INDIANAPOLIS — For 131 years, Indianapolis Water Company, a private utility, owned the water that flowed from the taps of the city’s 1.6 million residents.

Except for a summertime blue-green algae problem that fouled the water in parts of the city, the water was pretty good. But in 2000, the company’s parent, NiSource, decided to sell Indianapolis Water, giving city officials the chance to take control of the city’s life blood.

“We wanted to protect our most precious resource,” said city attorney Robert Clifford.

So it designed a savvy type of contract to keep that control. It built an incentive-based contract that tied at least 20 percent of a company’s pay to “political” standards such as customer service or taste and odor. Most contracts focus on regulatory benchmarks and do not tie bonuses to performance, said William G. Reinhardt, editor of Public Works Financing, an industry newsletter.

“It was important to the political management of the water system,” he said. “At the end of the day, you don’t want people calling you up saying, ‘What’s wrong with our water, Mayor?'”

The city was up against some powerful adversaries. European giants SuezVivendi Environnement and RWE AG all bid for IWC. City attorneys, however, ferreting through the archives discovered an 1870 ordinance that gave Indianapolis first option on the purchase.

After a short court battle, Indianapolis in July 2001 paid $522.5 million for IWC, ending 131 years of private ownership.

The city, however, didn’t want the problems of managing and staffing the utility, Clifford said. So it contracted out the management.

On April 2002, the city hired USFilter to manage the water company under a 20-year, $1.5 billion contract.

Clifford said that the city’s contract assured that USFilter would spend $17 million to fix a blue-green algae problem that left the water with a foul odor and taste. In addition, it would be expected to invest about $5 million in the White River treatment plant, and spend about $1 million to expand a purification plant.

The city set up a new water department with a seven-member, volunteer, bipartisan regulatory board.

Indianapolis first required a $40 million letter of credit from USFilter before it could be considered for the contract. The performance standards are tied to pay and incentives – about 20 percent of the package represents those incentives, Clifford said. USFilter could earn an additional $8 million to $9 million a year, but targets must be met fully for the company to be paid, he added.

The new company kept the employees of IWC, and they remained unionized. Water rates were frozen for five years and layoffs for two years.

USFilter will not earn the incentive pay this year, but not because the company did not perform well, Clifford said. It failed to meet customer service standards because it had problems with a new billing system installed by the former water company.

But unlike other cities in the nation, Reinhardt said, the city kept control of its water despite contracting out the services. “Not only does the city own the water,” he said, “but they’ve got a tightly detailed contract…to advocate on [the city’s] terms what the operator should do to the system [the city] owns.”