A prolonged drought in California could lead to ratings downgrades on the state's water and public power utilities unless they show a willingness to raise prices, according to a report by Fitch Ratings.
"Ratings could eventually be pressured if the severity and duration of this drought were to result in sustained (more than one year) weakness in utility credit quality," Fitch said in a report on the California drought.
California is experiencing one of the worst droughts on record and Jerry Brown, its governor, has declared a state of emergency.
Fitch says water sales are expected to decline due to calls for conservation. Although water and public power utilities are in a strong operational and financial position for the next year, Fitch says, a sustained decline in margins or reserve levels due to the drought could pressure ratings.
An ability to raise rates will also be key if the drought persists, Fitch says. "A utility's ability and willingness to exercise its rate flexibility and recover lost revenues will be a key rating factor in assessing any impact on ratings," the report says.
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