Just when it looked like things couldn’t get any worse for the Modesto Irrigation District (MID), the heavens opened and delivered a world of trouble in falling water.

In the arcane parlance of irrigation districts, “falling water” is water that falls from dams and spillways to provide electricity. Some districts impose on their customers a “Falling Water Charge.” The Falling Water Charge is an attempt to capture the value of the falling water and then pass it on as a cost to customers of the district.

The Falling Water Charge as imposed by the MID features two important elements: (1) The Falling Water Charge is hidden in customers’ electrical bills; most customers are not aware of its amount and purpose, and (2) even though the Falling Water charge is paid by MID electrical customers, it is used to cover operational expenses for the district’s Irrigation Division. Thus, MID customers, most unknowingly, subsidize Irrigation Division customers.

On November 2, 2010, California voters approved Proposition 26, also known as, “The Stop Hidden Taxes Initiative.”  One of the consequences of Proposition 26 was to shine a light on practices like the Falling Water Charge. The key issue is whether or not such charges constitute an illegal tax under the definition established by Proposition 26.

Several criteria are used to determine whether or not a fee or charge is in reality a tax as defined by the new law. One key element requires the local government entity, the MID in this case, to show that the fee or charge is not in excess of the amount required for the activity used to justify the charge. Since the Falling Water Charge provides revenue to the Irrigation Division of the MID, MID will have to show how the Charge applies to irrigation costs and whether or not it exceeds those costs.

Costs associated with the Falling Water Charge fluctuate wildly. According to an internal MID memo, they were as high as $10,158,720 and as low as $2,268,371 between 1996 and 2011. The reason for the wide gap between the two figures is doubtless readily available, but now MID will have to offer a public explanation.

Moreover, if a court were to rule the Falling Water Charge is indeed an illegal tax, the MID would lose an important source of revenue. Since the MID has significant financial deficits, the loss of revenue would be a major blow, especially coming after the defeat of a water sale which would have helped the MID begin to recover from some of its losses.

The Falling Water Charge has been in effect since 1995. Once it becomes public knowledge, there are bound to be some angry rate payers. And angry rate payers may be the best the MID can hope for, because if the MID must give up Falling Water Charge revenue, the alternative is higher rates and even more outrage and public scrutiny. For an institution that’s just endured months of scathing public criticism, the prospect of even more to come can’t be appealing.

All in all, MID Directors and management seem in for yet another round of storm and discord, and it’s hard to see how they can emerge with anything but more problems. Next: The Memo From Hell