SAN FRANCISCO - California's new statewide water usage restrictions are a credit negative for the state's water utilities, which could see a drop in water sales as a result, Moody's Investors Service said in a report.

In response to a severe drought, the State Water Resources Control Board recently adopted new statewide restrictions on water use.

California is currently experiencing the driest conditions on record and its major reservoirs are at just 50% of their historical average.

"The new regulations, which take effect Aug. 1 and seek to promote water conservation, are credit negative for the state's water utilities because they will reduce water consumption and water utility revenue," Moody's analyst Michael Wertz said in the report, released Thursday.

The new rules, announced on July 15, aim to accelerate the rate of water conservation by reducing wasteful outdoor water use, which would move the state closer to Gov. Jerry Brown's call in January for a 20% water use decrease.

Since then, water use in the state has only declined by 5%.

The regulations include prohibitions against watering landscapes or hard surfaces in a way that will result in runoff, using potable water in decorative water features, and using a hose that does not have a shutoff nozzle to wash vehicles.

Violators can be fined $500 per day of violation.

Water agencies will also be subject to restrictions, with most urban water utilities having to impose mandatory use restrictions on outdoor irrigation. This will limit the time and duration of landscape irrigation — a major component of the state's water use. Water agencies that violate restrictions can be fined $10,000 per day.

Moody's said the strong financial penalties and mandatory conservation measures will increase conservation and place water purveyors under pressure to increase rates in order to maintain stable revenues.

"In the event the utilities do not adjust rates to offset lower water sales, lower revenues will weaken credit quality," Wertz wrote. "Raising rates at any time is politically challenging, and we expect that raising rates to offset conservation, effectively charging more for less, will be even less politically palatable."

Before the SWRCB announcement, Moody's said the majority of water utilities had required only voluntary conservation. According to data from the Association of California Water Agencies, 153 agencies had voluntary water restrictions and 58 had mandatory water restrictions.

In some jurisdictions, water use has actually increased, due to greater demand for water use amid dry conditions.

Major water utilities that Moody's rates includes the Metropolitan Water District of Southern California (Aa1), Los Angeles Department of Water and Power (Aa2), San Diego County Water Authority (Aa2), and San Francisco Public Utility Commission (Aa3). The agencies have stable outlooks.

Since the rules take effect on Aug. 1, there is limited time for water utilities to adjust expenditures to offset the net effect of lower water revenues, Moody's said.

"Although some water utilities will be able to lower water purchase costs, they will be strained to decrease fixed labor expenses, capital expenditures that are already underway and maintenance expenditures," the report said.

Fitch Ratings took a more optimistic view of the water usage requirements, saying the statewide restrictions will help get their message out more broadly to promote conservation.

"With California's drought likely to persist for a fourth year, the state's mandatory water curtailments indicate a shift toward a one-size-fits-all message on water conservation," Fitch senior director Kathryn Masterson said in a brief statement Friday. "While many cities and their utilities have been conserving water individually, this enhances statewide publicity on an issue with varying regional severity, and supports local utilities in their customer communication and enforcement efforts."

Fitch said the state's public water utilities remain stable.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.