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Gallo Winery cashing in on MID’s low industrial electricity prices

E.&J. Gallo Winery, which employs about 5,000 worldwide including some 3,300 here in Stanislaus County, consumes 11 percent of the electricity sold by MID, but pays only 6 percent of the district’s revenue. The Gallo Glass plant is seen here from Santa Cruz Avenue in Modesto on Friday, July 29, 2016.
E.&J. Gallo Winery, which employs about 5,000 worldwide including some 3,300 here in Stanislaus County, consumes 11 percent of the electricity sold by MID, but pays only 6 percent of the district’s revenue. The Gallo Glass plant is seen here from Santa Cruz Avenue in Modesto on Friday, July 29, 2016. aalfaro@modbee.com

It’s not surprising that the world’s largest wine producer also is the Modesto Irrigation District’s biggest electricity customer.

What may not be widely known is the huge savings enjoyed by E.&J. Gallo Winery by virtue of a preferred power rate.

The corporate giant – which employs about 5,000 worldwide, including some 3,300 here in Stanislaus County – consumes 11 percent of the electricity sold by MID, but pays only 6 percent of the district’s revenue.

Simple math suggests that Gallo’s 2015 power bill came to about $21 million. If the winery had paid 11 percent of MID’s revenue, its bill would have been nearly $39 million.

Who covers Gallo’s theoretical savings of nearly $18 million? MID’s residential customers, who pay a larger proportionate share than those buying energy from other public utilities throughout California, according to Modesto Bee analyses.

MID charges Gallo rates that are actually above the national industrial rate average, making it difficult to compete with other regions with lower rates.

Natalie Henderson, Gallo spokeswoman

Gallo, founded in Modesto in 1933, says MID charges the company more than the national average for industry, “making it difficult to compete with other regions with lower rates,” said Natalie Henderson, a company senior manager.

Subsidies challenged in court

Questions regarding systematic subsidies are alive in public dialogue, especially since class-action lawsuits were filed recently against MID. Both accuse MID of illegally inflating power bills to subsidize farm water prices, asking that the practice be stopped, and one says big industry also is coddled at the expense of regular people in a region struggling with chronic unemployment.

Those suing have asked a judge to consolidate the two cases. If they’re granted class status, tens of thousands of customers could join the class action, which asks for unspecified refunds.

Both lawsuits are class-action complaints seeking refunds of the alleged illegal taxes. The lawsuits are in the very preliminary stages. The district is vigorously defending these matters.

Official statement, MID Electric System Refunding Revenue Bonds, Series 2016

MID’s electricity profit, defined as total revenue minus the cost of delivering power, came to nearly $98 million in 2015 – even though district leaders have not raised rates in four years. The utility’s average yearly profit from selling electricity has been more than $93 million since 2010, according to bonding documents prepared for prospective investors, released a few days ago.

The district otherwise has balked at pinpointing its profit, claiming it’s impossible to separate integrated bookkeeping that has combined water and power components for nearly a century. MID regularly has defended its rates, which are “based on cost of service,” spokeswoman Melissa Williams said, citing a cost-of-service study that the district has not made public.

But numbers that the district uses to justify creditworthiness are contained within hundreds of pages of bonding documents approved Tuesday by the MID board. The district does not intend to sell more bonds, but wants to refinance $102 million borrowed in 2004 and 2006 in hopes that the new structure will save nearly $38 million over time.

$93 million Average yearly MID electricity profit, 2010-2015

Belt-tightening has enabled MID to reduce its debt, which is heavier than most similar utilities, from a high of $970 million in 2010 to $776 million today. Some of the district’s electricity profit pays down that debt every year, while the rest subsidizes farmers and helps run the district and build its savings account – from $132 million in 2011 to $208 million in 2015, a 58 percent jump.

Others also benefit

Large customers other than Gallo also benefit from MID’s generous industrial rates, bond documents say. The district’s 10 biggest power users – including food processors, hospitals, and city and school government – consume 23 percent of MID’s electricity but pay only 16 percent of its total revenue, which was $353 million last year.

MID has 96,583 residential, 12,596 commercial and 156 industrial customers.

Experts say there are reasons that all utilities charge higher rates to residents, whose demand for electricity swings wildly with the weather. When it’s hot – like now – air conditioning drives power demand way up, while the needs of factories and canneries are much more stable, predictable and more or less constant.

The cost to serve a commercial and industrial customer varies from a residential customer based on the costs to serve that group of customers. For instance, large industrial and commercial customers pay rates based on time of use and pay additional fixed charges including a demand charge.

Melissa Williams, MID spokeswoman

Also, “Large power users help lower MID’s average costs by utilizing the system during low usage times at night, which helps absorb the overall high overhead costs of the system,” said Gallo’s Henderson.

Utility costs are among the criteria a business considers when looking for the right location, and companies paying competitive wages are difficult to attract and retain. Food and beverage processors in Stanislaus County produce more than any other California county except for Los Angeles, according to a 2015 study commissioned by the California League of Food Processors.

But the gap between MID’s high take from residential customers and low revenue from industry is much larger than for other utilities.

Industrial subsidy higher than elsewhere

The average public utility in California, for instance, gets 26 percent more in average revenue from residential customers than from industry, while MID gets 73 percent more, according to a previous Bee analysis of data from the U.S. Energy Information Administration through 2014, the latest period for which numbers were publicly available.

Although MID’s average revenue from residential customers was higher than Pacific Gas and Electric’s from 2008 through 2014, PG&E since has raised rates while MID has not. PG&E’s average residential revenue per kilowatt-hour now stands at 19 1/2 cents per kilowatt-hour, compared with MID’s 18 cents – both much higher than the average for public utilities. Updated numbers from other agencies are expected to be out in October.

$17 million 2016 farm water subsidy borne by MID's residential customers

Meanwhile, despite a series of rate increases in recent times, growers this year will pay only 18 percent of MID’s true cost for delivering farm water. In real numbers, farmers are paying $3.8 million toward MID’s $21.2 million cost of service, with electricity profit covering the difference.

The California Public Utilities Commission regulates rates charged by investor-owned utilities such as PG&E, while MID – a majority of whose elected board members are themselves farmers – controls its prices.

Garth Stapley: 209-578-2390

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