Wall Street paid attention when a board on 11th Street in Modesto rolled back electricity rate hikes last year.
And it wasn't terribly pleased.
Fitch Ratings, based in New York City, took the Modesto Irrigation District's bond rating down a notch after the planned power rate increases were reduced.
The downgrade, which could cost the district millions of dollars in interest on its bond issues, shows the large role rating agencies can play in local utility affairs.
The MID board, when deciding what to charge for power, has to consider not just the needs of recession-weary customers.
Directors also have to answer to distant experts in high finance who help determine the interest rates on the bonds that finance some of the power plants that light customers' homes.
The board on Tuesday will consider a new rate hike in part because these experts want to see an increase in reserves.
It's a familiar argument, said Mindy Spatt, communications director of The Utility Reform Network, a San Francisco advocacy group.
"Certainly, the utilities are very concerned about how they are viewed by Wall Street," said Spatt, whose group mainly does battle with investor-owned utilities such as Pacific Gas & Electric Co.
A bond rating reflects the ability of a utility to pay back the bond buyers with interest over a long period, typically 30 years.
Spatt said the rating agencies should give greater weight to the fact that utilities have their markets to themselves and are a more predictable source of income than other types of borrowers.
The MID had an A+ rating from Fitch, which is the fifth-highest on a scale with 20 possible grades. The downgrade brought it to A, or sixth.
A one-notch downgrade could add $8 million in interest to a $100 million bond issue, said Jerry Gold, a bond adviser speaking at the Jan. 12 MID board meeting.
The district has not been downgraded by the other two major rating agencies, Moody's Investors Service and Standard & Poor's Financial Serv- ices, but MID officials say it could happen.
The problem is the district has not met the financial goals set by the board in 2006, Gold said. This includes $200 million in reserves, which stand at about $125 million.
The district also is supposed to get enough annual income from power customers to cover operating and maintenance costs plus 110 percent of each year's payments on previous debt. That isn't happening.
"You have these promises you made in these bond documents, and you've got to comply," said Gold, a senior vice president at First Southwest Co. in Santa Monica.
Board members said they rolled back the electricity rate increases because of the reduced cost of natural gas, the main fuel for the power plants, and a desire to help customers dealing with the recession.
"The board opted to share the cost savings immediately with ratepayers through lower rates," Fitch said in the news release announcing the downgrade.
Failing to meet the standards could keep the MID from getting new bond financing, General Manager Allen Short said.
"We could not meet the financial tests without a rate increase," he said. "Therefore, we will not be able to borrow money."
Richard Harriman, a Modesto attorney and ratepayer advocate, said the answer is to take a break from borrowing.
"We don't need to increase the reserves if we aren't going to borrow," he said.
Rather than issue bonds to expand the power supply, Harriman said, the district could invest at much less cost in measures that reduce demand.
MID officials said bond financing is vital to projects that will assure the district's health -- and its ability to sell reasonably priced power -- in the long run. Chief among them are an expansion of its gas-fired power plant on Woodland Avenue and a share in a new gas plant in Lodi.
Phil Zhu, an assistant professor of finance at the University of the Pacific in Stockton, agreed that a solid bond rating and reserves are important.
"The more protections to the investors, the more you can decrease the financing cost," he said.
Chris Battreall, who helps clients buy bonds at Waypoint Financial Advisors in Modesto, agreed.
"If you can have a high bond rating, it makes you quite attractive and you can sell your bonds more easily," he said.
The board does not face an either-or choice. It could approve a less-than-planned rate increase, which would boost the reserves somewhat while easing the burden on customers.
Another option would be to trim the budget, though the staff warns that going too far could endanger the power system's reliability.
Bee staff writer John Holland can be reached at firstname.lastname@example.org or 578-2385.