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                                                                     Exhibit 4.8

                         Debt Service Reserve Guaranty

     This DEBT SERVICE RESERVE GUARANTY (this "Guaranty"), dated as of October
                                               --------
23, 2001, is issued by Peoples Energy Corporation, an Illinois corporation, as
guarantor (the "Guarantor") in favor of Bank One Trust Company, National
                ---------
Association, in its capacity as Administrative Agent under the Deposit and
Disbursement Agreement referred to below, as beneficiary (the "Beneficiary").
                                                               -----------


                                  WITNESSETH:

     WHEREAS, the Guarantor is the indirect parent of Elwood Energy LLC, a
Delaware limited liability company, (the "Issuer");
                                          ------

     WHEREAS, the Issuer has entered into that certain Indenture, dated as of
October 23, 2001 (the "Indenture"), with Bank One Trust Company, National
                       ---------
Association, as Trustee (in such capacity, the "Trustee");
                                                -------

     WHEREAS, the Issuer has entered into that certain Deposit and Disbursement
Agreement, dated as of October 23, 2001 (the "Deposit and Disbursement
                                              ------------------------
Agreement"), with Bank One Trust Company, National Association, as
---------
Administrative Agent (in such capacity, the "Administrative Agent"), Bank One
                                             --------------------
Trust Company, National Association, as Collateral Agent (in such capacity, the
"Collateral Agent") and Bank One Trust Company, National Association, as
 ----------------
Intercreditor Agent (in such capacity, the "Intercreditor Agent"), pursuant to
                                            -------------------
which the Issuer is required, among other things, to fund the Debt Service
Reserve Account (as defined therein) with a combination of cash, letters of
credit and guaranties (such guaranties to be in substantially the same form as
this Guaranty); and

     WHEREAS, the Guarantor anticipates benefiting directly and indirectly from
the transactions contemplated by the Indenture and the Deposit and Disbursement
Agreement.

     NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to the Guarantor, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor agrees as follows:

SECTION 1.  DEFINITIONS
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               (a) Each capitalized term used herein and not otherwise defined
herein shall have the definition assigned to that term in the Deposit and
Disbursement Agreement.

               (b) The following terms shall have the following respective
meanings:

          "Guaranty Cap" shall mean:
           ------------

               (a) for any date of determination occurring on a Six-Month DSR
Date, an amount equal to 50% of the scheduled principal and interest which will
be due or has become due on the Senior Secured Obligations during the period
from and including the day after the Bond Payment Date immediately preceding
such date of determination through and including the Bond Payment Date
succeeding such date of determination; or

               (b) for any date of determination other than a Six-Month DSR
Date, an amount equal to 50% of the scheduled principal and interest which will
be due or has become due on the Senior Secured Obligations during the period
from and including the day after the Bond Payment Date immediately preceding
such date of determination through and including the two Bond Payment Dates
succeeding such date of determination;

provided, however, in the event of payment of any amounts by the Guarantor under
--------  -------
Section 2.1, the Guaranty Cap shall, subject to Section 4 hereof, be reduced by
-----------                                     ---------
the amount of such payment.

          "Notice of Payment" shall mean a notice of payment in substantially
           -----------------
the form attached hereto as Exhibit A.
                            ---------

SECTION 2.  GUARANTEE

     Section 2.1 Subject to the terms hereof, the Guarantor hereby
unconditionally and irrevocably undertakes, as primary obligor and not merely as
a surety, for the benefit of the Beneficiary to pay to the Administrative Agent,
on first demand in the form of a Notice of Payment, the amount specified in such
Notice of Payment, but in no event exceeding the Guaranty Cap. Each demand for
payment

                                       2

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under this Guaranty shall be made in writing to the address set forth in Section
                                                                         -------
7.2 hereof and shall be in the form of the Notice of Payment.
---

     Section 2.2  The Guarantor shall make payment to the Beneficiary hereunder
on first demand in the form of a Notice of Payment and notwithstanding any
objection to such payment by the Issuer or any other Person.  The Guarantor
shall not require the Beneficiary to justify further its demand for payment, nor
shall the Guarantor have any recourse against the Beneficiary in respect of any
payment made hereunder.  The Guarantor shall pay any sum demanded by the
Beneficiary hereunder in immediately available funds on the date set forth in
the Notice of Payment (which date shall be in accordance with the provisions of
Section 3.6(c), (g) or (h), as applicable, of the Deposit and Disbursement
--------------  ---    ---
Agreement).

     Section 2.3  Subject to Section 5 hereof, this Guaranty is a direct,
                             ---------
independent and primary obligation of the Guarantor and is an irrevocable,
absolute, present, unconditional and continuing obligation, and the validity and
enforceability of this Guaranty shall be absolute and is not conditioned in any
way upon (a) the institution of suit or the taking of any other action or any
attempt to enforce performance of or compliance with the obligations, covenants
or undertakings (including any payment obligations) of the Issuer under the
Deposit and Disbursement Agreement or any other Financing Document, (b) the
genuineness, validity, legality or enforceability of any of the Transaction
Documents or the lack of power or authority of the Issuer to enter into any of
the Transaction Documents, or any other circumstance whatsoever (other than
payment or performance) that might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor, (c) any right of set-off,
recoupment or counterclaim, (d) any attempt to collect from the Issuer or any
other entity or to perfect or enforce any security or any other condition or
contingency or (e) any other action, occurrence or circumstance whatsoever.

     Section 2.4  Without limiting the generality of the foregoing, and subject
to Section 5 hereof, the Guarantor shall have no right to terminate this
   ---------
Guaranty, or to be released, relieved or discharged from its obligations
hereunder, and such obligations shall be neither affected nor diminished for any
reason whatsoever, including:

          (i)  any amendment or supplement to or modification of any of the
          Transaction Documents, any extension or renewal of the Issuer's

                                       3

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          obligations under any Transaction Document, or any subletting,
          assignment or transfer of the Issuer's or the Beneficiary's interest
          in the Transaction Documents;

          (ii)   any bankruptcy, insolvency, readjustment, composition,
          liquidation or any other change in the legal status of the Issuer or
          any rejection or modification of the obligations of the Issuer or the
          Beneficiary as a result of any bankruptcy, reorganization, insolvency
          or similar proceeding;

          (iii)  any furnishing or acceptance of additional security or any
          exchange, substitution, surrender or release of any security;

          (iv)   any waiver, consent or other action or inaction or any exercise
          or nonexercise of any right, remedy or power with respect to any of
          the Transaction Documents;

          (v)    the unenforceability, lack of genuineness or invalidity of the
          Senior Secured Obligations or any part thereof or the
          unenforceability, lack of genuineness or invalidity of any agreement
          relating thereto;

          (vi)   (A) any merger or consolidation of the Issuer or the Guarantor
          into or with any other Person, (B) any change in the structure of the
          Issuer or the Guarantor, (C) any change in the ownership of the Issuer
          or the Guarantor or (D) any sale, lease or transfer of any or all of
          the assets of the Issuer or the Guarantor to any other Person;

          (vii)  any default, misrepresentation, negligence, misconduct or other
          action or inaction of any kind by the Beneficiary under or in
          connection with any Financing Document or any other agreement relating
          to this Guaranty; or

          (viii) any other circumstance whatsoever (except the complete payment
          and performance of the Senior Secured Obligations), including, without
          limitation, any act or omission of the Issuer or the Beneficiary which
          changes the scope of the Guarantor's risk.

     Section 2.5 The Guarantor hereby unconditionally waives and releases, to
the extent permitted by law any circumstance which might constitute a defense

                                       4
<PAGE>

available to, or a discharge of, the Guarantor.  No failure to exercise and no
delay in exercising, on the part of the Beneficiary, any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege preclude any other or further
exercise thereof, or the exercise of any other power or right.  The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law.

     Section 2.6  The Guarantor agrees to pay any costs and expenses incurred by
the other parties to any Financing Document in connection with the enforcement
of this Guaranty.

SECTION 3.  GUARANTOR'S REPRESENTATIONS AND WARRANTIES

          The Guarantor represents and warrants unto the Beneficiary as set
forth in this Section 3.
              ---------

     Section 3.1  The Guarantor's long-term senior unsecured debt is rated at
least "BBB" by S&P and "Baa2" by Moody's.

     Section 3.2  The Guarantor is duly organized, validly existing and in good
standing under the laws of the state of its organization and has full power,
authority and legal right to execute, deliver and perform this Guaranty.

     Section 3.3  The execution, delivery and performance by the Guarantor of
this Guaranty has been duly authorized by all necessary corporate action. This
Guaranty constitutes a legal, valid and binding obligation of the Guarantor
enforceable against the Guarantor in accordance with its terms, except as such
enforcement may be affected by applicable bankruptcy, insolvency, moratorium and
other similar laws affecting creditors' rights generally.

     Section 3.4  The execution, delivery and performance of this Guaranty will
not contravene any provision of law, rule or regulation to which the Guarantor
is subject or any judgment, decree or order applicable to the Guarantor nor
conflict or be inconsistent with or result in any breach of any terms,
covenants, conditions or provisions of, or constitute a default under, or result
in the creation or imposition of (or the obligation to create or impose) any
Lien or other encumbrance upon any of the property or assets of the Guarantor
pursuant to the terms of any agreement or other instrument to which the
Guarantor is a party or by which it or its property is
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bound or to which it or its property may be subject, the violation of which
could have a material adverse effect on the financial condition of the
Guarantor, nor violate any provision of the constitutive documents of the
Guarantor.

     Section 3.5  No pending or, to the knowledge of the Guarantor, threatened
action, suit, investigation or proceeding against the Guarantor before any
Governmental Authority exists which, if determined adversely to the Guarantor,
would materially adversely affect the Guarantor's ability to perform its
obligations under this Guaranty.

     Section 3.6  No consent from any Person is required for the execution,
delivery and performance by the Guarantor of this Guaranty except that which has
been obtained.

SECTION 4.  SURVIVAL OF GUARANTY

     Notwithstanding anything to the contrary herein, this Guaranty shall
continue to be effective or be reinstated, as the case may be, if at any time
any of the amounts paid to the Beneficiary, in whole or in part, is required to
be repaid upon the insolvency, bankruptcy, dissolution, liquidation, or
reorganization of the Guarantor, the Issuer or any other Person, or as a result
of the appointment of a custodian, interviewer, receiver, trustee, or other
officer with similar powers with respect to the Guarantor, the Issuer or any
other Person or with respect to any substantial part of the property of the
Guarantor, the Issuer or such other Person, all as if such payments had not been
made.

SECTION 5.  TERMINATION

     Section 5.1 Subject to Section 5.2 hereof, this Guaranty and the
                            -----------
Guarantor's duties and obligations hereunder shall remain in full force and
effect and be binding in accordance with its terms until the earlier of (i) the
date on which all Senior Secured Obligations shall have been satisfied by
payment and performance in full, (ii) the date on which the obligations of the
Guarantor hereunder shall have been satisfied by payment and performance in full
and (iii) the date on which the Issuer provides to the Beneficiary (w) cash (to
be deposited in the Debt Service Reserve Account), (x) a Debt Service Reserve
L/C, (y) a replacement Debt Service Reserve Guaranty, or (z) any combination of
(w), (x) and (y), such that, on such date, the Debt Service Reserve Account
shall be fully funded without taking into account the

                                       6
<PAGE>

amount that would otherwise be available under this Guaranty. Upon the earliest
to occur of the dates set forth in clause (i), (ii) and (iii) above, this
Guaranty and the Guarantor's duties and obligations hereunder (including its
obligations under Section 2.1 hereof, shall terminate and be of no further force
                  -----------
and effect.

     Section 5.2  Notwithstanding anything to the contrary contained herein, the
Guarantor shall have the right to terminate this Guaranty upon 45 Business Days'
written notice to the Issuer and the Administrative Agent, which notice shall
set forth the date on which this Guaranty will terminate (the "Termination
                                                               -----------
Date").  In the event the Guarantor (a) terminates this Guaranty in accordance
----
with this Section 5.2, and (b) receives, not less than 15 Business Days prior to
          -----------
the Termination Date, a Notice of Payment from the Administrative Agent, the
Guarantor shall pay the amount set forth in such Notice of Payment in accordance
with Section 2.1 hereof.
     -----------

SECTION 6.  REMEDIES; SUBROGATION

     Section 6.1  Remedies.  In the event the Guarantor shall fail to pay
immediately any amounts due under this Guaranty, or to comply with any other
term of this Guaranty, the Beneficiary shall be entitled to all rights and
remedies to which it may be entitled hereunder or at law, in equity or by
statute.

     Section 6.2  Subrogation.  The Guarantor will not exercise any rights that
it may acquire by way of subrogation under this Guaranty, by any payment made
hereunder or otherwise, until all of the Senior Secured Obligations shall have
been paid in full. If any amount shall be paid to the Guarantor on account of
such subrogation rights at any time when all of the Senior Secured Obligations
shall not have been paid in full, such amount shall be held in trust for the
benefit of the Beneficiary to be credited and applied to by the Guarantor
hereunder.

     Section 6.3  Survival of Remedies and Subrogation Rights.  The provisions
of this Section 6 shall survive the termination of this Guaranty and the payment
        ---------
in full of the Obligations and the termination of the Operative Documents.

SECTION 7.  MISCELLANEOUS

     Section 7.1  Amendments and Waivers.  No term, covenant, agreement or
condition of this Guaranty may be terminated, amended or compliance therewith
waived (either generally or in a particular instance, retroactively or
prospectively)

                                       7
<PAGE>

except by an instrument or instruments in writing executed by the Guarantor and
consented to by the Beneficiary.

     Section 7.2  Notices.  Unless otherwise expressly specified or permitted by
the terms hereof, all communications and notices provided for herein shall be in
writing or by a telecommunications device capable of creating a written record,
and any such notice shall become effective (a) upon personal delivery thereof,
including by overnight mail or courier service, (b) in the case of notice by
United States mail, certified or registered, postage prepaid, return receipt
requested, upon receipt thereof, or (c) in the case of notice by such a
telecommunications device, upon transmission thereof, provided such transmission
is promptly confirmed by either of the methods set forth in clauses (a) or (b)
above, in each case addressed to the Guarantor hereto at its address set forth
below or at such other address as such party may from time to time designate by
written notice.

If to the Guarantor:

     Peoples Energy Corporation
     130 East Randolph Drive
     Chicago, IL 60601
     Telephone No.: (312) 240-4063
     Facsimile No.: (312) 240-4972
     Attention: Treasurer

     Section 7.3  Survival.  Except as expressly set forth herein, the
warranties and covenants made by the Guarantor shall not survive the expiration
or termination of this Guaranty.

     Section 7.4  Assignment and Assumption.  This Guaranty may not be assigned
by the Guarantor to, or assumed by, any successor to, or assignee of, the
Guarantor without the prior written consent of the Beneficiary.

     Section 7.5  Governing Law.  This Guaranty shall be in all respects
governed by and construed in accordance with the laws of the State of New York,
including all matters of construction, validity and performance (without giving
effect to the conflicts of laws provisions thereof, other than Section 5-1401 of
the New York General Obligations Law).

                                       8
<PAGE>

     Section 7.6  Severability.  Any provision of this Guaranty that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

     Section 7.7  Merger.   This Guaranty constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral
between or among the Guarantor, the Issuer, and the Beneficiary with respect to
the subject matter hereof.

     Section 7.8  Headings.  The headings of the sections of this Guaranty are
inserted for purposes of convenience only and shall not be construed to affect
the meaning or construction of any of the provisions hereof.

     Section 7.9  Further Assurances.  The Guarantor will promptly and duly
execute and deliver such further documents to make such further assurances for
and take such further action reasonably requested by the Beneficiary, all as may
be reasonably necessary to carry out more effectively the intent and purpose of
this Guaranty.

     Section 7.10 Effectiveness of Guaranty. This Guaranty shall be effective on
the date of its execution and delivery by the Guarantor.

     Section 7.11 Ratings Events.  The Guarantor hereby agrees to provide
written notice to the Issuer and the Beneficiary within 10 days of becoming
aware that its long-term senior unsecured debt is rated less than "Baa3" by
Moody's or "BBB-" by S&P (a "Ratings Event").
                             -------------

                                       9
<PAGE>

     IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly
executed and delivered by its officer thereunto duly authorized.

                                        Peoples Energy Corporation,
                                        as Guarantor



                                        By: /s/ Thomas A. Nardi
                                           --------------------------------
                                        Name:   Thomas A. Nardi
                                        Title:  Senior Vice President and
                                                 Chief Financial Officer
<PAGE>

                                                                    Exhibit A to
                                                   Debt Service Reserve Guaranty
                                                   -----------------------------

                           Form of Notice of Payment
                           -------------------------


                                                                          [Date]

Peoples Energy Corporation
130 East Randolph Drive
Chicago, IL 60601
Attention: Treasurer

                       Re: Debt Service Reserve Guaranty
                           -----------------------------

          Reference is made herein to (i) that certain Deposit and Disbursement
Agreement, dated as of October 23, 2001 (the "Deposit and Disbursement
                                              ------------------------
Agreement"), among Elwood Energy LLC (the "Issuer"), Bank One Trust Company,
---------                                  ------
National Association, as Administrative Agent (in such capacity, the
"Administrative Agent"), Bank One Trust Company, National Association, as
 --------------------
Collateral Agent (in such capacity, the "Collateral Agent") and Bank One Trust
                                         ----------------
Company, National Association, as Intercreditor Agent (in such capacity, the
"Intercreditor Agent") and (ii) that certain Debt Service Reserve Guaranty,
 -------------------
dated as of October 23, 2001 (the "Guaranty"), issued by Peoples Energy
                                   --------
Corporation, an Illinois corporation (the "Guarantor"), in favor of the
                                           ---------
Administrative Agent, as beneficiary (the "Beneficiary").  All terms used herein
                                           -----------
and not otherwise defined herein shall have the meaning assigned to such term in
the Deposit and Disbursement Agreement.

          The undersigned, an authorized officer of the Beneficiary, does hereby
certify on behalf of the Beneficiary, that:

     1.   This Notice of Payment is delivered pursuant to Section 2.1 of the
                                                          -----------
Guaranty.

     2.   The Beneficiary hereby instructs the Guarantor to pay $_________ to
the Beneficiary in immediately available funds in accordance with the wiring
instructions attached hereto as Schedule I.

                                  Exhibit A-1
<PAGE>

     3.   [The Beneficiary is entitled to draw on the Guaranty pursuant to
Section 3.6(c) of the Deposit and Disbursement Agreement in the amount set forth
--------------
in Section 2 hereof, which represents the Guarantor's ratable share of the DSR
   ---------
Insufficiency Amount.]

                                     - or -

     3.   [The Beneficiary has received notice from the Guarantor that the
Guaranty will be terminated on [________]/1/ in accordance with Section 5.2 of
                                                                -----------
the Guaranty, and (i) the Guaranty has not been replaced with a new Debt Service
Reserve Guaranty or with a Debt Service Reserve L/C and (ii) the amount set
forth in Section 2 hereof is no greater than the amount of the Guaranty Cap (as
defined in the Guaranty).]

                                     - or -

     3.   [The Beneficiary has received notice, in accordance with Section 7.11
of the Guaranty from the Guarantor that a Ratings Event (as defined in the
Guaranty) has occurred, and (i) the Guaranty has not been replaced with a new
Debt Service Reserve Guaranty or with a Debt Service Reserve L/C, (ii) the date
of this Notice of Payment is at least 45 days after the Beneficiary received
notice of the Ratings Event (as defined in the Guaranty), and (iii) the amount
set forth in Section 2 hereof is no greater than the amount of the Guaranty Cap
(as defined in the Guaranty).]

     IN WITNESS WHEREOF, the Beneficiary has executed this Notice of Payment as
of the date first written above.

                                         BANK ONE TRUST COMPANY,
                                         NATIONAL ASSOCIATION,
                                         as Administrative Agent, as Beneficiary

                                         By:_______________________________
                                             Name:
                                             Title:

________________________
     /1/  Insert date that is not less than 15 Business Days prior to the
Termination Date (as defined in the Guaranty).

                                  Exhibit A-2