California's water conservation could weaken utilities' credit

(Reuters) - California's strict new regulations for water conservation could have the unintended consequence of hurting the credit quality of water utilities in the drought-stricken state.

Regulators on Tuesday passed new measures to limit outdoor water use in an increasingly desperate effort to conserve. On Thursday, Moody's Investor Service warned that a significant drop in water sales could weaken the credit quality of some water utilities, many of them public districts.

Increasing rates to offset the loss of revenue - essentially charging more for less - would be politically challenging, the rating agency warned.

"Less sales is going to mean less revenue," said Eric Hoffmann, a Moody's senior vice president. "If they want to preserve their current revenue profile, there really isn't a lot they can do besides raise rates. That's not something that local governments are going to take lightly."

The State Water Resources Control Board's new regulations empower local agencies to fine water users $500 and $1,000 a day for excessive outdoor water use, such as washing driveways and sidewalks, watering of outdoor landscapes that causes excess runoff, using a hose without a shut-off nozzle to wash a vehicle, and using potable water in a decorative water fountain without recirculating it.

The new requirements go into effect on Aug. 1 and continue into 2015.

California is now in the third year of its worst drought in decades. Sixty percent of cropland has been left fallow, and state reservoirs are at only 42 percent of capacity. In January, Governor Jerry Brown declared a drought emergency, thereby committing millions of dollars to help stricken communities.

The drought is expected to cost California an $2.2 billion this year and potentially result in a loss of more than 17,000 jobs, scientists at the University of California in Davis said on Tuesday.

Brown had set a goal of reducing California's water use by 20 percent, but voluntary conservation efforts have only resulted in a quarter of that. By passing the new regulations, the state hopes more residents will shut off their taps.

"The pace that we've been on so far in terms of conserving has been fairly modest," said Hoffmann. "It's possible now that the pace is going to pick up and that may result in water revenues falling faster than what they originally planned."

For months, many utilities enjoyed usage rates that exceeded budgets, as customers craved more water amid hot and dry conditions. "So there is a margin there," Hoffmann said.

Utilities that have invested in storage, particularly in the southern parts of the state, will be in better shape to weather the drought as it continues, Hoffman said.

(Reporting By Robin Respaut; Editing by Steve Orlofsky)

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