A disincentive to conserve

Last month we reported that Fitch Ratings, a global agency that evaluates and rates agencies that issue bonds, had given the San Luis and Delta-Mendota Water Authority an A rating on revenue bonds issued in 2008.

The rating was based on the financial strength of Westlands Water District.  That, in turn, was based on Westlands water “entitlements” (a term open to question) and its asserted ability to market water.

We also noted that municipal bonds financing water supply can be risky, given potential shortages of water.

Now Fitch has given a AAA rating to $250 million in Metropolitan Water District water revenue bonds scheduled to be sold this week.  Fitch has also affirmed its previous AAA ratings on two prior issues of MWD water revenue bonds, totaling over $4.7 billion.

BusinessWire lists some key rating drivers. A regional water shortage and water use reduction in 2009 led to lost revenues.  Now MWD needs to recover 2 million acre feet per year in water sales. Also, MWD must participate in a long-term solution in the Bay-Delta, “which will likely involve additional capital spending, paid for by Metropolitan’s members.”

In other words, from the perspective of bond financing, MWD has nothing to gain in the short term from net reductions in water use.

(And we can’t lose sight of the fact that conservation in urban areas has never meant more water for the system statewide.  It has meant more water for local development.)

As recently as 2007, MWD reports getting about 75% of its water supply from the Delta. (The accuracy behind this percentage has been questioned by some researchers.)  Nonetheless, investors, and the ratepayers who will pay for the bonds, need to know that regardless of what kind of long-term solution is reached for the Bay-Delta, MWD will not be getting that much water from the Delta in the future.  We wonder if they understand that they are being asked to secure debt for less water.

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