Public utilities have a decent way of proving that the price they charge for electricity is fair. It’s called a Cost of Service study.
A Cost of Service study dials into nitty gritty details of each customer category to find exactly what it costs for the utility to provide electricity to that category. The utility follows that logic to decide what customers should pay.
Prices should and do vary from class to class, because it costs the utility different amounts depending on the class, and their needs can be wildly different. Houses, for instance, use a lot more energy when it’s really hot or cold and in the evening when people are home, while the needs of factories and canneries are much more stable and predictable.
If the Modesto Irrigation District charged what its Cost of Service studies say is right and fair for all customer categories, I wouldn’t be writing this column. But it doesn’t.
I’ll say it another way: When it comes to setting electricity prices, MID does not do what its own studies say it should.
For some of MID’s 10 customer categories, it’s close. Residential customers, for example – the utility’s largest class, with 96,000 accounts – have paid roughly what they should since 2010, the farthest period back for which the district keeps Cost of Service records.
But there are a few big winners, and a lot of losers, because of the MID board’s reluctance to adjust rates.
First, the winners.
MID wants people to believe that everyone wins because electricity rates have not changed in seven years. That’s true to some extent, so let’s give credit where credit is due.
The last time home owners in this region paid about the same, whether they were customers of MID, Pacific Gas & Electric Co. or the Turlock Irrigation District, was in 2009, when power cost 15 cents per kilowatt hour for all three. MID’s pricing stabilized soon after and its residential customers were paying 17.8 cents per kilowatt-hour by 2017, while PG&E home customers were up to 21 cents.
Things have gone even better – far better – for MID’s large industrial customers, including Modesto hospitals, canneries and other food and beverage processors such as the Gallo winery. Together they have saved $5.9 million a year on power bills, on average, since 2010, according to MID’s Cost of Service studies.
Gallo’s deal with MID is particularly valuable, saving the winery and glass plant $4.6 million a year. That figure represents the difference between MID’s estimates of what it costs to provide the company with electricity, and what Gallo pays for it.
When I first wrote about Gallo’s sweetheart deal as a Modesto Bee reporter in 2016, MID justified the company’s unique rate (no other uses nearly as much power, so Gallo gets its own rate) by pointing to the utility’s annual Cost of Service studies, which at the time I had not seen. Once I acquired them, it was easy to see that I had been misled, because MID has not charged the company even close to what it should, according to MID’s own studies.
Simple math suggests MID – which we all own as a public utility, let’s remember – has lost $37 million supplying Gallo’s electricity over eight years. The loss is $47 million when you add in 43 of the Modesto area’s largest companies; MID won’t say who they are, and it doesn’t really matter because I don’t blame them and I don’t blame Gallo for taking advantage of preferential treatment. Wouldn’t you, if you were them? Businesses are supposed to make money.
E&J Gallo puts to work about 3,500 employees in Modesto and has about 7,200 worldwide, with other wineries in Madera, Lodi, and several premium coastal regions, along with New York and Washington state. It’s the largest wine producer in the world, and also markets brandy, gin, vodka and other spirits.
But this isn’t about Gallo. It’s about MID, its unfair prices and a strange reluctance to change them.
As I said earlier, when it comes to MID rates there are losers, and they probably don’t even know it.
MID’s Cost of Service studies show that all stores and offices in and around Modesto – nearly 13,000 – pay a lot more than they should. About $7.6 million more per year, on average, since 2010.
That’s $61 million more than stores and offices should pay, according to MID’s own reasoning for what’s fair and what isn’t, since 2010.
It’s reasonable to assume that companies pass on to customers many of their costs of doing business, according to small-business advocates at NFIB, the National Federal of Independent Business. In other words, that burrito you had for lunch, or the movie you saw at the theater, or a car bought from a dealer all probably cost more in Modesto than they might have under more equitable pricing.
“In many cases, it trickles through” to consumers, said Shawn Lewis, NFIB’s policy director. “Our members operate on such tight margins to start with, so it’s a very delicate balancing point, where large businesses can absorb cost increases or pay it without building it into prices because then they lose customers.”
Small business owners in California are more worried about electricity costs than those in most other parts of the United States, according to the latest nationwide NFIB survey of problems facing small businesses. And the smaller the business, the more the owner watches power prices, the same study concluded.
The answer to MID’s problem is mind-bogglingly simple: Charge what your own studies say you should charge.
Why is that so hard?
Part of the board’s caution came from a lawyer’s warning in 2012 that raising rates without a vote of customers might violate state law. Also, MID board members have a class-action lawsuit hanging over their heads, alleging that MID heavily subsidizes farm water prices while overcharging electrical customers; how many charges of unfairness can one board be expected to deal with at a time?
“I think this does need to be looked at,” said the board’s John Mensinger, “but in the middle of a lawsuit, it’s hard to do. We should look at it when the legal field is settled.”
Lastly, raising rates is always dangerous, politically. Some board members openly enjoy bragging to constituents that they haven’t boosted prices in a long time.
It’s true that power rates haven’t gone up in seven years. But MID’s own studies prove this: It wasn’t fair back then for thousands of retail customers, and it still isn’t.