SAN FRANCISCO (Reuters) - Residents of drought-ravaged California can expect to pay more for water next year as utilities pass on the cost of mandatory conservation measures to customers, a survey released by rating agency Fitch on Tuesday said.
Seventy-eight percent of the 46 retail water utilities polled said rate increases would either begin next year or have already begun.
The median increase in 2016 will be about 5 percent, although the largest increase will be 31 percent, Fitch said.
Facing a record-breaking drought, California in May adopted emergency regulations requiring a statewide 25 percent reduction in water sales.
As a result many water utilities will experience reduced financial margins in fiscal years 2015 and 2016.
“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 at Fitch.
Raising water rates in California is not easy. State law requires utilities to notify all property owners in writing of the proposed change and hold a public hearing to receive protests.
It also requires water changes to be limited to the actual cost of service. Many California water utilities are currently engaged in cost-of-service studies, making rate actions likely during mid- to late fiscal 2016.
“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,” Masterson said.
In addition to rate increases, 52 percent of water utilities expect to offset lower revenues by cutting operating expenditures, 46 percent said they would dip into financial reserves, and 37 percent said they would divert from their planned capital spending, according to Fitch.
Fitch said 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.
Reporting by Rory Carroll; Editing by Lisa Shumaker