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The federal government’s draft Supplemental Environmental Impact Statement on Colorado River conditions isn’t likely to trigger significant rating changes, but it could spur the seven states that use the waterway to reach a consensus on additional supply cuts and the future of the watershed, S&P Global Ratings said.

The federal government has encouraged the states dependent on the river to modify user agreements and more heavily restrict offtakes as conditions have grown increasingly dire on the river system in recent years.

The anticipated runoff from the snowpack created by this year’s record storms is not enough to insure longer-term prospects for the river system, said S&P analysts, which prompted the U.S. Bureau of Reclamation to release the draft SEIS.

Federal water officials emphasized when they released the report at Lake Mead in mid-April they want the states to reach a consensus on steeper cuts to water use because any action taken by the federal government is likely to invoke litigation from water users.

The choices federal water officials outlined in the SEIS “provide room for additional work and solutions,” Tommy Beaudreau, deputy secretary of the Department of Interior, said when he released the report. The document “is intended to drive those conversations and negotiations forward,” he said.

The announcement served as a step in an ongoing environmental impact study, led by the U.S. Bureau of Reclamation, to analyze the cuts needed to stabilize the Colorado River’s reservoirs, which serve about 40 million people across the West and have hit record lows in recent years. The deadline for comments on the draft SEIS is May 30.

The SEIS outlined three options: one a “no action” proposal; one that lowers water based on historic water rights priorities; and a third that would significantly accelerate the curtailment for Lower Basin states, S&P analysts said.

Nevada’s respective curtailments are similar in both proposals, and upper basin users are unaffected. Arizona and California are the most affected, and one proposal under a Lake Mead water shortage scenario would force steeper cuts on Arizona, while the other proposal would hit California harder, according to S&P’s report.

The USBR report, released last month, affects water systems that rely on the Colorado River System and hydroelectric power production in the lower basin states of Arizona, California and Nevada. It laid out options for revised near-term operating guidelines for Glen Canyon and Hoover dams that could presage a “precedent-setting shift in how priority water rights are recognized,” S&P analysts Jenny Poree, Chloe Weil and Paul Dyson, said in Thursday’s report.

“We believe the intention of the SEIS is to spur the seven affected states to agree to a set of priorities, specifically past 2026, when a current set of guidelines, established in 2007, expires,” the S&P analysts said.

The 2007 Colorado River interim guidelines addressed the issue of water shortages in the basin and linked the operations of Lake Powell and Lake Mead, but S&P said key stakeholders agree that a more comprehensive set of cuts will be necessary to fully address operations within the Colorado River watershed in the future.

“We expect very few negative rating actions given the municipal utility sector’s strong financial capacity, improved hydrology and snowpack conditions in the west, ample storage, and supply diversification across the region,” S&P analysts said in the report.

The federal government has signaled before that if the states don’t come up with a better system to trigger steeper water-use cuts to preserve the river system, it would step in.

“We believe the draft SEIS represents more than a warning, it’s a proposed action,” Poree said. “It suggests the federal government will step in, if there isn’t a consensus decision reached.”

The USBR is expected to make a final decision in August that “will affect utility operations in 2024 and potentially in 2025,” Poree said. “The river conditions have improved, so it is less likely that a federal mandate is as time sensitive as it was a short time ago.”

Surface and groundwater supplies in Arizona and California, in addition to the Colorado River watershed, improved with this year’s above-average snow and rain, Poree said.

“For example, the Salt (230% of average) and Verde (450% of average) rivers are well above average,” Poree said. California’s State Water Project system, which funnels water through a complex system of canals from northern California to the Central Valley and southern California, “reports a 100% allocation and the Los Angeles Aqueduct is 296% of average.”

She added, improved conditions should provide greater flexibility in the near term.

The alternative in the SEIS suggesting steep cuts to California has the potential to affect southern California water districts that receive water from the Metropolitan Water District of Southern California. Met supplies water to 26 cities and water districts that in turn provide drinking water to nearly 19 million people in parts of Los Angeles, Orange, San Diego, Riverside, San Bernardino and Ventura counties.

“While there could be short-term credit pressure if the second action alternative is implemented, which accelerates cuts in California, we believe that scenario is unlikely and would be heavily litigated given established water rights,” Poree said. “At this point, MWD has ample storage, strong financial capacity and sophisticated planning which supports the current rating. They also have supplemental supply projects that will provide improved future redundancy.”

S&P currently has a stable outlook on the water sector “given the strong financial metrics and rate affordability that provide significant financial capacity to meet the challenges in the sector,” Poree said.

As noted in the report, Poree said, “the average water bill for the three Lower Basin states, using the major wholesaler rates and retail rates of rated issuers as a proxy, is well below 1% of median household income, which provides managers with significant rate-setting flexibility. Those with regulatory pressures and redundancy needs may face greater challenges but given the essentiality of service, we believe elasticity of demand is favorable.”

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