WATER POLITICS

The FAIR Plan Moment for Water

Since 2019, more than 30 major insurance providers have either left the California property market, reduced their product offerings or paused the issuance of new insurance policies in the State. The rationale behind these movements is that the physical risks from wildfire, flooding, drought, etc. outran pricing models faster than regulators or the market could respond. Insurance providers could not raise premiums fast enough under California’s Proposition 103 restrictions to cover the expected losses. The math simply no longer worked.

In response, property owners have moved to the State insurance plan ‘of last resort’: FAIR. Between September 2024 and December of 2025, the California FAIR plan saw an increase in enrollment of 43%, surging to a total plan liability of over $700 billion. This is over twice the liability of two years prior and analysts are noting that FAIR is rapidly running out of capacity.

The flight of insurers and transfer of risk to the State makes sense given the accelerating physical risks. We are now seeing the same math, and the same behavior activating in western U.S. water markets. In this case, the climate risk is taking the form of inadequate supplies of water to be delivered in major river basins such as the Colorado River. For western water, it is municipal water utilities, rather than Allstate and State Farm, that have for years absorbed and distributed the risk of shortages. And these companies are now restructuring their role to shed that risk and move it back to large industrial users of water by pricing water more explicitly.

The result is that corporate water users in the U.S. west are now in the same position that homeowners in California found themselves in 2019. The pricing signal for water, which has long been artificially low, is correcting and the agents that have long defrayed the risk of water shortages are exiting that role to leave corporate water users exposed. Combined with the reality of diminishing supply from effectively insolvent watersheds as discussed in my last post, western U.S. corporate water users may be facing a ‘perfect storm’ of sudden water risk combined with an inability to transfer that risk off the balance sheet. Moreover, it is apparent that many of these corporate water users have not reflected the resulting liability.

Utilities as Risk Intermediaries

Water utilities sit between the physical risks of water quantity (shortage, curtailments, droughts) and the end users of water. In this way they act similar to an insurer by absorbing volatility of supply and by distributing the costs of shortages across a ratepayer base. Water utilities in basins such as the Colorado River will have contracts with the Bureau of Reclamation or state water agency to receive set allocations from the river. They then contract with ratepayers, including commercial, industrial and residential users, to treat and deliver that water. The utility manages the gap between supply and demand by borrowing from storage or paying for alternative supplies as needed.

This system works when the supply/demand gap is manageable. Large reservoirs, like Lake Powell and Lake Mead, allowed for multi-year smoothing of supply and have allowed water utilities to continue to provide low-cost water. With low prices, users had little incentive to conserve or hedge against future water risk. But climate change and underlying legal and regulatory devices are now changing the math for water utilities across the U.S. southwest. These utilities are rapidly coming to a point where the river basin simply will not be able to deliver the contracted supply. Just as rising wildfire losses changed the math for California insurers, the cost of maintaining delivery commitments now exceeds what can be recovered through historical rate structures.

And just like insurers in California, water utilities in the western U.S. are no longer willing to serve as the price-absorber of last resort for large commercial and industrial water users. Several recent examples illustrate the movements of water utilities in the region to extricate themselves from this role:

– The City of Phoenix utility has issued three consecutive rate increases totaling approximately 26% between October 2023 and March 2025 (customers that do not reduce use will see even higher rises). They have also implemented a conservation surcharge for customers exceeding use allowances.

– The Las Vegas Valley Water District has an “excessive use fee” targeting the top 10% of residential users. This fee adds $200–$300 annually for heavy users and potentially thousands per month for the top 1% of users. The District has also reduced allocations to golf courses from 6.3 to 4.0 acre-feet per irrigated acre (a 37% cut) and issued a ban on evaporative cooling permits for new commercial and industrial buildings as of August 2023.

– The Arizona Corporation Commission has formal curtailment tariffs updated in 2024 that allow utilities to reduce service to commercial and industrial users during shortage periods.

– The Arizona Department of Water Resources issued a 2026 requirement that active management area plans include conservation requirements for industrial users that consume over 100 acre-feet per year. This result is an efficiency standard mandate as a precondition for future water deliveries.

These actions are effectively a renegotiation of which entity will bear the risk of shortages. As utilities see an inability to absorb shortage risk at historical rate structures, they are repricing, restricting, and shifting delivery obligations back to large users through tiered pricing, curtailment tariffs, and conservation mandates. Just as with insurers in California, the risk doesn’t disappear, it transfers to industrial users who have not yet reflected this exposure in their financial planning.

Public Disclosure Suggests the Price Signal is Being Missed

Looking across the water pricing landscape, there are clear signals of the impending, long-term rise. The current Central Arizona Project delivery cost is approximately $200-$400 per acre-foot. However, mechanisms to try to ensure supply in the face of diminishing river basin deliveries reflect significantly higher prices coming soon. For example, water transfer agreements between basins such Arizona and Nevada have increasingly looked at transfers from desalination plants or groundwater resources reflecting anticipated scarcity. These ‘alternate’ resources are not cheap. The planned desalination partnership with Mexico (which will serve as the primary alternate resource for the Central Arizona Project) is estimated to deliver water at a cost of $1,200-$4,000 per acre-foot. Even efforts to tap more resource from the existing rivers have high price tags such as the “Third Straw” drainage infrastructure from Lake Mead for the Southern Nevada Water Authority is priced at $1.4 Billion. The project, designed to extract water after Lake Mead reaches ‘dead pool’ status will inevitably be passed in large part to ratepayers.

These alternate resource process run up to 10x current prices, but it can be difficult to find acknowledgement of the risk in public disclosures of companies. The Colorado River basin is hardly alone with regard to impending scarcity and looming water price increases. River basins around the world face similar challenges. One would expect, in the face of growing water price signals, that we could see this risk emerging in the disclosures of large global corporations. One source of such information is the CDP – a voluntary database of climate risk disclosures for over 8,500 large companies around the world. In 2024, only 5% of companies in the CDP reported the use of an internal price of water and only 3% use a price that is more than the external utility tariff.

Assuming the current utility price in planning for costs versus the clear price increases on the horizon creates significant balance sheet risk. The CDP in 2025 reported $339 billion in potential financial impacts linked to water risks for the companies in the database. The estimated cost to mitigate those risks was estimated at $58.7 billion. This is a 6:1 return for mitigation that is being missed because companies are not projecting the risk appropriately while assuming current water price.

Again, the parallel to California homeowners and wildfire risk is telling. Homeowners in California knew the growing risk of wildfires long before 2019. But that risk was borne and distributed by insurance companies and so housing prices did not price the risk correctly. When the insurer left, the correctly priced risk became visible for the first time.

2026 Will be Seen as the Inflection Point for Water Risk

The California insurance crisis became undeniable in 2019 when Allstate and State Farm paused new policies, the FAIR Plan saw exponential growth and it became evident that the withdrawal of private insurance was not a temporary phenomenon. The warning signs had been evident earlier with the 2017 wine country fires, the devastating 2018 Camp Fire, regulations constraining premium hikes and rising reinsurance costs. But all of this crystallized in 2019.

The situation I described in my last post on the Colorado River will be seen in the future as a similar inflection point for water risk in the southwestern US. The 2007 Interim Guidelines and the 2019 Drought Contingency Plan have expired and parties to these agreements are at a standstill opening the door to Federal intervention and the almost inevitable lawsuits on allocation. The price of water risk will become evident this year. Whatever framework emerges will formalize deeper, more permanent curtailments than anything in the prior system. The Bureau of Reclamation’s five draft alternatives all involve aggregate reductions of 3–4 MAF per year, distributed across states and users.

Utilities that have been absorbing the risk of shortages will be operating under a new set of delivery constraints and they will necessarily pass that risk to large users through tiered pricing, shortage surcharges, curtailment tariffs and higher cost transfer prices. If they cannot pass this risk along to industrial users, then we will see transfer to taxpayers. There is no third option.

I expect to see one or more of three specific triggers that will make water risk more apparent to corporations in the U.S. southwest and beyond. First, the operating guidelines in the Colorado River basin that emerge in 2026 will formalize the shortage framework. This will convert the contingent curtailment risk into a disclosed contractual term rather than a background condition. Second, Arizona’s 100 acre-foot industrial conservation mandate (effective January 2026) will force companies to document their water dependency and conservation plans. This will create a paper trail on water risk and price that investors will begin to track. Third, CSRD’s ESRS E3 water reporting standard requires large European-regulated companies with U.S. operations to disclose water consumption and material adverse impacts in high-stress basins. This will create a starting point of disclosure of water risk for a small number of companies (e.g. semiconductor manufacturers, data centers, mining companies, real estate companies and companies with agricultural and food supply chains) that operate in the Colorado River basin. This disclosure will then likely spill over into other water-stressed regions in subsequent years.

Thinking Through the Disclosure Challenge

If we accept that water is a material risk on the balance sheet of companies in water stressed regions and that this price signal will crystallize in the very near future, it is worth thinking through where the pressure will manifest on companies to disclose. One area will be 10-K filings with the Securities and Exchange Commission. Water rights and supply contracts are not separately disclosed in most 10-K filings. They typically appear (if at all) as a general risk factor in boilerplate language of section 1-a rather than a quantified exposure. There is no GAAP or IFRS accounting treatment, for example, to identify a contingent liability created by junior water rights exposure or contractual curtailment risk. The CDP water disclosures, while growing, are voluntary and not standardized to the site-specific, watershed-level detail inherent to this type of risk.

Outside the U.S. Federal jurisdiction, the European Union, the CSRD ESRS E3 requires disclosure of water consumption and high-stress basin exposure for in-scope companies. The result is a mandatory disclosure for multinationals even in the absence of U.S. regulation. At the State and regional level, Arizona’s industrial conservation mandate creates a state-level documentation requirement that functions as a precursor to regulatory disclosure. The operating guidelines for the Colorado River will likely include enhanced reporting requirements for large industrial users as a condition of delivery contracts and could serve as a template for other water-stressed basins.

On the voluntary disclosure side, the Taskforce on Nature-Related Financial Disclosures (TNFD), already adopted by 1,200+ companies, recommends site-specific water stress disclosure in high-risk basins.

The conditions for greater disclosure, both voluntary and mandatory, are already in place. With increasing water risk on companies resulting from increased price and an inability to transfer that risk to the utilities, I expect that companies will increasingly be forced to increase financial disclosure of these risks by regulators (EU, States, regional agreements) and investors (TNFD, CDP).

Three Questions for Corporate Controllers and CFOs

• What is the contractual structure of our water supply agreements, particularly in water-stressed basins such as the Colorado River? Are we on fixed-rate utility contracts, and what do those contracts say about delivery obligations in shortage conditions or curtailment events?
• What would water cost at alternative supply pricing such as desalination when prices rise to $1,200–$4,000/acre-foot rather than current utility delivery pricing? Have we stress-tested our operating cost structure against that scenario?
• Are we ready for mandatory water disclosure under from the EU or from State or regional-level requirements? If not, what is our timeline for building the data infrastructure to comply?

 

CDP. (September 17, 2025). Internal Water Pricing Unlocks Resilience and Long-term Growth, Reveals New CDP Insights. CDP Press Release. https://www.cdp.net/en/press-releases/internal-water-pricing-unlocks-resilience-and-long-term-growth