Arizona and neighboring states are preparing for the first mandatory cuts in water from the Colorado River after 20 years of drought.
The cuts required by the 2019 Drought Contingency Plan could affect the credit of dozens of bond issuers in states that rely on the river to irrigate the desert landscape. Arizona, which has voluntarily stored water in Lake Mead up to this point, stands to lose about 18% of its supply.
“Arizona would see the greatest impact of the lower basin states,” according to Fitch Ratings. “Further, due to the more senior rights held by upper river participants within the state, all reductions in Arizona’s allocations would be taken from the portion of water distributed by CAP [Central Arizona Project].”
The Drought Contingency Plan requires California, Nevada and Arizona to store defined amounts of water in Lake Mead based on the elevation above sea level.
By mid-March, Lake Mead was only at 40% of its capacity and Lake Powell, upstream on the Colorado River, was at 37%. With snowpack in the mountains at 82% of normal this year, the elevations are not expected to rise.
California would begin making contributions when the lake falls to an elevation of 1,045 feet. The May 1 elevation was 1,079 feet.
The Metropolitan Water District of Southern California would be responsible for 93% of the contribution amounts for the state. The MWD, the wholesale water provider for the massive Southern California region, carries triple-A ratings.
“If Metropolitan were required to make contributions, it could ultimately affect its price competitiveness as the district’s charges would likely increase beyond current expectations to enable it to recover all of its costs,” according to a May 7 report by Fitch. “However, Fitch does not believe there is an immediate credit concern for Metropolitan as a result of the DCP.”
On May 1, Lake Mead, the measuring point on the river between Arizona and Nevada was 136 feet below its 2002 level when the drought began.
The lake impounded by Hoover Dam is expected to drop to 1,071.57 feet in June, breaking the previous record low of 1,071.6 feet in June 1981. That would be about 4 feet below the level that would trigger a federal declaration of a water shortage.
The shortage will result in a “substantial” cut to Arizona’s share of the river, with reductions falling largely to central Arizona agricultural users, according to the Arizona Department of Water Resources.
Irrigated agriculture is the largest user of water in Arizona, accounting for 74% of the available water supply. Agriculture’s share was once as high as 90%, but urbanization of agricultural lands and heavy investment by the irrigated agriculture industry in conservation measures have reduced…