LOS ANGELES — Moody's Investors Service says the California governor's recent water restriction mandates are a credit negative for water utilities.
Gov. Jerry Brown issued an
"This is the first time the state has ever implemented mandatory statewide water restrictions, though local restrictions have been used frequently in prior droughts and are already in place in some California communities," according to Moody's April 9 report.
Overall, the governor's order is credit negative for California water utilities for several reasons, according to Moody's, including that the deadline for the reductions might limit water utilities' ability to raise rates to alleviate the impact of reduced use. It also reduces the opportunity to garner the broad customer support typical of regular and periodic local rate adjustments, according to Moody's.
The state is requiring that utilities implement "conservation pricing" to reach the 25% goal rather than allowing them to set rates and fees according to their own, specific local circumstances.
In September, 84% of California water utility respondents to a Moody's rate-planning survey indicated that they intended to raise rates in fiscal 2016. However, the average projected 2016 increase was only 4.1%, which came on the heels of an average 5.3% increase in 2015. The combined rate increases were to offset an expected 10% decline in water sales starting in fiscal 2015.
"Most enterprise managements have assumed some level of increased conservation and possibly stricter usage rules were on the horizon, but likely not a mandatory 25% reduction," according to Moody's analysts. "Also appropriately tuning their price schedules to achieve this 25% reduction, while not undermining their overall fiscal health, will require a level of insight into their customers' price sensitivity that many enterprises do not have."
In developing the rules and restrictions, the SWRCB will give consideration to the relative levels of use and conservation already achieved in each water supplier's service territory.
The new rules aren't expected to be adopted by the board until May 5 or 6, and local governments' rate planning for the 2016 fiscal year beginning July 1 will already be well underway.
Some agencies are likely to fare better than others.
For instance, Eastern Municipal Water District creates and indoor and outdoor water budget for each household based on the number of occupants and the amount of irrigable land. Customers are then charged sharply escalating rates for water use above the budgeted amount. This approach resulted in a 15% decline in water use despite only a 4% increase in customer costs.
"This sort of sophisticated water budgeting and pricing is the exception rather than the rule in California, with most enterprises using much simpler tiered pricing," Moody's said.
As of February 2015 the San Francisco Public Utilities Commission's daily residential use per capita in the city was just 44 gallons, which is well below the statewide average of 77 gallons. It is just 6% below SFPUC's retail customers' 2013 use, however.
The draft framework for the rules released on April 8 suggests San Francisco will only be required to meet a 10% reduction due to its already low per capita use, Moody's said.
Despite a multi-decade trend of stable per capita water use, annual water use by the customers of the Los Angeles Department of Water and Power has increased in each of the last several years as a result of warmer than typical weather and increased economic activity.
"We anticipate that LADWP's existing rate structure will mitigate some of the financial impact of the water sales reduction that will occur in the current and next fiscal year," Moody's said. "As of February 2015, the city's daily per capita use was 69 gallons, which is below the statewide average, but only 5.9% below their 2013 average."
