California Mandates Present Financial Challenges To Water Utilities

Water conservation mandates in California are likely to have a negative impact on water utilities. 

According to Fitch Ratings, the mandates "will reduce revenues available to pay bondholders at many agencies and could create an unintended disincentive to invest in necessary local water supply and storage projects."

"We expect the financial impact will occur primarily in fiscal 2016 and [will] vary across the 49 Fitch-rated retail California water utilities," Fitch said. "The speed of the cuts will force some to spend down their reserves or divert capital funds, possibly reducing credit quality in the short run."

New rules announced by Governor Jerry Brown in April order localities to cut water use significantly. Utilities must cut usage between 8 percent and 36 percent by February 2016. Overall, "the governor is looking to cut urban water use by 25 percent by the end of next February. There are 411 urban water districts in California and the 25 percent reduction will be drawn from all of them combined," KPCC reported.

That presents challenges to water utilities. Analysts say utilities "could struggle to raise revenue in the arid conditions," The Bond Buyer reported.

Investors are avoiding investing in debt issued by water utilities, which was "long considered one of the safest types of debt sold by state and local governments," The Wall Street Journal reported. Now they are wary of bonds "from hard-hit areas of the U.S. west, amid concerns that restrictions on water use will drive down water-authority revenue. Some authorities may have a tough time raising rates to offset that lost income."

In some areas, the financial challenges utilities experience could mean higher rates for consumers. Many localities are already raising rates to deal with cost pressures. 

"Gov. Jerry Brown’s landmark mandatory orders requiring the biggest users to conserve more will impact communities differently. Yet many San Mateo County residents must brace for water rate increases as the area’s main supplier, the San Francisco Public Utilities Commission, announced a 28 percent rate increase slated for July," The Daily Journal reported. 

Utilities and cities could face fines up to $10,000 per day if they fail to cut back, according to the report.