A Publication of WTVP

Dick Schwarz was born and raised on a farm on the shores of Lake Erie in Ashtabula, Ohio. Following graduation from Kent State University with a Bachelor of Science Degree in Geology, he was employed by the American Water System as an administrative assistant to the manager in Davenport, Iowa. He was subsequently employed at several other American Water properties before moving to Peoria in 1988, where he began his duties as manager of the Northern Division of the Illinois-American Water Company.

Dick has been a member of the American Water Works Association since 1978 and presently serves on the Water Utility Council for the Illinois Section of the AWWA. He is also a member of the National Association of Water Companies. He serves on the board of the Employers’ Association of Illinois and Junior Achievement, and is a member of the Government Committee of the Peoria Area Chamber of Commerce.

Illinois-American is a subsidiary of the American Water Works Company, Inc., the largest investor-owned water company in the United States. What advantages does this give your customers over other water companies, both municipal and private?

The advantages are many. By having sister companies in 21 states, we have a system-wide pool of experienced employees.

Mass purchasing through national contracts increases our purchasing power, and as a part of the American Water System, we have the ability to secure large amounts of capital at favorable rates. Illinois-American also enjoys economies of scale from centralized billing, accounting and customer service. We are also the only water utility in the state offering our customers the convenience of a toll-free, 24-hour customer service information hotline. Our system laboratory in Belleville, with its state-of-the-art technology, is one of the few laboratories in the country certified for Cryptosporidium testing, and helped put Milwaukee’s water system back in production after the outbreak there.

There seem to be more municipal water systems than privately owned water systems. Why is this, and does it mean that municipal systems are better?

Municipal water systems outnumber privately owned systems three to one. The reason for this is the conditions that exited when these water systems were established.

In the late 1800s and early 1900s, most municipalities chose to finance, build, and operate their own water systems. There were, however, many municipalities that for lack of funding or other reasons, did not establish their own systems. In many situations, pioneers in the investor-owned water business were able to raise the necessary capital and build water systems to satisfy the public need. These privately owned systems relieved the municipality of the burden of financing and running a water systems, which was a very satisfactory arrangement for many cities and villages.

Throughout the years some privately owned companies have been purchased by municipalities and some municipalities have chosen to sell their systems to the private sector. The net result is that there are more municipally-owned water systems today than there are privately-owned systems. It has no reflection on how well those systems run, nor does it mean that municipal systems are better or worse.

In your view, what are the advantages to the customer of private ownership over municipal ownership?

Customers are interested in receiving water that looks good, tastes good, is odor-free, and is safe to drink. They also want reliable water service that gives them adequate pressure and volume. They want these things 24 hours per day, and they are willing to pay a fair price for what they get. Both private and municipal systems can sill these customer needs. However, having been employed by an investor-owned utility for over 33 years, I tend to favor private ownership.

Municipal utilities are often controlled by political decisions that may not always be in the best interest of customers. Under political control, rates can be structured to favor certain groups or classes of customers. Customers outside of the city must be charged double the rates of those inside the city, or industrial customers might be charged excessively high rates to subsidize residential customers. Favoritism is also a real possibility. A politically controlled system is not subject to any outside rules, regulations or requirements except those dealing with water quality and safety.

In Illinois, privately owned utilities must operate under the rules and regulations of the Illinois Commerce Commission (ICCC). Those rules are designed to protect the customer and prevent discriminatory practices. They also require private owners to build, operate and maintain their systems so that customers receive specific standards of service at a cost which the Commission has judge to be fair to both the customer and the utility. The rates which a private water utility in Illinois charges its customers are based on cost of service.

The regulations that an investor-owned utility must operate under provide a degree of protection and consistency to the consumer that does not exist under the politically-controlled municipal system.

In what way is Illinois-American an asset to the economic growth and development of the Peoria area?

Because we have a declining rate block structure, with rates decreasing as usage increases, the cost of water in Peoria is very appealing to businesses that consumer large volumes of water.

We work closely with the Economic Development Council in economic growth initiatives, and look for innovative ways to finance water main extensions to serve prospective customers outside of our existing franchise territory.

What are some of the major challenges facing the water company in Peoria?

One of the most important challenges is controlling costs. While we have kept operating cost increases to a minimum, capital investment costs continue to climb. We must keep up with increasing regulatory requirements, establish additional sources of supply and meet the demands of replacing an aging infrastructure. That is quite expensive.

The water industry is changing very rapidly, especially in the area of water quality, and those systems that are not in compliance will be subject to penalties. The cost of safe drinking water in most communities is going up and it is important for customers to understand why.

Improved communication with our customers, political officials, and the business community is an additional challenges.

What is Illinois-American doing to control rising costs?

We have begun a program to improve the efficiency of our operation in every phase of the business. Management and hourly employees have joined forces in an effort to cut costs while maintaining or improving the present level of service. Our goal is to achieve a zero increase in operating expenses over the next five to eight years. During the three-year period covered by the current proposed rate increase, our totally operating expenses increased just 4.6 percent, approximately 1.5 percent per year, in spite of a dramatic increase in chemical costs. We feel pretty good about this considering the national CPI was about 3 percent per year during this same period.

We have also begun a growth initiative. Sufficient growth will increase our customer base, increase revenue and help offset expense. We are currently talking to neighboring communities to see if there are ways that we might be able to market our expertise, technology and economies of scale to help them with both their water utility and wastewater operations.

The most difficult area of cost to control is capital investment. Water quality must be maintained and the cost of capital improvements to meet new regulations is tremendous. Over the next five years, it will be necessary to spend in excess of $30 million for capital improvements to the Peoria system.

What capital improvements will require such a large sum of money?

Or normal capital expenditures for the Peoria District are about $2 million per year. This includes replacement of mains, fire hydrants, services, meters and various types of construction and transportation equipment. In addition to these normal expenditures, we have two very large projects in progress: a nine-year, $5 million ground water development program which includes development of new well sources, which are less expensive to treat than surface water; and the $5 million San Koty Well Field improvements which, over a four-year period, will increase production and enable that facility to meet new safe drinking water regulations. Additional distribution system improvements will involve the installation of large diameter transmission mains at a cost of $2.26 million. Other projects include the replacement of sheet piling along the Illinois River at our treatment plant, a new one million gallon clear well, wastewater handling facilities, well station improvements and chemical feed improvements.

Illinois-American has recently filed for a rate increase. Why is this rate increase necessary?

Though never popular, rate increases are necessary when operating and construction costs exceed the revenue allowed by the ICC. The current rate increase request is primarily due to capital expenses caused by stricter regulatory standards. The Surface Water Treatment Rule, which was brought on by the Safe Drinking Water Act, has necessitated changes in water treatment that have effectively reduced the productive capacity of our Illinois River Treatment Plant by at least five million gallons per day. This shortfall combined with expected growth of our area means that we must increase our sources of supply. It’s been 20 years since our production capacity was last increased. The majority of our $11.2 million capital expense during the three-year period of this rate increase will be spent increasing our source of supply and production capacity to meet the needs of our customers.

Could you explain just how this rate process works and when customers can expect new rates to go into effect?

The utility first files its request for a rate increase with the Illinois Commerce Commission and states the reasons for the increase. The Commission then conducts a thorough investigation which includes visits to the utility, public hearings in the local area, written testimony from both the utility and interveners (those that oppose the increase), and public hearings in Springfield.

Following consideration of all the data and information, a final order is given. It usually takes about eleven months from the time a water utility files for new rates until the Commission issues its final order detailing the new rates on which the utility is allowed to earn. That means new rates for Peoria customers would not go into effect until late December 1995 or early January 1996.

It is important to not that a utility seldom, if ever, receives the full amount of the increase. Over the past four rate cases, the Peoria District has been granted only 56 percent of the increase requested, while the Pekin District has received about 71 percent of the requested amount.

What is single tariff pricing and how will it affect customers in Peoria?

Single tariff pricing means that a single schedule of rates is used to charge customers for services in all of the districts of the company across the state. The tariff is based on the sum of all the districts as a whole. The Southern Districts of Illinois-American have had a single tariff for over two years and it has worked well.

All water systems periodically need to invest large sums of money for various projects as their systems grow or as aging infrastructure needs to be replaced. One of the advantages of single tariff pricing is that when these large investments of capital are needed, the impact on the local customers is considerably less than if all the costs were borne by those local customers alone. Over time, the expenditure per customer is essentially the same.

Will the Peoria District become part of the single tariff pricing at Illinois-American?

Yes, but it may not happen in the rate proceeding which is currently being proposed. The rates for residential water service in the Peoria District are nearly identical to those of the company’s Southern Division and could very easily join the single tariff for Illinois-American without any noticeable impact.

Illinois-American Water Company has been accused of having very high water rates. How do you respond to that?

We feel our rates are fair and reasonable. Of course, we would like our rates to be lower, but the rates that Illinois-American charges its customers are directly related to the cost necessary to provide quality water service to them, and we are working hard to control these costs. The average residential customer in Peoria paid just $278 for water in 1994. Over the last seven years the average residential bill has increased only 2.3 percent per year, much less than inflation. Water is the least costly utility available for residents in the Peoria area. Most people pay more for cable TV than they do for water.

A recent survey by Ernst & Young listing water rates for the top 100 metro areas has been cited in the media lately. Why are water rates of privately run water utilities traditionally higher than those of municipally-run systems?

About 95 percent of the utilities in the survey are municipally owned and the rates charged by municipalities are often subsidized by other sources of revenue. This can make the rates charged for water sold by a municipal utility lower than those charged by a privately owned utility, when in fact customers may be paying just as much or more for the water operation in the municipality. Other sources of revenue charged by a municipality make the cost of operating privately owned utilities seem high when they really aren’t.

To get the full meaning of a comparison of rates, it is important to understand that the cost for water paid by a customer to the municipal utility may be subsidized by other sources of revenue. It is common for municipal water utilities to charge a service connection fee to new customers. This fee can range from a few dollars to thousands of dollars. Municipal utilities also often charge a higher rate to customers outside the city. This rate is frequently double what customers pay inside the city.

These other sources of revenue have a direct effect on the rates customers pay for water. Illinois-American foes not have service connection fees or higher rates to customers outside the city. We do have a customer charge and a fire service charge which appear in our rate schedule, but other than these, all revenue is derived from the water we sell, and all costs of the water service are reflected in the monthly or quarterly bill received by our customers. When rates are compared, consideration should be given to other sources of revenue received from customers in the municipal systems.

How does your rate structure affect the various classes of customers – residential, commercial, and industrial?

The type of rate structure used by a utility can have a significant effect on the cost that a particular classification of user pays for water. Rate structures can be declining block, uniform or inverted block. A declining block structure results in a lower rate for each usage block as consumption increases. A uniform structure is the same rate for or all customers regardless of use, and the inverted block structure results in a higher rate for each usage block as consumption increases. Like most other privately owned water utilities, the rates in Peoria are declining block and, as required by the ICC, are based on cost of service to each customer class.

Peoria customers using volumes of water in the third or fourth rate blocks are paying much less than similar customers in other cities. Lower industrial rates, which appeal to high volume water users and businesses that might be considering the Peoria area for expansion, are an asset to the growth of our area.

The inverted block method and the uniform method usually don’t consider cost of service in the rates being charged. When cost of service is considered as a basis for determining rates, customers are charged their fair share of the cost of the water service that they receive. Perhaps what people should really be comparing is the total revenue required by a utility to pay for its cost of operation.

What does this mean to the residential user?

Residential customers make up 90 percent of Peoria’s customer base, but account for only 65 percent of our revenues. (Commercial customers make up 8 percent of the customer base, while only 2 percent of our customers fall into the industrial class.)

The typical Peoria residential customer in 1994 used 210 gallons per day and paid about $278 per year or 76 cents per day for this service. As usage increase, the price charged decreases.

If the full rate increase request were to be granted, residential customers in Peoria would pay an average increase of $2.51 per month, raising the average monthly bill from $24.72 to $27.23.

What are some of the new regulations that concern our drinking water?

The enactment of several new rules under the Safe Drinking Water Act (SDWA) are changing the way water utilities across the country now treat and test their drinking water supplies. In Peoria, it has meant a decrease in our plant capacity. Before implementation of the Surface Water Treatment Rule, the maximum production at our Illinois River Treatment plant was 20 million gallons a day (mgd). Now it is down to 15 mgd due to new standards which have slowed down the treatment process, increased chemical contact times and tightened turbidity standards (the measure of particles suspended in water).

What is Illinois-American doing to ensure the highest quality water possible?

Just a few weeks ago, Illinois-American joined the Safe Water Partnership, a voluntary U.S. EPA program designed to enhance the ability of drinking water systems across the nation to prevent the entry of Cryptosporidium, Giardia and other microbial contaminants in drinking water and to demonstrate to the American public that local water suppliers can work together in harmony with government to protect drinking water supplies. It is important to emphasize that this is a voluntary proactive approach to safer water treatment which water utilities are not required to become a part of. What is means is that Illinois-American is already treating its water to comply with the Enhanced Surface Water Treatment Rule, the Disinfection/Disinfection Byproducts Rule, and the Information Collection Rule, all of which are currently bogged down in the legislative process.

To assure safe drinking water, Illinois-American maintains its treated water at least than 0.1 turbidity units, well below the USEPA standard of 0.5. Lower turbidity improves the microbial safety of drinking water.

To further improve treatment, we recently installed particle monitors which continually monitor the size and number of minute particles in the water. These monitors allow improved control of the water treatment process for even further improvement in drinking water safety.

How have regulations affected the cost of our drinking water in Peoria?

Due to regulatory impact, chemical treatments costs have increased so sharply that they now exceed fuel and power costs for the first time ever. A corrosion inhibitor we didn’t even use five years ago is now required to comply with the Lead and Copper Rule and has become our most costly chemical. Besides chemical costs, substantial capital investment will be necessary to construct the facilities needed for regulation compliance. Because of the capacity loss to our surface water supply, we have begun a $5 million ground water supplies and develop new well sites to recapture that loss and serve the growing areas of Peoria.

Have the high number of zebra mussels in the Illinois River affected the water supply for Peoria?

We have been able to control the zebra mussels so they have minimal effect on our treatment operation in Peoria. Zebra mussels were first detected at our river intake in 1992 and since that time have been found in large numbers. We were prepared for them because we learned from the experiences of others, including our Ashtabula, Oh., plant on Lake Erie. We experimented with various chemicals used in our water treatment and found that zebra mussels could not tolerate the chemical polymer which we use as a coagulant. By changing the application point of polymer to where the river first enters the intake, we created an environment hostile to the zebra mussels and were able to control them at that point.

The city’s recent attempt to buy the water company has been abandoned. Do you think there will be another attempt some time in the future?

The primary motivation for the city’s recent attempt at acquisition was to use the water as a tool for growth. Now, it seems that the city will be successful in using the wastewater system for that same purpose. If it and other incentive plans work, I would no expect another attempt at buying the water company.

What is the status of the franchise agreement between the water company and the city?

The franchise agreement dates back to 1889. Much of it has been superseded by Public Utility Law and Illinois Commerce Commission Regulations. The agreement was perpetual and provided for no franchise fee. It did, however, contain a buyout clause which permitted the city an option to purchase the water company at five year intervals.

It is this clause that has sparked the interest of the city to buy the water company several times over the last 55 years. It has yet to be proven in court, but we believe that the franchise agreement is no longer valid.

The referendum in 1994 indicated that 86 percent of the voters preferred that the water company remain private. Is this really indicative of how people feel?

I think so. We really appreciate our customers who believed that a privately owned water company could serve them better than one owned and run by a municipal government, and made it possible for Illinois-American to continue to provide quality water service to the people of Peoria County. As a continuing measure of our customer satisfaction, in January 1995 we conducted an extensive independent survey which indicated 79 percent of our customers rated our overall performance as excellent or good; while 74 percent rated our customer service as excellent or good. Other information from the survey will enable us to better conform our services to meet our customer’s needs.

How can Illinois-American continue to operate in Peoria without a franchise agreement?

A franchise agreement is a mutual working agreement between a utility and the municipality it serves, but is not a necessity. We operate in many cities without franchise agreements and have very good working relationships with those cities, including Peoria and Pekin.

Has any effort been made to renegotiate the existing franchise agreement?

Yes, the People Area Chamber facilitated a meeting between representatives from the water company and the city to explore matters of mutual interest in February. The meeting was productive, but there was no indication of a desire to pursue renegotiation of the franchise agreement.

We are always willing to meet and discuss any matter with the city. We would be receptive to discussions on renegotiation of the franchise agreement which we feel has expired.

What do you see for the future of Illinois-American and the water supply industry?

With the rapid advance in technology, I think there will be dramatic changes in the way things are done throughout the entire water industry, and we expect American Water System companies to lead the way. We’ll be doing the same work, but it will be done much more efficiently and effectively utilizing automation and electronic technology wherever cost effective.

Many changes are already taking place. We are currently installing automatic meter reading. Telephone and radio meter reading – which will allow us to real all meters within a matter of hours – is in the not-too-distant future.

I see the quality of water improving as we make changes in treatment to accommodate new rules promulgated by the SWDA and the SWTR. I also think we’ll see the growth of regional water providers, such as Illinois-American, who will become primary suppliers or operators for many nearby smaller water systems. The obligation to provide a safe and adequate water supply is becoming a much greater responsibility as water standards increase. The economy, technology and economies of scale that Illinois-American can provide might be shared with many neighboring small systems to mutual advantage. IBI