The expected water cuts from the Colorado River as a result of the Drought Contingency Plan (DCP) will likely mean higher water utility rates, according to Fitch Ratings.

The U.S. Congress passed the DCP in 2019 to protect water levels in Lake Powell and Lake Mead which provide water to Colorado River basin states. Arizona, California, Colorado, Nevada, New Mexico, Utah, and Wyoming, and Mexico entered into the DCP, which mandates how water cuts will occur when the lakes drop to certain levels, called tiers.

The agreement was sealed because public agencies, eight major private corporations, and non-governmental organizations(NGOs) contributed tens of millions of dollars to leave water in the lake for conservation projects and to provide aid to Pinal County farmers, who would be the hardest hit by reductions.

The DCP included a new water level for extra protection, “Tier Zero.” If the water level dips below 1090 feet above sea level, reductions are made to leave water in the lake. Lake Mead has been in Tier Zero. A tier 1 shortage occurs when the lake drops to 1075 feet above sea level.

Water volume at Lake Mead, the Lower Colorado Basin’s principal reservoir serving Arizona, as well as Nevada and California, has fallen to historically low levels due to the drought throughout the west. As of April 26, Lake Powell was down to 35% full, while Lake Mead was down to 38 percent.

Fitch Ratings predicts that the drought will cause a tier 1 reduction in water allocation for 2022 when shortage levels are announced in August as part of the US Bureau of Reclamation water study. In addition, Fitch expects further water delivery reductions over the next several years, which will result in increased delivery rates to customers to counterbalance lower sales volumes.

According to the DCP, Arizona is required to take reductions of about 18% of its allocation in a tier 1 shortage. The largest cuts under the DCP will be absorbed by the Central Arizona Water Conservation District, which transports water via the Central Arizona Project (CAP) to three counties in central and southern Arizona under long-term contracts with strong purchasers.

The tier 1 shortage will reduce water to the Central Arizona Project by 320,000 acre-feet, enough water to supply 1.2 million individuals for a year. These reductions will affect farmers first because they have low priority rights for river supplies. Municipalities and tribes are considered a higher priority and are unlikely to see any early reductions to supply. However, they will still be subjected to higher prices.

The largest purchasers of CAP water include Tucson, Phoenix, Scottsdale, Gilbert, Mesa, and Peoria. CAP participants have been taking more water at lower prices and storing it in anticipation of cuts to guard against price increases.

Regional wholesale and retail purchasers of CAP water will likely rely on other supply sources, such as groundwater or stored water reserves, and/or pass on the CAP rate increases to users to eventually pressure rate flexibility.

Ted Cooke, general manager of CAP, said in a briefing led by state water leaders that the reductions would not harm most citizens and businesses.

“We have a plan. It’s called the Drought Contingency Plan, and we’re implementing that plan,” Cooke said. “This is a day we knew would come at some point and we’ve been preparing for this moment for at least a couple of decades.”

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This article was published on July 6, 2021 and is reproduced with permission from  The Center Square.