Public utilities are known for financial stability. Without competition, they generally don’t have to worry about remaining financially solvent. However, in the last few decades, technological changes have undermined the bottom line of some public utilities.

When American Telephone and Telegraph was exposed to competition via deregulation, it tried to adapt in order to survive. Eventually, because of its weak financial condition and poor competitive structure, the company sold out to Southwestern Bell, which then changed its name to AT&T!

The important question for the Modesto Irrigation District (MID) is whether new technology can undermine its monopoly position as a water and electricity provider for service areas in the San Joaquin Valley. In the 1980’s, the MID had no debt and absolutely no competition within its service area. Since then, MID expanded its service area to Mountain House and went heavily into debt to do so. The utility needs to maintain its revenue stream to service the debt and cover increasing operating costs.

MID Has Competition

In the last twenty years, electricity and natural gas have been deregulated. Since deregulation, MID has faced increasing competition. Its customers can buy electric power from other providers or install solar systems provided by competitors. Natural gas prices have dropped dramatically, encouraging customers to switch from electric power to natural gas.

The increased competition and the sluggish local economy have slowed demand for MID electricity. As more customers switch to solar, other electric power suppliers, and natural gas, the demand for electricity from MID will level off and may even start to decline. Because MID has been unable to contain operating costs, its income stream is under increasing pressure.

In the 1980’s, MID had close to the lowest electric rates of any utility in California. At present, its electric rates are on a par with Pacific Gas and Electric, near the highest in the Central Valley. With competition, demand for electricity is elastic. If MID raises its rates, its customers will migrate to the competition. Once customers are lost, the utility may never get them back.

The Switch to Solar Is Picking Up Speed

The Modesto Irrigation District has an incentive program that encourages customers to switch to home-based solar energy power plants. The utility was recently surprised by a spike in demand for the solar plants and temporarily stopped the program. Lower prices for solar energy caused a spike in demand.

Now that the incentive program has resumed, sales of solar energy systems are free to take off again. The more attractive the cost for solar energy, the greater the loss to MID’s core electric business and revenue structure.

Water Rate Subsidy Not Helping

Many observers thought the MID attempt to sell water to San Francisco in 2012-13 was in order to service debt. Those same observers wonder how long the MID can continue to sell water to local users at prices dramatically lower than those in the rest of the state.

If one asks the Modesto Irrigation District how much it costs to deliver one gallon of water, the answer may be “unknown.” The “falling water charge” to generate electricity has been used to justify what appears to be artificially low water rates charged to large water users.

Given the loss of revenue growth in the electric side of the business, the utility will be forced to raise water rates. MID would be wise to start raising water rates in increments to reflect the true cost of delivering water rather than implementing a large increase later. Businesses can adjust easier to a series of small rate changes than to one large one.

A Proposal to Slow the Loss of Electricity Customers

When Allen Short was still the General Manager of the Modesto Irrigation District, this writer suggested that MID might want to enter the solar energy business to remain competitive. The suggestion included installing small electric power plants at homes throughout the district and compensating homeowners with a slight rate concession in exchange for use of their roofs for the plants. This would have retained electric customers permanently and frozen out competition that would undermine MID’s bottom line. The suggestion was reviewed by the staff and dismissed without further discussion. Now the utility grows increasingly vulnerable to loss of business as solar technology improves.

When Does Bankruptcy Occur?

Assuming the Board of Directors and management do not change current business practices, the Modesto Irrigation District will go bankrupt after the following occurs: First, the utility loses enough customers so that it can no longer compete with other energy providers. Rate increases will cause customers to migrate to the competition so fast that revenue will actually fall after a rate increase. Second, operating costs exceed revenue due to inability to contain costs. Finally, the utility is no longer able to service its debt.

The MID could act to stop the loss of customers, but it may wait too long to realize the danger. Following the pattern set by AT&T, should MID reach bankruptcy, its assets most likely would be sold to a competitor and local control would be lost. Loss of local control would be tragic for the utility, its employees, and the community because company profits would be shipped out of the area. While the company could try to reorganize, it could be too weak to come out of bankruptcy, forcing a sale.