Water Industry News

Peoria votes on $220 million Illinois American buyout

The pros and cons of private water from the advocates

Monday, April 4, 2005

By MOLLY PARKER of the Journal Star
PEORIA - An advisory referendum asking whether Peoria's water utility should be owned by the city or remain in control of Illinois American Water Co. will appear on Tuesday's ballot.

The utility has been priced at $220 million, and the City Council has until May 3 to make a decision on whether to buy it. A court decision allows the city to do so. Many council members have expressed concerns about purchasing the system with that price tag, which is more than double what the city's independent appraiser said it was worth.

Illinois American Water Co. officials have argued that the company should retain ownership because it has a proven track record of providing water service to the community.

But members of the Peoria Area Advancement Group, a group of business owners who funded the process of exploring a buyout, and some council members think the purchase would still be beneficial for the city. They argue the city could curb water rates and that the public should own its water service, saying that the private company is a subsidiary of a foreign-owned company.

The referendum is nonbinding, and the Water Selection Committee is expected to make a recommendation to the full council Thursday on how to proceed. But the referendum is also likely to have an impact on the elected council. So we asked a representative from PAAG and Illinois American to express their views on the following questions. The answers from PAAG were compiled by Sandra Birdsall, who sits on the Water Selection Committee. Those from the water company were answered by company President Terry Gloriod.

- Illinois American Water is a subsidiary of New Jersey-based American Water, which was acquired in 2003 by German utility giant RWE Thames Water. Is foreign ownership problematic for the city?

ILAM: On the contrary, our presence is an asset for the city of Peoria. We have been part of the RWE Thames Water team now for 27 months, and every American Water subsidiary, including Illinois American Water, has realized significant benefits from this partnership, including greater efficiencies, even better customer satisfaction and a renewed commitment to be the trusted water provider for our customers. That said, our operation is led by people that live and work in Peoria, who care about the community and raise their families here.

PAAG: It is problematic for several reasons. A) City residents get no benefit from the net income of approximately $14 million earned from Peoria operations which now benefits its foreign owner. B) Water is our most important resource. It should not be controlled by foreign interests. C) Water is a public resource and should be in public ownership. Eighty-five percent of the water utilities in the U.S. are owned by governmental entities.

- Can water from this area be sent overseas or to other parts of the country?

ILAM: The water in Illinois belongs to the people of Illinois, and its use is strictly regulated by the state of Illinois. It is important to make this very clear because this misconception is frequently used to justify who should own the water company. Illinois American Water does not own the water in Peoria. The citizens of Illinois own the water. We simply treat the water and make sure it's there for you every time you need it.

PAAG: Water from Chicago's system is sold to the suburbs. Water from Peoria's system could be sold to Bloomington, for example, or elsewhere without Peoria's approval. If Peoria owned the system, it would take Peoria's approval to sell the system's water.

- What is Illinois American Water's rate history and how does that process of requesting rate increases work? Could rates be curbed through city ownership?

ILAM: Illinois American Water's rate filings are well documented and publicly available at the Illinois Commerce Commission. What is important for the community to know is that the rates we charge in Peoria reflect the investments made in and the costs to operate a water system which provides water that is as good or better than all state and federal water quality guidelines. Water quality and quality service are directly related to annual investment in the water system. Today, the trend nationally is for municipal systems to seek partnerships with the private sector, largely because many municipally owned systems have failed to make the necessary investments over the past 20 years.

Illinois American does not set the water rates. The Illinois Commerce Commission extensively reviews evidence in a process that takes about 11 months. Only after reviewing the testimony of experts in engineering, finance, operations and many other fields do the commissioners decide on changes to rates. It is an open process that allows for public scrutiny and input. There is no such process involved when a municipality owns the water system.

In September 1993, the average residential customer in Peoria paid $24.74 per month for 6,000 gallons of water. Today, that same Peoria customer pays an average bill of $34.73 per month. That's only $9.99 more a month over 11 years, or 91 cents a year. While the average increase is slightly greater than 3 percent per year, it should be noted that a single large rate increase occurred as a result of the events of September 11, 2001, and the resulting need to address new security measures.

The current business plan of Illinois American Water does not call for a general rate case before 2009, and that means customers will not see the impact of a general rate increase before 2010. Barring an extraordinary event like Sept. 11, the average residential bill will still be $34.73 in 2010.

It is also important to note that the U.S. Environmental Protection Agency estimates that municipal water systems need to spend $18 billion in order to bring their existing systems up to government standards for water quality. Peorians don't have this problem because the necessary and timely investments have been made in their water system by Illinois American Water.

The financial models being reviewed by the city and PAAG under city ownership of the water system all require a 3 percent minimum rate increase every year over the course of the bond, which could be as long as 40 years.

PAAG: Illinois American has raised water rates 185 percent in the past 30 years, an average of 6.1 percent per year. Rate increases are as follows: May 1975 - 26.30 percent; May 1977 - 21.90 percent; May 1979 - 11 percent; December 1980 - 24.50 percent; December 1981 - 15.6 percent; October 1983 - 7 percent; September 1984 - 7.6 percent; March 1986 - 8.34 percent; December 1990 - 7.69 percent; February 1993 - 12.45 percent; January 1996 - 7.88 percent; December 1997 - 15.14 percent; February 2001 - 8 percent; July 2003 - 13.48 percent; 2004 - a 1 percent decrease. Rate increases for a private utility go before the Illinois Commerce Commission, which liberally grants increases as shown above. The city's projections show projected rate increases of 3 percent or less, which is far less than Illinois American's history. Illinois American now conveniently says they project no increases, but their factual history contradicts this projection. Under city ownership, elected officials would have to approve increases.

- If the city does not move forward with the buyout, can it exercise its option to do so again in five years? What is the earliest date it could pursue a buyout again? Are there other options to a buyout, such as a franchise fee?

ILAM: The city has the right to purchase the water company under the purchase option terms in the franchise agreement every five years. The next opportunity would be in 2008. American Water has operating companies in 29 states, and we have a wide array of strong, positive partnerships with local municipalities. We are always willing to work with our municipal partners in ways that benefit our customers. The city could request a franchise fee from the company, which is subject to negotiation.

PAAG: Yes, but the option comes up again in 2008. The process of exercise which has just happened cost $1 million. It is more cost-effective to do it now. As for alternatives, a franchise fee or local water tax would be passed on to consumers by Illinois American, so Peoria citizens would end up paying more.

- Who are the members of PAAG? Why do some of them live outside the city of Peoria? Is this problematic?

ILAM: Not applicable

PAAG: The PAAG members are prominent citizens and businessmen who were concerned about Peoria's water rates, which are some of the highest in the country, and believed the city should exercise its option to purchase. Because it was known Illinois American would fight the exercise in court, these citizens agreed to front the cost for the city's benefit. All of the citizens and businesses involved have investments in the city and Tri-County Area. Water is a key resource, and what happens in Peoria affects the entire larger community. Peoria's well-being is important to all of us. It is a good thing that people who live inside and outside the city understand its importance to the region.

- Under what circumstances must PAAG be repaid? How much would they be owed? Who determines whether they are paid back?

ILAM: Our analysis of the PAAG agreement is that the $1 million loan, plus interest, must be repaid by the taxpayers if the Water Selection Committee, by a majority vote, says the purchase is feasible. It is our interpretation that repayment does not depend on what action the City Council takes.

PAAG: If the acquisition is completed, PAAG will be paid out of the proceeds of the bond. The group must also be repaid if the acquisition is financially feasible and the city elects not to purchase the system. The repayment amount is $1 million plus interest at 6.9 percent to the date of payment from PAAG to the city. The determination on repayment is a matter of the contract between the city and PAAG. PAAG and the city have worked closely together on this project. The recommendation to the council regarding the purchase will be made by a Water Selection Committee appointed by the city which includes the mayor, two councilmen and two members of PAAG.

- What will the referendum say? How will it affect the council's decision?

ILAM: The ballot question will read: "Shall the city of Peoria purchase the Peoria water system for the price which has been previously announced?" On March 4, a panel of independent appraisers completed a valuation process mandated by the city and said the price is $220 million. The actual bond issue, according to the Water Selection Committee, may be more than $240 million. That would triple the debt of the city of Peoria and increase the per-capita debt obligation of every taxpayer in Peoria from $1,028 to $3,153. The referendum is a nonbinding referendum, which means the City Council can choose to ignore the outcome of the referendum on Tuesday.

PAAG: The referendum is a simple yes-or-no question of should the city buy the water company at the stated price. The referendum is advisory, and it will be up to the City Council to ultimately determine what the answer means. It is the expression of the opinion of those who vote at a particular point in time with information available at the time. The council is elected to act in their best judgment. They will take the referendum into consideration, but they will also consider the detailed information which will be available to them regarding the financial and other benefits to city ownership. The council will continue to share information with the public and obtain input and ultimately do what they believe is best for the city.

- Does the financial evaluation of the proposed purchase meet the requirements of the PAAG agreement?

ILAM: The conditions under which this determination shall be made are clearly outlined and quite specific in the PAAG agreement. For example, the agreement states that the financing "shall be payable over a period not to exceed 26 years" and that revenues would be based on water rates in effect in when the agreement was executed (1998).

PAAG: Yes.

- What would change under city ownership?

ILAM: We do not believe that water service in Peoria would be better than it is today under city ownership and contract operation. The reason is simple: Customers today have the advantage of the ownership and operation by Illinois American Water, a private, professional water company with a 100-year track record of service and reliability. Customers also have the oversight of water rates by a state commission. As residents of Illinois, customers will continue to control the water resource.

PAAG: Profits would remain in the city, giving the city more money available for needed projects. Under city ownership, the city can decide the priority of capital improvements. Financing improvements would be at a lower interest rate. The water system can be used to help promote economic development.

- Is $220 million the final price tag? What amount would be added to that because of infrastructure improvements made since the beginning of the appraisal process?

ILAM: The price set by the independent panel of appraisers on March 4 is $220 million. There are approximately $5 million in additional investments made by Illinois American Water that will be added to the appraised value of $220 million.

PAAG: It is close. The number would include improvements made after the appraisal and not included in the initial price. Illinois American has estimated that number to be $5 million.