Arizona and neighboring states are preparing for the first mandatory cuts in water from the Colorado River after 20 years of drought.
The cuts required by the 2019 Drought Contingency Plan could affect the credit of dozens of bond issuers in states that rely on the river to irrigate the desert landscape. Arizona, which has voluntarily stored water in Lake Mead up to this point, stands to lose about 18% of its supply.
“Arizona would see the greatest impact of the lower basin states,” according to Fitch Ratings. “Further, due to the more senior rights held by upper river participants within the state, all reductions in Arizona's allocations would be taken from the portion of water distributed by CAP [Central Arizona Project].”
The Drought Contingency Plan requires California, Nevada and Arizona to store defined amounts of water in Lake Mead based on the elevation above sea level.
By mid-March, Lake Mead was only at 40% of its capacity and Lake Powell, upstream on the Colorado River, was at 37%. With snowpack in the mountains at 82% of normal this year, the elevations are not expected to rise.
California would begin making contributions when the lake falls to an elevation of 1,045 feet. The May 1 elevation was 1,079 feet.
The Metropolitan Water District of Southern California would be responsible for 93% of the contribution amounts for the state. The MWD, the wholesale water provider for the massive Southern California region, carries triple-A ratings.
“If Metropolitan were required to make contributions, it could ultimately affect its price competitiveness as the district's charges would likely increase beyond current expectations to enable it to recover all of its costs,” according to a May 7 report by Fitch. “However, Fitch does not believe there is an immediate credit concern for Metropolitan as a result of the DCP.”
On May 1, Lake Mead, the measuring point on the river between Arizona and Nevada was 136 feet below its 2002 level when the drought began.
The lake impounded by Hoover Dam is expected to drop to 1,071.57 feet in June, breaking the previous record low of 1,071.6 feet in June 1981. That would be about 4 feet below the level that would trigger a federal declaration of a water shortage.
The shortage will result in a “substantial” cut to Arizona’s share of the river, with reductions falling largely to central Arizona agricultural users, according to the Arizona Department of Water Resources.
Irrigated agriculture is the largest user of water in Arizona, accounting for 74% of the available water supply. Agriculture’s share was once as high as 90%, but urbanization of agricultural lands and heavy investment by the irrigated agriculture industry in conservation measures have reduced usage.
“These reductions are painful, but we are prepared,” the AWDR said in a
“We have long understood the risks to Arizona’s Colorado River supplies and have been planning for decades, including the successful efforts to create a Drought Contingency Plan for the Colorado River system in 2019,” the ADWR said.
So far in 2021, the river is currently operating in a “Tier Zero” status, requiring Arizona to contribute 192,000 acre-feet of Arizona’s 2.8 million acre-foot annual entitlement to Lake Mead. The contribution is coming entirely from the Central Arizona Project system.
State officials expect the U.S. Bureau of Reclamation to elevate the shortage level to “Tier 1” in 2022. That would require Arizona to reduce uses by a total of 512,000 acre-feet.
“We are prepared for Tier 1 reductions because Arizona water users have been working collaboratively for many years to protect our Colorado River water supply,” the ADWR said.
Seven states in the Colorado River Basin and the U.S. developed the Drought Contingency Plan in 2019 that lasts through 2026. A similar agreement with Mexico was reached separately. The DCP Steering Committee included more than 40 representatives of tribes, cities, agriculture, developers, environmental organizations, and elected officials, worked collectively to share the risks and benefits of the DCP.
The actions taken by Arizona’s water-community stakeholders, legislature and Gov. Doug Ducey manage the immediate risk to supplies on the Colorado River, providing time to develop new rules and programs to sustain the river after 2026, according to the ADWR.
The Colorado River Compact of 1922 is a complex set of laws governing water use in the basin and designed to conserve supply. But demand from population growth has surpassed the water available.
The Central Arizona Project was created by the Colorado River Basin Project Act, signed by President Lyndon B. Johnson on Sept. 30, 1968. In exchange for supporting the project in the 1960s, California's congressional delegation won senior rights to the Colorado water.
According to a 2014
A drop in available water of only 10% would endanger some $143 billion in economic activity in a year, according to the study.
The 2019 Global Water Report found that assessed the total business value at risk due to water shortages and water pollution at $425 billion.
“In many ways major water projects, such as the Colorado River Aqueduct, completed in 1941 to bring water to Southern California, and the Central Arizona Project, delivering water to Phoenix and Tucson since completion in 1994, have defined the civilization of the region,” S&P Global Ratings noted in a Jan. 6 report. “In the 21st century, though, the federal government has turned off funding for massive water projects.”
Lower flows through the generators at Hoover Dam mean less hydropower generated, forcing customers of the low-cost power to buy on the market.
Lincoln County Power District No. 1 in Southern Nevada has already warned customers to expect higher electric rates due to the falling levels on Lake Mead.
The cost of Hoover Dam hydropower is typically half the cost of power available from the wholesale electric power markets, according to Lincoln. Before 2005, hydropower from Hoover Dam supplied all the energy in Lincoln County. Since then, as generation has been reduced because of the drought, Lincoln County Power has had to purchase more power from the wholesale energy market at higher costs, officials said.
