DuPage County explores building pipeline to Lake Michigan

Citing rising rates and unresponsiveness from City Hall, DuPage County — Chicago’s biggest water customer — has taken initial steps to cut off its lucrative contract and build its own pipeline to Lake Michigan.

The massive undertaking, which would cost billions of dollars and was once considered almost unthinkable, comes at an inflection point in the region’s water system, as the DuPage Water Commission’s 40-year agreement with Chicago is ending in March 2024. It also comes just weeks after Chicago inked a historic deal to sell water to the city of Joliet at an attractive rate.

The outcome of negotiations between DuPage and Chicago will undoubtedly affect water rates for the roughly 1 million consumers the DuPage Water Commission serves as well as Chicago’s bottom line.

The city received $113 million from DuPage customers during DuPage’s 2022 fiscal year. Annual DWC billings represent about 30% of the annual revenue the city receives for water from suburban customers, according to Chicago’s Department of Water Management. If DuPage decides to break away and build its own water system, it could also snap up other suburban customers as more aquifers that have provided water to those towns run dry in coming decades.

Chicago officials said securing a new contract with DuPage is a top priority. But DuPage officials said they feel they’ve been getting the runaround from City Hall for years and want to know why they are paying roughly double what Joliet is expected to pay under a deal that recently departed Mayor Lori Lightfoot hailed as a big financial victory for Chicago.

“Right now, all water consumers on the Chicago system pay the same rate: $4.54 per 1,000 gallons,” said Paul May, DWC’s executive director, who asked Chicago officials what DWC’s rate would be under the cost-of-service model included in the Joliet contract. Though the official rate is not yet established, May said he was told “it’s about half of what we’re currently paying,” or about $2.50 or $3 per 1,000 gallons.

[ Chicago City Council approves 100-year water deal with Joliet ]

“Essentially what they’ve done is they’ve acknowledged that the value of the commodity that they’re producing — that we sell on their behalf — is about half what they’re charging us for it,” May said.

Water won’t start flowing to Joliet until 2030. The best practice, May said, is that cost-of-service model, where in addition to the amount of water used, a custom rate is calculated based on the cost of the infrastructure built to deliver it and how efficiently the water travels. A grandmother with a half-inch meter would pay less, for example, than an industrial water user with a 14-inch pipe.

“Our frustration is pretty high,” said James Zay, the DuPage Water Commission’s board chair. He said DuPage water officials have been “actively trying to negotiate a new contract for the last four years” but when they requested serious sit-downs with Lightfoot administration officials, they’d get bounced around to different people at City Hall.

Chicago officials portrayed the dialogue with DuPage as less adversarial. They said negotiations have been ongoing since 2019 and that the city has been clear about its plans to move all 50 suburban wholesale customers — including DuPage — to the cost-of-service calculation by 2030.

“We have not yet received a written document conveying prospective contract terms of any sort, including a commitment to a date-certain implementation of the cost-of-service model,” a spokesman for DWC said in an emailed response. “While DWC appreciates the intention that Chicago has recently conveyed through news media and most recently in the Joliet contract, DWC has not yet received a draft contract from the City for consideration.”

By state law, Chicago is required to provide water “at no greater price or charge” than what it charges within its own city limits, which stands at $4.54 per 1,000 gallons. As for the $2.50 per 1,000 gallons estimate for Joliet, Chicago officials agree that DuPage would pay a lower rate than it pays now under the cost-of-service model, but that final rate has not been calculated.

“The City’s recent meetings with DWC have been candid and productive,” and the hope is to “expeditiously” land a contract, Chicago Department of Water Management spokeswoman Megan Vidis said in an emailed statement. “The City intends to continue meeting and negotiating in good faith with DWC as we have been since 2019 to enter into a new long-term water supply agreement that meets the needs of DWC and the residents of DuPage. This includes the implementation of a rate based on cost-of-service.”

With the 40-year contract’s expiration approaching, DWC commissioned the firm Carollo Engineers Inc. to study whether DuPage should go its own way. Board members were publicly briefed on the findings last month.

[ Just 50 miles from Lake Michigan, groundwater is running out, leaving Illinois towns with a tough choice to make ]

As it stands, Lake Michigan water supplied to DWC is treated at Chicago’s Jardine Water Purification Plant next to Navy Pier. It then flows to the Central Park Pumping Station in North Lawndale, then Chicago’s Lexington Pumping Station, before making its way to the DuPage Pumping Station in Elmhurst, where it is then pushed out to about 35 wholesale customers in cities and villages such as Naperville, Downers Grove and Wheaton.

While Chicago billed DuPage $113 million during DuPage’s 2022 fiscal year, DuPage billed its customers $133 million, charging an average rate of $4.97 per 1,000 gallons, according to DWC’s most recent water sales analysis.

Carollo presented three alternatives for DuPage, each of which calls for constructing a maze of pipes, a treatment plant and intakes from the lake akin to the city’s red-and-white striped cribs. In hard construction costs, the plans range in price from $1.5 billion to $2 billion, but the 30-year debt obligations would cost DuPage between $5.3 billion and $7 billion, according to the report. Those numbers could be higher or lower depending on interest rates. The report’s calculations assume debt service payments at 6% interest.

One route would begin with a new intake off the coast of Glencoe north of Chicago with lake water flowing to a potential treatment facility just northeast of Northbrook along new pipes that head west to Wheeling then pivot south all the way down to the Elmhurst pumping station. That plan — dubbed the North Alignment — would be the costliest, at $2 billion, according to the report. But Zay said that plan would likely attract other municipal partners to sign on and shoulder part of the costs.

Two other potential routes travel through Chicago. The Central Alignment — costing an estimated $1.5 billion — features an intake in the waters off Chicago’s Near South Side, with pipes traveling through Chinatown and McKinley Park. The third plan, the South Alignment, would cost an estimated $1.9 billion and start north of Whiting — in Indiana waters — and cut through Chicago’s Far South Side, traveling northwest and exiting the city in Archer Heights.

Plans were specifically developed to minimize the distance between the lake and DuPage’s Elmhurst pumping station while also avoiding Chicago-owned land. But the report notes engineers anticipate “challenges with temporary easement and land acquisition” to build transmission pipes and a water treatment facility.

All three routes would involve “numerous technical, financial, legal and political tasks,” the report notes, including building the new intake and water treatment facility, carving 13-foot diameter tunnels into bedrock 200 feet below ground and a series of land acquisitions and easement negotiations to make it all happen. DWC redacted a portion of the report regarding “political tasks,” but the section does note legal challenges might occur in the earliest phase of the development.

May and Zay both said the engineering is straightforward and the land acquisitions are doable, in part because of state rights-of-way and the ability to build along train tracks.

System operations wouldn’t begin until 2037, and ongoing operating and maintenance costs — including added workforce — would cost an estimated $13.7 million annually, according to the report. The time it would take to build also would necessitate DuPage extending its contract with the city so it could still receive water in the interim, a short-lived consolation to Mayor Brandon Johnson.

DuPage would have to pay back borrowing costs for construction, and interest rates are unclear. With a 6% interest rate, “the alternative water supply system becomes more cost effective than the City of Chicago,” by 2049 at the latest, according to the report. Lower interest rates could speed that timeline up, and new partners in other municipalities could ease the financial burden, according to the report.

But it is still a significant undertaking, Zay said.

“I’ve been the chairman for 12 years. And if anytime over the last eight years or so, you would think that we would venture into a project like that, I probably would have said, ‘You’re crazy.’ But we’ve basically been pushed in this direction” due to the tenor of negotiations.

“I think there was some doubt from our commissioners if we could do this or not, and we saw a lot of head shaking when the financials came out that this is doable, and the money that we would save and the financial security would be for our customers and DuPage County,” Zay said. “It’s starting to make some sense.”

Vidis, of Chicago’s water department, said that while city officials “understand and respect DWC doing its due diligence to determine the feasibility of such an initiative, it entails enormous cost and construction of vast new infrastructure to duplicate Chicago’s existing robust, world-class water system.”

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“We believe strongly that DWC would be better served by working with Chicago as we advance implementation of the new cost of service rate methodology. It will ultimately provide DWC with the favorable water rate it wants to obtain while continuing to receive the reliable, high-quality water service it has had from the City for the past 40 years,” she said.

The loss of DuPage as a customer “would lower ongoing revenues and could weaken financial performance” if the city doesn’t offset the revenue losses with rate increases, expense cuts, or making up for the loss with new customers, said Kristen Reifsnyder, a director in the Water Utilities Group at the rating agency Fitch.

But officials at both Fitch and ratings agency S&P pointed out the city had pledged to transition all of its customers to the cost-of-service rate. Switching to a cost-of-service calculation is a credit positive, S&P pointed out, because it “specifically links cost of service to revenue requirements,” and transparency around the switch also “helps minimize political risk and potential customer discord.”

That transparent and predictable pricing also makes Chicago competitive compared with rates charged by Evanston and Hammond, Indiana, city finance and water officials said. The cost-of-service model helped convince Joliet to sign on as a customer and likely will bring on more, as other suburban municipalities see their aquifers dry up or want to transition away from rivers.

Margaret Scheeman, an economist who advises the Chicago Metropolitan Agency for Planning on water financing issues, said the dispute between Chicago and DuPage underscores a regional problem in which different water agencies are often forced to compete with each other rather than address water usage holistically.

“If you’re running a company and you’re trying to find the optimal size of the company, how can you provide it in the most reliable way at the lowest cost to the people who need it?” she said. “Nobody is asking that question in a coordinated way across our region. Chicago could ask that for itself, DuPage could ask it for itself, Evanston could ask. We do not have anyone asking on the infrastructure side what the optimal Lake Michigan utility would look like.”

aquig@chicagotribune.com