NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: California Water - Striving for 25% Conservation (Rates and Charges Increase, Financial Margins Dip)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869298
The potential extension of California's 25% conservation mandate will have minimal impact on the credit quality of water utilities in the short term but presents mid- to longer-term risks, Fitch Ratings says. Utilities that fail to act quickly could face downward rating pressure.
Fitch expects water utility ratings to be stable in the short-term due to the actions issuers have taken so far, most notably upward rate adjustments and/or changes to rate structures to raise overall rates. Many of these tactics are in process and are expected to take effect by fiscal 2017.
Over the longer run, lower water consumption may be the 'new normal' even after drought conditions improve due to demand hardening as users adapt to conservation. Utilities with effective outreach programs to educate users about the need to increase rates, and which have more closely aligned fixed costs with fixed charges will likely garner more public support. However, increasing rates combined with decreasing water consumption could test rate flexibility.
Conservation mandates have thus far not taken into account local water supply. This could make capital-intensive investments in the development of additional water sources less economical. However, with the extension of the conservation mandates the state will consider modifying usage restrictions to addresses lessons learned, including uses of potable and non-potable water.
The governor issued an executive order last week proposing an extension of conservation mandates put in place in May 2015 from their original expiration in February 2016 to Oct. 31, 2016 if drought conditions persist. Given that the drought is not expected to end despite above average precipitation anticipated from an El Nino storm system, the restrictions will almost certainly stay in place through fall 2016.
For more information, see the Fitch report: "California Water - Striving for 25% Conservation (Rates and Charges Increase, Financial Margins Dip)" on www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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