Fitch: Proposal Could Mean Revenue Increase for California Water Issuers

Proposed changes to California’s drought regulations would likely result in higher sales and better financial performance for water issuers in fiscal 2017, according to Fitch Ratings. The proposal would move from state-mandated conservation levels to a system based on local supply conditions.

If the proposal is approved, Fitch says it expects it will lead to a quick rise in sales for some utilities, resulting in higher revenues. The prior state conservation mandate required between 4 percent and 36 percent reductions in usage over the past year. That led sales to fall sharply across the state, even for some utilities with robust supplies. Most water credits raised rates to levels that would, at least partially, recoup the revenue they lost when the cuts were put into place.

Water agencies would be required to calculate how much water they will need to ensure adequate deliveries, assuming they will have three additional dry years and conserve to close any projected shortfall. The State Water Resources Control Board will decide on the proposal on May 18.

RELATED: Fitch: RatesKey for California Water Utilities Amid Conservation

In February, after several months of above-average rainfall (due in part to El Nino), the state modestly revised the mandate when it introduced credits that could be used to reduce a water issuer’s required usage cuts. Based on climate, population growth and alternative water sources, including recycled water, the credits could reduce the conservation requirements by as much as 8 percent. Given continued above-average rainfall and snowpack, the new self-certification system is an effort to acknowledge improved conditions as well as a diversity of supply portfolios.

However, we believe sales are unlikely to rebound fully to pre-drought levels. The changes in water use patterns under the current mandate will likely lead to a lower normal consumption level being maintained. Furthermore, despite the recent rise in supplies, some drought risk remains. Any recovery in sales could be reversed if the prolonged dry conditions continue or worsen and the state returns to conservation mandates.

California water utilities have generally weathered the historic drought quite well, with little movement in ratings. Fitch expects its ratings to remain stable as utilities continue to implement, and customers continue to accept, rates adjustments to recoup fixed costs and improve financial margins.

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