OREANDA-NEWS. California residents can expect to pay more for water in the coming year as the state's utilities seek to offset costs associated with mandatory conservation, according to Fitch Ratings' survey of public utilities in the state.

Seventy-eight percent of utilities polled indicated that rate adjustments will be on tap in the next year or have already begun. Fifty-seven percent said a self-correcting rate structure is already in place.

"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. "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."

Proposition 218 altered the California constitution to add procedural requirements and limitations on property-related fees and changes, including the requirement that water charges must be limited to the actual cost of service. Many California water utilities are already engaged in cost of service studies, making rate actions likely during mid to late fiscal 2016.

Fitch expects the median water rate increase in 2016 to be around 5%. However, the range of rate changes expected by utilities ranges between 0% and 31%. Specific rate proposals are preliminary and will likely adapt over the remainder of 2015 as conservation trends and financial performance solidify.

Among the other tools utilities expect to use to offset lower revenues, 52% of utilities reported cutting operating expenditures; 46% said they would use financial reserves; and 37% said they would divert from their planned capital spending. None of the utilities polled said they planned to limit new customer growth, while only 2% said they would consider debt service restructuring.

Fitch's survey results indicate 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.

The credit quality of California's water sector is well supported by strong financial flexibility and adaptive rate structures that were in place going into the drought. These features provide short-term support to credit quality as long-term rate adjustments being taken in the next year gain traction by fiscal 2017. Utilities that fail to act quickly could face downward rating pressure.

Fitch surveyed the 49 California retail water utilities in its ratings portfolio to determine how they are managing the increasing severity of the drought and the state-mandated reduction in water sales. Responses were received from all but three utilities.

The full report is available at 'www.fitchratings.com'.