BRADENTON, Fla. — Georgia issuers are facing new credit pressures and calls for conservation because of a looming deadline to cut back on withdrawals from certain river basins and a federal reservoir that provide drinking water to the state’s growing population.
Georgia credits that rely on such withdrawals may be placed on negative rating watch at the beginning of next year if a federal court order imposing the cutbacks by July 2012 isn’t resolved, Fitch Ratings said in a special report.
The state should focus more of its financial resources on water conservation, which is less costly than building more expensive infrastructure such as reservoirs that can take years to build, according to Ceres, a national coalition of investors and environmental groups, and American Rivers, a national environmental nonprofit organization.
Gov. Nathan Deal has been asked by Ceres and American Rivers to dedicate 20% of the $300 million of general obligation bonds he has proposed for drinking water projects to local and regional water conservation and efficiency projects, programs and incentives.
Deal’s press secretary, Stephanie Mayfield, did not respond to a request for comment about whether the governor would consider more conservation funding.
The renewed focus on drinking water issues follows a severe drought in 2008, and a federal judge’s 2009 ruling that local governments with a combined population of more than three million people in the Atlanta Metropolitan Statistical Area, or MSA, were improperly withdrawing water from a federal reservoir, Lake Lanier.
He ordered cutbacks by nearly half. Several appeals of the judge’s ruling are pending.
The ruling is also related to the “tri-state water wars” between Georgia, Alabama, and Florida over regional water rights and withdrawals from Lake Lanier and interconnected river basins.
“Fitch has long cited the issue of water supply as a long-term credit concern for issuers operating in the Atlanta MSA,” said a report by Fitch analyst Christopher Hessenthaler.
Fitch will not take uniform rating action on the regional issuers, he said, based on the expectation that the court ruling will be resolved well before the deadline and “given the essentiality of water supply to the MSA and the devastating effect any material reduction would have on the region.”
For issuers in Atlanta and the surrounding region, Fitch said any rating action would depend on a resolution to the federal court decision and the extent an issuer depends on Lake Lanier.
“Fitch will continue to monitor the issuers it rates and focus on each utility system’s ability to withstand any reduction in water allocation in a way that sustains the level of financial flexibility and overall credit quality assumed at each system’s current rating,” Hessenthaler said.
To address the drought and the federal court ruling over the past few years, state officials have developed recommendations on water conservation and supply options.
Some have focused on infrastructure such as building new reservoirs, though a task force appointed by former Gov. Sonny Perdue in 2009 recommended “that enhanced conservation, implemented through incentive-based programs, should be pursued regardless of the outcome of the Lake Lanier reauthorization.”
Perdue signed the Water Stewardship Act of 2010, which requires efficient water fixtures in all new residential and commercial construction starting next year. It also ordered state agencies to look at grants and loans for local governments to develop incentive programs that encourage retrofitting in existing construction projects.
The Georgia Environmental Finance Authority in mid-May began offering a 1% interest-rate reduction on water conservation loans from several of its funds for projects that focus on utility water loss and end-use water efficiency. There are also other conservation-oriented projects for education, financing, and voluntary compliance.
Ceres and American Rivers acknowledge that Georgia has adopted water-related policies and set programs in motion, including identifying funding sources such as the $300 million of GOs Deal has proposed selling over the next four years.
However, many of the conservation-oriented efforts and other sustainable management practices have not been adopted by the state, the groups said. They also pointed out that some financing sources for Georgia’s programs are dependent on diminishing federal funds.
“The governor’s $300 million provides a new type of funding for water-supply projects that we think should be made available for water efficiency and conservation … to provide direct state investment, similar to grants, to Georgia communities,” said Jenny Hoffner, director of water supply for Georgia-based American Rivers.
“Given recent droughts and the tri-state water conflict, it is certainly in the state’s interest to be as efficient as possible with this scarce resource,” she added.
While state progams are on the right track, the state should go further in requiring and incentivizing more cost-effective investments in conservation and efficiency, according to Sharlene Leurig, senior manager of insurance programs at Ceres.
“The Water Stewardship Act falls short of steps recommended by Governor Perdue’s task force following the 2008 drought, and as a result the state’s water use in 2035 is expected to only be 2.1% lower than it would have been under a business-as-usual scenario,” she said. “Economic growth can be achieved even as total water use stays constant or decreases.”
Leurig said Los Angeles and San Diego have held water use at their 1990s levels even as their populations grew over the last two decades. For Georgia to achieve that level of water savings, the state must make “serious investments into conservation and efficiency,” she said.
“The state’s water and economic security rests on the efficient use of water, as increasing regional water competition and more volatile weather will surely limit supply,” Leurig said.
Leurig — who authored a report last year about risks associated with bonds sold in areas with declining water resources — said Georgia’s task force recognized “huge potential to saving tremendous amounts of water through cost-effective methods.”
The state has taken some steps, like requiring reductions in the loss of water from leaking pipes, “but very little funding has been allocated,” she said.
Another fundamental area of change she thinks Georgia could address is the way water is sold. Many utilities, some of them in Georgia, manage their water “by selling as much as they can when supplies are good,” Leurig said.
Credit rating downgrades can result when water supplies shrink because of drought and emergency conservation measures are required.
Utilities can set rates to allow for conservation and allow customers to conserve, Leurig said, noting that some utilities have experimented with this for some time, especially in the West.
“Conservation comes with a cost, but you can plan for it,” she said.
