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Some public power agencies in California could be financially pressured this year by the drought's impact on hydropower production, Fitch Ratings says.

Fitch reports that while the financial impact is expected to be manageable, utilities with a greater reliance on hydroelectric generation may be forced to use more expensive generation and purchased power to replace the potential shortfall in hydropower output for the third year in a row. Eight of the 14 Fitch-rated public power issuers receive between 10% and 32% of their power supply from hydroelectric resources, according to "California Public Power Agencies," a Fitch report from July 2013.

The rating agency says that the fuel mix for in-state electricity generation in California has generally shifted away from lower-cost hydropower toward natural gas-fired resources during below-average water years.

In 2011, hydropower accounted for an above-average 21.3% of in-state electricity generation, Fitch notes. In 2012, hydropower production decreased to just 13.8% under drier conditions. This corresponded with an increase in natural gas-fired generation, which rose from 45.4% in 2011 to 61.1% in 2012. While figures are not yet available for 2013, Fitch says the contribution from hydropower is expected to remain relatively low based on observed water levels.

According to Fitch, public power utilities in California have experienced prolonged periods of dry-water conditions before the current cycle and have undertaken measures to reduce their vulnerability. These measures include improved rate design, broader use of automatic-recovery mechanisms, collection and use of rate-stabilization funds, and more conservative budgeting.

Although sufficient time remains for water conditions to return to more normal levels this year - which has occurred in about half of water years that experienced dry first quarters, according to the California Department of Water Resources - Fitch adds that the state is currently experiencing record low-water conditions with almost one-third of the water year (Oct. 1 - Sept. 30) having passed.

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