The True Cost of a Water Buyout

by Dr. Philip R. O’Connor

My 35 years of work in the utility arena tells me that Peorians should be unimpressed with the idea that their city government should borrow at least $300 million for a buyout of Illinois American Water. Converting Peoria’s investor-owned water utility into a government-owned and operated water system would be a mistake.

Illinois American has supplied water to residents of Peoria for more than 100 years. As part of the original 1889 franchise agreement, the City of Peoria has the option to consider a buyout of the company every five years.

For good reason, the buyout option has historically been unpopular. In 2013, the last time the option was considered, the Council voted 8-3 against the purchase. Moreover, a 2017 poll showed 79 percent of Peoria voters said they opposed spending money to even study the buyout in 2018. Instead, voters favored investments in education, road improvements, job training, and hiring more police and firefighters.

It is not clear what buyout backers think the people of Peoria stand to gain. While taking on a large debt burden, there would not be any offsetting windfall of saving – unless the city chose not to make needed investment in the years to come. What is clear, however, is that much could be lost.

Over the past decade alone, Illinois American Water has invested approximately $150 million to improve Peoria’s water system. Therefore, in addition to raising more than $300 million for the initial purchase, more capital would be required for ongoing system improvements.

Peoria citizens should be wary of the financial projections being made by the small group of buyout proponents. The company’s past $15 million average annual infrastructure investment is not accounted for in financial projections made by Peoria’s CEO Council and their associates. Do the buyout advocates support or oppose future investment in the water system? National headlines tell of the disastrous effects of antiquated municipal water systems when local officials neglect to invest in a system.

Illinois American Water is regulated by the Illinois Commerce Commission (ICC), which I had the privilege to chair in the 1980s. Illinois American Water has been making aggressive infrastructure investments over the last decade and the water bill is reasonable at about $43 a month for the typical household. Municipal ownership is not a free lunch. For example, customers of the City of Chicago’s municipal water system, which is not regulated by the ICC, have seen their water rates double since 2012, in part to help fund city pension payments.

Then there is the question of water quality. According to EPA data, Illinois American Water performs far better than the industry average with no violations last year, while 198 other systems in Illinois faced violations. Approximately three-quarters of the violations issued cited municipally owned and operated water systems.

Illinois American Water is part of the largest privately-owned water company in the United States, giving it access to state-of-the-art water testing laboratories and the latest technological advancements. It is one of only nine Illinois water utilities to partner with the EPA to implement higher water quality standards than required in a program called the Partnership for Safe Water.

Operating a municipal water utility brings consistently emerging challenges. There are over 130 million chemicals currently registered globally, each of which may pose a threat to water quality. It is imperative that the public’s water supply is monitored by professionals with the scientific and safety backgrounds necessary to keep up with the newest challenges. Changing to a government-run system offers no prospect of better water quality or safety in Peoria.

The goals of the buyout advocates are murky, at best. Largely this is the same group that has been pushing the buyout conversation since the 1990s, but losing time and again. They claim in a lawsuit that the City of Peoria owes them at least two million dollars for attorney fees and other costs for previous buyout campaigns. What have Peoria taxpayers and water consumers gotten for two million dollars?

The Peoria City Council will have some considerable risks to consider in exercising a buyout option:

  • Over $300 million of bonded indebtedness for which taxpayers will be responsible for;
  • Loss of $5 million annually in tax and permit fees currently paid by Illinois American Water in the Peoria area;
  • The ongoing burden of funding $15 million in needed annual investment in Peoria’s water infrastructure (or suffering the consequences of failing to do so);
  • Loss of the Illinois Commerce Commission’s regulatory rate oversight and other consumer protections;
  • Loss of Illinois American Water’s seasoned water management expertise; and
  • Loss of a good corporate citizen that supports community organizations and has a positive relationship with its highly skilled union workforce.

A city government venture into the water business would likely prove expensive, risky, unproductive and disappointing. iBi

Dr. Philip R. O’Connor is a former chairman of the Illinois Commerce Commission.

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Comments

My question concerns whether there are any limitations on the ability of the water company to sell Peoria water either to other municipalities or to private concerns who might bottle water for commercial use. I understand there is a municipality in Indiana that is experiencing a significant drain on its water supply due to a commercial bottling operation over which it had no control. I would be interested to know if there are any such limitations on the current water company, and if not, will there be any limitations imposed in the next 5 year period.

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