LOS ANGELES — A survey Fitch Ratings conducted of 49 California water utilities found that customers can expect rate increases and that those increases bode well for California water districts' credit quality through 2017.
California residents can expect to pay more for water in the coming year as the state's utilities seek to offset costs associated with mandatory conservation, the survey found.
"The persistence of this drought has begun to outstrip the tools utilities typically use to manage the state's hydrological cycles," said Kathryn Masterson, senior director. "Despite constitutional considerations and legal scrutiny of water rates, rate increases remain one of the most viable tools utilities have in the face of greater conservation and lower revenues."
Fitch surveyed the 49 California retail water utilities in its ratings portfolio to determine how they are managing the increasing severity of the drought and the state-mandated reduction in water sales. Responses were received from all but three. According to Fitch, 78% of utilities polled said that rate adjustments will be enacted in the next year or have already begun and 57% said a self-correcting rate structure is already in place.
Fitch's survey results indicate that while fiscal 2015 will show lower financial margins for many utilities, fiscal 2016 may see modest improvements, with the full rate impact benefitting financial margins in fiscal 2017, even if the drought continues at its present level of severity," according to the rating agency's Aug. 18 report.
"The credit quality of California's water sector is well supported by strong financial flexibility and adaptive rate structures that were in place going into the drought," Masterson said.
These features provide short-term support to credit quality as long-term rate adjustments in the next year gain traction by fiscal 2017.
"Utilities that fail to act quickly could face downward rating pressure," she said.