SAN FRANCISCO (Reuters) - New rules floated by California water regulators would force utilities to sell less water at a time when it is becoming more difficult for them to raise customer rates, credit ratings agency Fitch said on Monday.

"Water rates have risen faster than incomes. If this trend continues, Fitch would expect that overall rate flexibility - the ability for utilities to raise rates - could be tested," it said in a note.

California has been in the grip of a drought since 2013 that has cost the state's agricultural economy billions.


California Governor Jerry Brown mandated last year that urban areas cut back their water use by 25 percent amid the historic drought and ordered the state to develop a long-term conservation plan.

Last month, California regulators recommended tighter oversight of agricultural irrigation and a permanent ban on over-watering urban lawns as first steps toward developing a long-term conservation plan.

Water charges in the state remain affordable overall, Fitch said, with water and sewer rates equal to 1.6 percent of median household income.

But the rapid rise in rates has led to some ratepayer pushback, like in the Yorba Linda Water District, where a $25-a-month rate increase led to recall votes for two board members last month.

Despite the pressures of the drought, Fitch said it expected the ratings of California water districts to remain stable based on their rate flexibility, revenue diversity, strong reserve levels and ability to defer capital projects.

Despite concerns, Fitch's ratings for California water and sewer agencies average 'AA,' which means they are at a very low risk of default.


(Reporting by Rory Carroll; Editing by Peter Cooney)