interest in water transfers as a way to adapt to climate variability. The before versus the after are a strong argument for transfer from low-return uses in agriculture to high-value uses in cities, but the processes of making the change have always been problematic. Western water rights are transferable, but the protection of other water rights holders and the mitigation of environmental and public-good externalities have made the process expensive and slow. This has prevented many small transfers, which costs efficiency within the agricultural sector, and it has prevented many short-term and reversible transfers out of and into agriculture, also reducing over-all efficiency. The increasing pressure for transfer of water from agriculture to urban use increases the desirability for a transfer process that allows for lower-cost and reversible transfers, as well as ways to "right-size" and "right-kind" the transfers. Permanent transfers have different effects from those which will take effect only in dry years, but so far the legal and engineering costs of "interruptible supply contracts" or "dry-year options" have been so high that cities considering them have just gone ahead with permanent sales of water rights, and leased water back to agriculture as convenient. Colorado's very rapid urban growth has resulted in quite large transfers, resulting in significant public concern over impacts to agriculture and areas of origin. In response, the Colorado legislature has begun an experiment in the superimposition of a water bank on current water law, in the Arkansas River Water Bank Pilot Program.

The legal innovation has been formally established, and the Office of the State Engineer has drafted the rules to allow maximum use of climate information. But the rule-making took place in a year during which threats to Arkansas water users prevented anyone from beginning the social processes of institutional innovation and engagement with the critical players whose support will be needed for there to be a fair trial of the new opportunities. Worse, a very severe drought was well underway as the rules went into effect. The presentation will note the idea of water transfer cost-reduction, and how the new rules accommodated our theory-driven requests. Among these are the hope of reduction in the high salinity in the lower River, which adds stress to agriculture by reducing yields. But as this abstract is submitted, the work is just beginning, in the effort to show potential users how it may benefit them, and to explore the possibilities for transfers out of basin which would avoid the kinds of adverse secondary impacts that have already hurt local economies and tax-based services. The presentation will report on the situation as of December 2002. We think this is an important case of trying to take theory into policy, and hope to learn through participation and observation.