Due Diligence on Local Water Systems

by Tom Fliege with Bill Cirone
CEO Council

On January 9, 2018, an offer of $400,000 from the CEO Council, an organization of local business leaders, was formally presented to members of the Peoria City Council. This funding is to pay for an appraisal of Illinois American Water Company‘s (IAWC) Peoria District holdings and related due diligence. The offer will not be repaid if the City Council eventually decides against completing the acquisition.

The CEO Council made this offer after an exhaustive analysis of the facts and merits of the City exercising the repurchase option in its 1889 franchise agreement with Illinois American. While the committee focused on the business and financial aspects of this issue, we also gathered some valuable information from the last appraisal process, which delivered a price of $220 million in 2005.

For example, we learned that American Water Works (AWK), the parent company of IAWC, has a great deal of history and expertise in fighting against efforts to reclaim control of local water systems. In contrast, no one on the City’s team had anywhere near that experience during the 2005 appraisal process. That is not to say that those involved were not good and competent people, but rookies seldom do well when up against hardened veterans determined to protect their interests.

We also learned that the 2005 appraisal was not like a typical business appraisal. No comparable sales were considered, and the appraisers concluded that a government buyer should pay more than a private-sector buyer. These and other lessons from the 1998-2005 effort make us much better prepared to get a true, fair market appraisal—if the City Council decides to accept the CEO Council offer to fund the due diligence process. That is the only way our community can make a sound business decision on the potential repurchase of the water system.

While lessons from the last appraisal are important, we have also had the opportunity to gather information about other communities that have completed the repurchase of their water systems, specifically Missoula, Montana; Huber Heights, Ohio; Felton, California; and Nashua, New Hampshire. Here is part of what we found.

Missoula, Montana: Population 72,364
In June 2017, Missoula completed the purchase of its water system. After the long and difficult process, Missoula’s mayor said, “From this day forward, your hard-earned dollars will stay local and be reinvested in water system infrastructure, rather than boosting profit sheets of a Canadian company. We are grateful for your support during this fight and applaud this monumental victory for our city.”

The Missoula appraisal was much closer to the city’s final offer than it was to the value that the private owner proposed. The other important point is that under public ownership, the plan is for no increase in water rates before 2021, when a two-percent increase is expected.

Huber Heights, Ohio: Population 38,101
Huber Heights completed the purchase of its water system in the mid-1990s. There are three aspects of this experience that seem relevant to Peoria.

First, the price for the purchase was the result of a negotiation that happened just before the matter was to go to the local courts as an eminent domain proceeding. A negotiated settlement with IAWC, like in Huber Heights, would be the best case in Peoria.

Second, Huber Heights is using a contract operator to manage its water system, and the city is pleased with the results. A contract operator may be a viable option for Peoria.

Lastly, according to the Huber Heights website, the cost of water for a homeowner using 6,000 gallons per month is less than $30 per month. According to the IAWC website, the comparable cost in Peoria is over $55 per month.

Felton, California: Population 4,057
Felton offers a useful lesson in the value of strong community support when they took on California American, another AWK company. At the start of the acquisition process, 74.8 percent of Felton voters approved a tax increase for an $11 million bond issue to support the purchase. The system’s final purchase price was much closer to the public estimate than to the value claimed by California American.

With respect to the cost of water under public ownership, an organization called Friends of Locally Owned Water (FLOW) has the following on its website: “Public ownership has saved Felton households hundreds of dollars per year on their total water costs… So, in total, compared to the company’s proposed rates, public ownership saved a Felton household about 30 percent or $500 on total annual water costs, including taxes.”

Nashua, New Hampshire: Population 87,889
In 2003, 78 percent of Nashua residents voted to buy their local water company. In 2010, the Nashua Board of Aldermen approved $220 million in bonds for the purchase. According to the local newspaper, the total cost of the acquisition in 2012—including consultants, advisors, assumption of debt, and a severance package for outgoing executives—was less than $210 million.

Water rates did not increase from 2012 until November of 2017, when an 11-percent increase was approved. Since the beginning of 2012, IAWC has raised rates by more than 23 percent.

If Peoria can duplicate Nashua’s record of an affordable acquisition and savings to customers, we can leave a similar legacy for future generations. Business leaders, through the CEO Council, have taken a first step. Now it’s up to the City Council to take the next step by voting to conduct a thorough and fair due diligence process. We encourage Peoria citizens to do their part by letting members of the City Council know that you want to know all of the facts. iBi

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