Colorado River states running out of time to craft usage plan

Bloomberg News

The clock is ticking for the seven western states that use Colorado River water to renegotiate an operating agreement before the federal government steps in and lays the ground rules for them.

At stake are water allocations, curtailments, storage and other general operating conditions — all of which S&P Global Ratings believes could affect the credit quality of Colorado River water users, according to a Monday commentary.

The Colorado River's reservoirs provide water to about 40 million people across the West.

The current operating framework expires in December 2026, but if the states fail to reach a consensus by this summer, federal intervention and litigation become more likely, said Jenny Poree, an S&P senior director.

"An operating framework that improves the predictability and reliability of Colorado River allocations and storage would be credit-supportive — even if that means reduced allocations under certain circumstances," Poree said.

In a draft Supplemental Environmental Impact Statement, released in April 2023, the federal government had encouraged the states dependent on the river to modify user agreements and more heavily restrict offtakes as conditions had grown increasingly dire on the river system. But record rainfall since then has lessened the urgency to strike agreements, Poree said.

If water users reach an agreement by this summer, they would have more say on what water reductions look like, Poree said.

"There has been very little agreement based on the federally proposed alternatives," Poree said. "They didn't submit what the federal government asked for. They submitted upper and lower basin proposals, but they haven't agreed on guidelines [that would work for the whole system]."

Under the Colorado River Compact of 1922, S&P analysts said, the Upper Basin and Lower Basin are each allocated 7.5 million acre-feet of river water annually.

The Lower Basin states of Arizona, California and Nevada generally use most of their allocation, but the Upper Basin states of Colorado, New Mexico, Utah and Wyoming generally use about 4.5 million acre-feet of their allocation, which is mostly dependent on snowpack for crop irrigation and hydropower generation, S&P said.

The lower basin states have proposed a plan in which lower basin states would absorb most of the reductions when water levels across the system fall below 69%, and when they drop below 38% reductions would be shared by all seven states and Mexico, S&P analysts wrote.

In contrast, the Upper Basin proposal includes only mandatory cuts for the three Lower Basin states if Lake Mead, the reservoir behind the Hoover Dam between Arizona and Nevada, falls to a certain threshold, while offering the four Upper Basin states the option to undertake voluntary reductions.

One of the Upper Basin's priorities, according to S&P, is for the new plan to be more responsive to actual hydrology at Lake Powell, the other massive reservoir on the river, and Lake Mead. They are recommending a monthly meeting with USBR to monitor drought conditions to help avoid a repeat of 2021, when water levels in the reservoirs reached dangerous levels.

S&P analysts are concerned that if the states don't reach agreement on a new operating plan, the federal government could return to what it did before the current agreement was struck in 2007, which was to determine water allotments on an annual basis.

"There wasn't a lot of supply predictability then," Poree said.

Having set allotments enables water users to determine what level of conservation they need to do each year, whether they will need to access an alternative water supply or implement a drought surcharge, she said.

S&P analysts expect the federal government will take a more active role in the negotiations under the Trump administration, but the incoming appointees of the Department of the Interior and USBR have not been confirmed.

Funding to support water projects on the river, roughly $8.3 billion for drought resilience projects under the Bipartisan Infrastructure Law, and $4.6 billion for drought mitigation under the Inflation Reduction Act, are frozen as part of the wider Trump administration slashing of federal spending, Poree said.

The amount of money available to fallow farmland to reduce water use from federal funds, or for other water projects, is probably not enough to "make or break" those projects, Poree said.

"It won't create a credit event, but it won't be helpful," she said.