Modesto pays more, so outlying water customers can pay less

If you live or do business almost anywhere in Modesto, your water bill is higher than if City Hall hadn’t bought several outlying water systems 21 years ago.

If you’re in Del Rio or Grayson, your water bill is far lower than it should be, because Modesto water customers are subsidizing you. The same is true for a few neighborhoods in Ceres and Turlock.

Modesto, long proud of its water heritage, more than two decades ago fought hard for the right to buy Del Este Water Co., a private outfit providing tap water in neighborhoods sprinkled throughout the city and some nearby communities. The 1995 purchase made water service uniform throughout Modesto, and 12,100 families and businesses – former Del Este customers – no longer paid higher water bills than others just across the street.

But the transfer was a package deal, and Modesto suddenly took responsibility for another 8,000 water accounts in Salida, Empire, Del Rio, Waterford, Hickman, Grayson and those few spots in Ceres and Turlock. And nasty, expensive problems since leave Modesto officials wondering if their predecessors bought a pig in a poke.

“Was it a good deal? I don’t know,” said Modesto Mayor Ted Brandvold. “They are somewhat of a burden.”

Modesto spends a lot to regularly send crews to fix water problems beyond its borders. The city also is on the hook for millions of dollars of needed upgrades, especially in Del Rio – whose people have sued to force improvements that never came, and may again – and in Grayson, where nitrate contaminants are costing gobs of cash.

Getting rid of a headache

“We’re spending money on systems that aren’t even in our city’s footprint,” said Brandvold. When water troubles came into focus after his election in February, he said, “I thought it’s at least worth investigating possibly selling off these systems.”

That was the plan from the start, according to city and Modesto Bee reports from 1995, when Modesto bought Del Este – a subsidiary of the Beard Land and Investment Co., which includes the Modesto and Empire Traction short-line railroad. But more than 21 years later, Modesto has managed to spin off only one piece, and the others have sucked millions of dollars from Modesto taxpayers, with little enduring hope of unloading them.

It’s clear that Modesto leaders would not have had to raise water prices so sharply this year if they had gotten rid of the high-cost, low-return water systems.

In August, the City Council stared down nearly 1,500 protests, swallowed hard and increased water rates like never before. A typical family’s monthly bill shot from $41.77 to $55.43 per month, and is expected to continue climbing to $73.81 in five years.

The city’s consultant, Bartle Wells Associates, had looked into the idea of charging people in old Del Este areas more than those in Modesto, to make things more equitable and to dampen the sense of dread in the Modesto voting base. But charging enough to cover true costs, plus needed improvements, could double the price paid in Del Rio, and Grayson residents’ bills could be five times what they’re now paying, the firm said.

Under one scenario, monthly bills for the same water amount would be $67 in Del Rio and $180 in Grayson. By 2021, Del Rio would be paying $111 and Grayson customers $259, while Modesto families using 364 gallons per day could pay $68 per month instead of the expected $74.

(In reality, a typical Del Rio customer uses a lot more water – 1,289 gallons per day, on average – costing $219 a month.)

“From that perspective, the outlying systems are being subsidized, because if they were operating independently, their price would be much higher,” said Larry Parlin, Modesto’s utilities director.

But the Modesto City Council didn’t go that route.

Subsidy boosts other communities

A tax law called Proposition 218 would require voter approval in Del Rio, for example, to split Del Rio’s rates from Modesto’s, and the same for Grayson and the others. Critics could easily muster enough protests to kill proposals in those areas, so Bartle Wells recommended keeping their rates lumped in with Modesto’s, and the council agreed.

By the way, California voters approved Proposition 218 in 1996 – a year after Modesto sealed the Del Este purchase. Then-Modesto leaders probably didn’t know the change was coming.

So the subsidy continues, although Parlin prefers to say Modesto is simply running a blended system with uniform rates.

Since shortly after the 1995 purchase, the Salida and Empire water systems have been hooked directly into Modesto, so the city will keep them. The others are for sale.

“We don’t think it makes sense for your customers at this time,” Turlock municipal services Director Michael Cooke told his City Council on Dec. 13. That’s when Turlock weighed the latest of Modesto’s multiple offers, spurred by Brandvold, to buy three small water systems serving Turlock neighborhoods.

Modesto’s asking price: $758,000. The 410 water customers pay $270,000 a year combined, and it only costs Modesto $114,000 to deliver that water. Sweet deal, right?

Not really, said Turlock, knowing that overdue improvements – which Modesto failed to make in 21 years – could cost up to $8 million. Thanks, but no thanks, Turlock said in an abrupt rejection. Brandvold was a bit surprised, saying he had expected to sit down and negotiate.

To Modesto, Ceres would seem an even more attractive mark because it’s home to many more former Del Este customers: 1,818. If Modesto comes calling, Ceres will listen, City Manager Toby Wells said.

Pitching wells and pipes

“But we’ve got the same concerns Turlock had,” Wells said, “when it comes to who gets to pay for upgrading the system. And I would expect we will have a difference of opinion.”

Modesto’s best hope for unloading an unwanted water system might be Del Rio, which seems strange because the community – supremely frustrated at the way Modesto has managed its water system – openly discusses whether to sue Modesto on a neighborhood blog site.

Del Rio, suffering from low water pressure, sued the city in 2005 after Modesto jacked up water prices, leading to a legal settlement requiring that the city upgrade the community’s water system without raising rates again. Eleven years later, Modesto upped prices – along with everyone else’s – even though none of the Del Rio promises had been kept.

Not that Modesto hasn’t tried. The city hoped to sink a new well serving Del Rio a half-mile away, but rural neighbors there feared that a much deeper municipal well could threaten their shallow domestic wells. The neighbors sued and won in a local court, but the city appealed and prevailed on Friday. Modesto also recently circulated a new draft environmental impact report suggesting the neighbors have little to worry about.

Meanwhile, Del Rio residents reserved the right to sue while negotiating with city officials, including the mayor. Talks in recent weeks have turned to the idea of Del Rio forming a new water agency and taking over the water system.

But numbers produced by both sides are miles apart. Del Rio people figure since 2005 they’ve paid Modesto $2 million more than it cost for the city to deliver their water, while City Hall says updating Del Rio’s water system could top $10 million.

Modesto’s biggest and most costly headache from the Del Este deal may have sprung from tiny Grayson, 14 miles to the west.

Scrubbing tainted water

Like many Valley communities, Grayson’s wells are tainted with nitrates that can cause health problems, including blue baby syndrome. Modesto was forced to take a number of costly measures, including paying a company to run ion exchange equipment, another to haul away a brine byproduct, and an Oakland disposal facility to take it. Current annual costs for those three functions come to $162,000. All for 257 water customers.

But making water safe doesn’t necessarily make it taste good.

“We don’t drink the water,” said John Mataka, whose family uses tap water to wash dishes and clothes and to shower, while buying 5-gallon jugs for drinking.

The only bright spot in Modesto’s 21 years of shopping outlying water systems came last year, when Waterford paid $2.6 million for the former Del Este system providing water to all 178 homes in nearby Hickman and to 86 percent of Waterford’s 2,165 customers.

Waterford said the purchase was a move toward independence. Waterford finally would control its destiny, city leaders said, criticizing Modesto for repeatedly budgeting improvements there, and charging Waterford people for them, but never actually doing them.

Waterford officials then held water prices stable for a year and a half while studying improvement costs, eventually determined to be $14 million. The City Council in November agreed to a significant rate hike, boosting the average family’s monthly bill from $29 to more than $42, rising to $53 in five years if Waterford can’t get $3 million in state grants for tying together the Waterford and Hickman systems.

Waterford and Hughson may join Ceres and Turlock in their vision of treating Tuolumne River water to drinking water standards, much like Modesto has done for two decades. Modesto mixes that treated surface water with pumped groundwater before delivering it to taps in Modesto, Salida and Empire.

Water = destiny

Modesto, which for decades has eyed swallowing Salida with annexation, essentially controls Salida’s destiny by controlling its water, some say. The town needs a massive increase in taxpaying businesses to hold any hope of someday incorporating into a real city. But business growth is impossible without water, and Modesto won’t agree to provide it unless a developer agrees to annex to Modesto.

That amounts to “water extortion,” said Katherine Borges of Salida’s Municipal Advisory Council. “They control whether Salida grows.”

Modesto in July absorbed the former Empire Sanitary District, leaving no one to buy the Empire holding even if Modesto wanted to sell it, which it doesn’t.

Modesto’s best hope for unloading its unwanted water systems might be a private operator.

That almost happened, in fact, when California Water Service Co. – the largest investor-owned water company west of the Mississippi River – shook hands with the Beard family on a $9 million agreement to buy Del Este in 1992. State regulators approved, but Modesto filed an eminent domain action, the deal fell apart and Modesto bought Del Este from the Beards in 1995.

Nearly 6 million people in California – about one in six residents – get tap water from investor-owned utilities, the California Water Association says. All are regulated by the California Public Utilities Commission, which sets their water prices and is not subject to Proposition 218 customer votes like cities are.

“So it’s easier to get rates increased,” Parlin said.

But nothing is ever easy with water in California.

Just three months ago, Gov. Jerry Brown signed legislation, Senate Bill 1263, aimed at limiting the proliferation of small water agencies. More than 7,600 such systems serve fewer than 200 customers each and lack resources needed to confront ever-changing standards, many fear.

Inheriting a mess

That could pose a problem for Del Rio if that community pursues forming its own water agency. Representatives say they’re serious but would need cooperation from Modesto.

“(Modesto officials) do seem to want to deal fairly and with integrity,” Del Rio’s Joyce Parker said. “So we’re going forward with the premise that they just inherited this mess and want to resolve it.”

Parlin came to Modesto in 2014, 19 years after the Del Este purchase. Given all of the problems since, was it the right thing to do?

“It’s hard to say. I’m sure at the time it probably seemed sound. I assume they thought it would be a significant source of revenue going forward,” Parlin said. “But they may have been a little optimistic.”

This story was originally published January 14, 2017 at 2:45 PM with the headline "Modesto pays more, so outlying water customers can pay less."