CA declares drought state of emergency, water agencies stable, research shows

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Jan. 22, 2014 -- California just finished the driest calendar year on record, according to the California Department of Water Resources. As such, Governor Jerry Brown declared a drought state of emergency on Friday, Jan. 17. The drought has exuded conditions likely to have significant impacts on the state's communities, economy and environment in the coming months, according to a recent Department of Interior press release.

The release indicated that the U.S. Department of Agriculture (USDA) designated areas in 11 states, including 27 counties in California as primary natural disaster areas due to the drought. Further, it stated that the Interior's Bureau of Reclamation is working closely with federal and state authorities to facilitate water transfers and provide operational flexibility to convey and store available water and facilitate additional actions that can conserve and move water to critical areas.

While severe droughts continue to pervade the state of California, water utilities are expected to effectively manage the emergency in the near term, according to research by Fitch Ratings. However, a more severe or prolonged drought could affect import- and surface-water-dependent facilities, even as those with significant groundwater supplies are predicted to maintain their financial stability.

Accordingly, an extended drought could simultaneously increase water prices and reduction in usage, ultimately pressuring import-dependent utilities and forcing large and difficult-to-impose rate increases. Contrarily, water plants with significant groundwater supplies in basins that haven’t been overpumped, utilities that have invested heavily in alternate supplies like water recycling, and surface water purveyors with very high-priority water rights would have ample supplies to sell, outperforming peers.

The current wet season has also been severely dry, marking a third dry year for the most populous U.S. state. Governor Brown asked the state's residents to cut water use by 20 percent while declaring a drought emergency and hinting that mandatory rationing may be required in the months ahead. The California State Water Project, which serves two-thirds of the state's population, announced late last year an initial allocation of water for 2014 at just 5 percent of contracted amounts. Water rationing is likely to begin in earnest in 2014.

Fitch expects revenue reductions in 2014 and 2015 to be less severe than those in the 2007-2009 drought as sales are currently lower than when utilities experienced the dual impact of economic recession and drought conditions. Also, many utilities adopted drought rates following 2007-2009 or will have corresponding expenditure reductions in their purchased water costs.

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