SAN FRANCISCO - Groundwater legislation signed by California Gov. Jerry Brown last week will be positive for the state's water agencies in the long term, but could pressure ratings in the mid-term, according to Fitch Ratings.
Brown signed a package of three bills on Sept. 16 that require local agencies to create and adhere to plans for sustainable groundwater management to battle chronic overdraft conditions.
The legislation "will benefit municipal water agency credits in the long-term by stabilizing supply and raising drought resiliency," Fitch analysts said in a report released Sept. 22.
The new rules create incentives for water agencies to invest in alternative water supplies like groundwater recharge, maximizing usage of surface water rights, conjunctive use, water recycling, and conservation.
"These investments will boost debt levels and water bills but will be more than offset for most issuers by supply reliability improvements," Fitch said. "If well implemented, the legislation also will lower the risk that water agencies investments in stable supplies will be negated by overuse by neighboring communities through unadjudicated basins."
In the shorter term, the 10- to 20-year phase-in of the requirements comes too late to mitigate the supply pressures caused by the current severe drought and could hurt ratings of agricultural water agencies, Fitch said.
In addition, the legislation could pressure some water agencies by forcing some farmland out of production, weakening customer bases.
Adapting to changes under the new rules will be harder for agencies that lack rate setting flexibility, according to Fitch. These agencies will be pressured sooner.
The groundwater legislation continues a long tradition of state water policymaking in which droughts force the state and its local agencies to make major investments in long-term supply reliability.
"In our view these investments are among the main reasons the current extreme drought impact has had little impact on credit ratings," Fitch said. "However, the potential for greater impacts remains as the drought lingers."
