The annual budget waltz is just beginning.
But leaders at the Modesto Irrigation District say costly state and federal regulations have all but filled up the utility's dance card, leaving it few options.
Quick translation: The MID's business and residential customers soon will be joining the dance in the form of higher electric rates.
A rate increase for MID customers appears inescapable. All that remains to be determined is:
"A lot of (regulations) are driving what we do," General Manager Allen Short recently told MID directors, "taking local control away from your hands."
Against that backdrop, the MID board of directors has launched its annual review of district financial practices along with a hunt for potentially untapped or overlooked solutions.
One scenario visited over the past year contemplates "backloading" rate increases, pushing the biggest of them several years into the future.
But that "pay me later" approach undoubtedly would produce some nasty sticker shock, something the district would rather avoid.
Such an approach, if adopted, also seemingly would fly in the face of board-adopted policies aimed at keeping the MID on stable financial footing.
Among the keys are establishing adequate financial reserves to ensure the MID's favorable bond rating, and maintaining a revenue stream that covers the util-ity's cost of generating, obtaining and/or delivering power.
During a budget workshop Tuesday, staff presented an overview of the district's nearly $50 million capital budget, including funding recommendations for two MID divisions -- electric resources and transmission and distribution.
Earlier this month, directors were briefed on the MID's hedging and risk management policies, which seek to stabilize the cost of buying fuels used to generate electricity.
Think of hedging like an insurance policy, locking in prices for natural gas -- a prime source of fuel for the MID's electricity production -- that remain steady in the face of wild price fluctuations.
Directors also reviewed a new state regulation requiring the MID and other utility companies around the state to reduce their electric "loads," meaning the amount of power needed to meet customer demand.
No actions were taken; a vote on a final budget is weeks away.
One of the reasons the MID has relatively few financial options, Short said, is that the utility has little fat to cut from its budget and is not plagued by financial waste and mismanagement.
Director Mike Serpa has questioned MID financial policies and practices, saying the district's budget process has made it difficult, if not impossible, to get a true picture of the utility's financial health.
At the end of the Tuesday budget workshop, Serpa appeared to be satisfied, at least so far, and thanked staff for the level of detail they provided.
At this stage, however, all numbers are preliminary and the budget remains subject to revision.
Public budget workshops are scheduled for Tuesday; Oct. 16; Oct. 23; and Oct. 30.
Short said his staff is developing a breakdown of costs directly attributable to the regulatory actions imposed on the MID by the state or federal governments.
Those mandated regulations include:
Reducing electric loads by 10 percent -- 1 percent a year for the next 10 years -- appears especially problematic, according to MID staff.
Peter Govea, senior energy services engineer, said part of the difficulty will be persuading consumers to comply with voluntary energy conservation programs.
Govea said a more realistic goal for the MID would be a 5 percent load reduction over 10 years.
Since most of the state's load-reduction target rests with consumers, the MID and other utilities must develop marketing and educational campaigns to encourage customers to replace inexpensive incandescent light bulbs with the more costly but energy-efficient compact fluorescent lamps.
Govea said that by switching to CFLs, consumers could lower their monthly electric bills. That, in turn, would help the MID meet the state's 10 percent load-reduction goal.
As the program is voluntary, the MID cannot force its customers to make the switch.
But even if the change to CFLs proved wildly successful, Govea said, it still would be tough for the MID to reach the state-imposed electric load reduction goal.
That's because other variables remain in play, not the least of which includes fluctuations in the cost the MID must pay to obtain, produce and deliver power.
When it comes to buying and generating electricity, the MID is a "price taker," meaning the district has no control over what it pays for fuels such as natural gas.
Those costs are controlled by the supplier and, as a result, are tied to supply and demand.
That's why the MID uses hedging to try to lock in gas prices, for example, commonly using three- or five-year contracts.
But there's some risk involved in the practice. There always a chance that the MID will lock in a price that turns out to be higher because of a dip in the price of natural gas.
Alternative energy source
Alternative energy sources also figure into the MID power portfolio.
State law determines how much power the MID must produce via alternative energy sources such as wind or sun.
Under state regulations, the MID is required to generate 20 percent of its power from wind, solar energy or other alternative forms by 2017. MID spokeswoman Kate Hora said the district expects to achieve the 20 percent before 2017.
But there's talk in Sacramento of raising the 20 percent to 33 percent.
Using alternative energy sources to generate electricity can be more expensive than the cheaper but dirtier-burning fuels, such as coal and diesel oil.
Those fuels also are believed to be heavy contributors to air pollution as well as global warming.
In the Northern San Joaquin Valley and Sierra foothills, scientists say, global warming will mean less snow in the mountains and more volatile weather patterns overall.
The melting Sierra snowpack is captured in large reservoirs such as Don Pedro and is used for farm irrigation and drinking water in the valley. When released from the dam, that water also can be used to turn giant turbines that generate electricity.
Less snow not only means potentially less water for farming operations and drinking but also less water to generate electric-ity.
Compared with fossil fuels, solar energy and wind power, hydro can be a less costly alternative. That assumes, however, that water is plentiful and that the utility owns a dam and powerhouse.
New Mexico plant a question
The San Juan generating station, in a remote corner of New Mexico, has been another source of relatively inexpensive power for the MID because the plant uses coal as its primary fuel source.
The MID can draw up to about 71 megawatts a year from the San Juan plant.
In 2006, MID imported about 19 percent of its power supply for the year from San Juan.
It's uncertain, however, whether the MID will be allowed to continue importing power from the San Juan sta- tion.
That's because California passed a law barring state-based utilities such as the MID from importing power produced at coal-fired plants.
While the law "grandfathered" the San Juan plant, allowing the MID to continue using it as a source of power, it did so with a caveat -- that the utility did nothing to upgrade the plant's output.
Federal regulations, however, required the MID and other utilities that get electricity from San Juan to reduce harmful emissions, including mercury, being released into the atmosphere as a result of burning coal.
The cleanup was so successful, however, that the plant is treated as a "new facility" under California law, which could prevent the MID from taking power from the plant in the future.
Losing San Juan power would force the MID to replace it, at least in the short term, with more costly energy purchased on the spot market to avoid potential problems for customers during the summer, including temporary power disruptions.
It's during the summer that the demand for electricity is highest in the valley.
Short told MID directors that the utility will be seeking clarification from the state, and possibly an exemption, so it can keep using electricity generated at the San Juan plant.
Bee staff writer Michael G. Mooney can be reached at email@example.com or 578-2384.