Thanks to Wendy P for bringing up an important issue: How much institutional service should graduate students do? (and who should decide this?)
I think it's great if there are graduate students with the maturity, perspective, time, and time-balancing skills to serve effectively on departmental or other committees, providing their insights and, in some cases, gaining valuable career experience. As long as the time commitments are not onerous, graduate students (and everyone) can benefit from their participation in committees that oversee/organize graduate programs, hiring, seminars, and other activities related to the operation and governance of academic units.
It can be good preparation for a later career if a graduate student successfully serves on such committees and gains the respect of those involved; such service can also result in a useful line or two in a reference letter about the student's 'broader' activities beyond their thesis research ± teaching. Faculty have to do service work, so it can be useful for a graduate student (or postdoc) to get experience with it early on, especially for those contemplating an academic career.
But what if a student gets involved in more time-consuming institutional service, including committees beyond the department? No student should be compelled to do more service work than is the norm for their department, but some students want to be involved in graduate student organizations and committees at the university level. Others are asked to be involved in committees at the institutional level. These activities can benefit the students and it might even be important for their future careers to have such experiences. I suppose that if a student finds that s/he enjoys service work more than research, that can be important information..
Nevertheless, the first priority of the student and adviser is to make sure that time spent on these activities does not unduly slow progress towards degree. If the student's research progress is demonstrably slowed by participation in service activities, everyone needs to have a talk about priorities, funding timelines, research deadlines, career goals, and so on. It's not worth it to anyone if a student's funding runs out because of time-sucking committee work, even if the work is important and interesting.
It sounds like that is exactly what Wendy P has done with her group. I'm always impressed when I hear about an example of good communication between advisers and students, working together to find the right balance of time and focus. In that particular case, it's possible that the administrators inviting grad students to participate in university service activities might not be aware of the impact of the time commitment on the research progress of the students. Perhaps the administrators are so removed from research (particularly lab-based science research) and the realities of grad student life these days that they aren't aware of the negative effect that time-consuming university committees can have on their student members (and others).
In the case of significant time commitment for university-level service work, potentially resulting in a prolongation of a graduate student's time-to-degree, the adviser's choices are: (1) ask the student to quit the committee(s) or at least scale back the time involved, if possible; (2) compel the student to quit the committee(s) (because funding will run out otherwise); or (3) get institutional commitment (department or beyond) for at least some financial support of a student who is devoting significant time to the institution while being paid from the adviser's grant.
Has anyone used any of these options -- or others -- when a situation arises in which students devote a significant amount of time (that would otherwise be spend on their thesis research) on service work?