Modesto Irrigation District’s culture of imbalance: Farmers coddled, power customers gouged

An intriguing public debate over electricity customers subsidizing farmers has focused on what the farmers get: irrigation water at bargain basement prices. Somewhat lost in the dialogue is how much more power customers are paying – not just to benefit agriculture, but to keep afloat the Modesto Irrigation District’s entire operation.

The bottom line seems staggering: 115,000 electricity customers pay about $44 million more a year than it costs MID to give them power. Profits amount to $300 million in a decade – on top of what MID pays its employees in handsome salaries and keeping 3,100 farmers’ water prices artificially low.

Those paying attention at Tuesday’s MID meeting, when board members balked at a recommended 3.5 percent electricity rate hike, heard the term “cost of service” thrown about. The underlying theory is that government provides a service and should charge those receiving it about the same amount that it costs to deliver the service. Cost-of-service expectations bloomed with Proposition 13 in 1978 and became the standard after California voters embraced Proposition 218 in 1996.

But those state laws exempted some utilities, such as the irrigation districts in Modesto, Turlock and Merced. They are among the few selling retail electricity straight to homes and businesses relying on energy for lights, refrigerators, curling irons, you name it. A subsequent initiative, Proposition 26, tried to close some cost-of-service loopholes in 2010. Case law remains unsettled, but MID officials don’t think it applies.

By the way, investor-owned utilities such as Pacific Gas and Electric Co. must seek approval from state regulators at the California Public Utility Commission before raising rates. Public utilities such as MID and TID are governed by locally elected boards that make decisions on rates, usually without regard to cost of service, and answer directly to voters.

In olden times, no one agonized over the cost-of-service theory. MID and TID leaders salivated at thoughts of power profits when they finished the original Don Pedro reservoir in 1923 and began selling energy. Political battles were frequent, but they rarely pitted farmers against power customers, who would provide “the best cash crop of an irrigation district,” U.S. Bureau of Reclamation leader Elwood Mead reportedly said around that time, in a reference to Hoover Dam on the Colorado River.

The money infusion helped the districts retire debt and reduce irrigation taxes until MID’s were officially abolished in 1959. They returned 15 years later as an irrigation user fee, according to “The Greening of Paradise Valley,” an MID history published in 1987.

Previous MID boards, aware of long-standing preferential treatment for growers, became sensitive to the cost-of-service theory more than 20 years ago. Previous board members have said debates raged internally, but those representing mostly urban areas were always in the minority on farmer-dominated boards.

Former board member Glen Wild blasted the subsidy on The Modesto Bee’s editorial page in April 2013, noting that MID’s electricity customers “have their power bills inflated so that the MID irrigators do not have to pay for the cost of service.” He also said, “It is clearly wrong to have those who have the least,” presumably electricity customers in an area known for low income and high unemployment, “subsidizing those who have the most.”

Tom Van Groningen, who gave up his MID seat along with Wild in November 2013, at the time said he regretted being unable to correct the inequity despite sustained effort over two decades. He had tried to force then-board members into an open public discussion about private advice from an attorney warning the board that part of the subsidy could run afoul of state law – and told The Bee he expected a lawsuit – but the board majority silenced the issue.

Modestans may recall such a lawsuit brought against City Hall in 1998 by the Stanislaus and Howard Jarvis taxpayers associations. The taxpayer advocates said the city’s practice of overcharging people $3.5 million yearly on water and sewer bills, and transferring the windfall to cover other services such as parks and police, violated Proposition 218.

City leaders initially resisted but eventually settled the lawsuit, agreeing to repay to the water and sewer funds $7.2 million collected since taxpayer advocates had first challenged the illegal transfer.

That amount pales next to the cost-of-service imbalance in either of MID’s core services.

Before Tuesday’s electricity rate hearing, MID acknowledged undercharging farmers more than $11 million a year in recent seasons. They would have to pay about triple the current rate to cover the true cost of service; no one is suggesting a single leap to that amount, but some board members have warned growers to brace for higher rates when the board considers a water rate hike in January.

“At least 10 percent, or more,” said Chairman Nick Blom, one of three farmers on the five-person board, on Friday. “I think we’re going to move that a little faster. But it remains to be seen what the board decides.”

Some subsidy supporters say MID’s water system should get credit for replenishing groundwater aquifers and for canals that support power poles and carry stormwater from Modesto streets.

Meanwhile, the fact that MID has been overcharging electricity customers $44 million a year, in a cost-of-service sense, is hardly mentioned. Simple math suggests each family, on average, pays $383 more a year than it costs MID to deliver energy to that family.

The nonprofit district’s cash cow enabled MID to collect a $300 million surplus, representing total operating income minus expenses, from 2004 to 2013, the last 10 years for which audited records are available. The high mark came in 2012 with a single-year profit of $73 million. That surplus accumulates after the district pays salaries; more than one-third of MID employees last year got in excess of $100,000.

What happened to all the extra money?

It’s not “extra,” in the district’s eyes. Much was plowed into capital projects, such as building a solar farm on McHenry Avenue or buying into windmill operations in Oregon and Washington, the district’s response to state renewable energy mandates. Millions more went to repay debt. And MID beefed up its rainy day reserves, an account now holding about $185 million, up from $120 million three years ago.

Those reserves made it easier for board members on Tuesday to postpone deciding on an electricity rate increase; the fund easily can cover a projected $12 million 2015 budget deficit, some board members said. A board workshop on upping power rates, which could feature cost-of-service analyses, is expected in February or March. Information could help explain another perceived inequity favoring a few dozen large plants, which pay comparatively less for electricity than MID’s 95,000 residential customers.

“Cost of service – we’re trying to get there,” Blom said. “Our goal for this board, here and now, is to get closer to cost of service, on both sides of the house.”

This story was originally published November 29, 2014 at 6:48 PM with the headline "Modesto Irrigation District’s culture of imbalance: Farmers coddled, power customers gouged."