The Legislature has advanced a measure to halt water grabs by hedge fund investors and venture capitalists. Farm and business groups worry the proposal would upend water transfers—a critical tool to combat drought and climate change and for reducing groundwater pumping.

Under Assembly Bill 1205, it would no longer be a reasonable or beneficial use for an investment fund to sell, transfer or lease a water right on agricultural land, nullifying their claim to the right.

The bill is the latest in a series of measures seeking to overhaul aspects of the state’s water right system to better protect disadvantaged communities and the environment amid escalating climate impacts. Prior to AB 1205, Assemblymember Rebecca Bauer-Kahan raised the ire of agriculture last year with a measure to require groundwater sustainability agencies to address impacts to domestic wells in plans submitted for the Sustainable Groundwater Management Act (SGMA). She later pulled the measure to join forces on a similar bill that failed last year but has been reintroduced in the current session.

Other contentious bills circulating through the Legislature seek to expand water right enforcement at the State Water Resources Control Board and increase penalties for violations.

Bauer-Kahan has now joined a growing chorus of Democrats targeting outside investors. Last year Senators Melissa Hurtado of Bakersfield and Dave Cortese of Silicon Valley requested the U.S. attorney general investigate potential water profiteering during the drought. They worried hedge funds were buying up land for the water rights through anti-competitive practices. Hurtado, who chairs the Senate Agriculture Committee, has also raised eyebrows among farm groups for her proposal to bar foreign governments from purchasing farmland.

Ed ManningEd Manning, KP Public Affairs

Such concerns over unintended consequences to an industry reliant on global markets and complex water markets propelled a dozen farm groups to raise opposition to AB 1205. Bauer-Kahan countered that agriculture actually stands to benefit from her bill.

“Many stand to make a pretty penny on these resources as we face droughts,” she said during a committee hearing on the bill last week. “It is not acceptable that investment funds come here and make exorbitant profits off this essential resource that is truly a public good.”

Under California law, she stressed that the public owns the water and water right holders are only allowed to put the water to beneficial use. She pointed to media reports declaring a gold rush of investors and foreign corporations buying up farmland across the West to monetize the surface and groundwater rights for profit. She argued “this practice is not in the public’s interest and is unconscionable in this era of increasing water scarcity” and blasted large institutional investors for using those groundwater supplies to irrigating permanent crops like tree nuts while nearby domestic wells run dry.

“Having these outside actors coming in to see the next great buck to be made off of water in the West and in California is something that we need to be keen to hear in the Legislature,” she said. “We believe that this effort, if we get it right, will protect agriculture in California, because when the water prices go up, our food prices go up.”

She worried that such hedge funds will charge exorbitant amounts for sending water to large suppliers like the Metropolitan Water District of Southern California, forcing Californians to pay more for drinking water.

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“I see down the line years from now that this gets bigger and bigger—our water rates being something the state has lost complete control over,” she said.

Ed Manning, a partner at KP Public Affairs representing the Western Growers Association and other trade associations, raced to explain the technical nuances of California water law to the committee. Water transfers alone are not a beneficial use. State code instead focuses on how the recipient of the transfer uses that water, regardless of the entity owning the right.

“This bill flips it on its head,” said Manning, adding that legal uses would be illegal if a private investment firm were involved.

He shared an example of the state funding a water bank through an investor. A Los Angeles-based hedge fund bought agricultural land when the water right became more valuable than the crops. Leveraging investments from the California Public Employees' Retirement System (CalPERS), the hedge fund then partnered with other entities to enhance the ability of the property to store more water underground, allowing the water bank to move supplies to public water agencies when needed. Manning was doubtful that such an investment would happen without the hedge fund.

The Public Policy Institute of California (PPIC) has been leading research efforts into water markets. Such trading exchanges have significant potential for developing reliable drinking water sources for cities while helping farms stay in business as the state implements new groundwater restrictions. PPIC has found that nearly a million acres of farmland could go permanently fallow from implementing SGMA.

Brenda Bass, a policy advocate for the California Chamber of Commerce, extended the concern to housing developments. She worried the bill’s definition of an investment fund is expansive enough to prevent developers from purchasing water rights for a planned community.

Manning also took issue with Bauer-Kahan’s assumption that investors can charge excessive and inappropriate prices for water. Supply and demand—driven largely by public water agencies—set the price. He questioned why it would be profiteering or morally wrong if a private entity is selling the water at the same price as a public one.

The agriculture coalition argues that limiting transfer activity in such a way would arbitrarily pick winners and losers.

Backing Bauer-Kahan, Asm. Laura Friedman of Glendale was skeptical of allowing any sort of role for hedge funds in delivering water to people, since the firms are driven by shareholder profits. Asm. Steve Bennett of Ventura, who is leading the charge in limiting new groundwater wells, added that private investment firms would have an incentive to sell the water only when they can get the maximum price.

“We don't want the groundwater—or any water in California—to be used as an investment asset,” said Bennett.

The committee passed AB 1205 along party lines, sending it to the Assembly floor for the next vote.

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