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One thing I did discover while trying to run the utilities under the town is that it has destroyed the efficiency of my water wheel setup. If you do decide to run under, definitely make sure the power shaft comes later in the stream than the wheels. It's gonna take me a bit to figure this setup out properly. Above is probably easier, cheaper, and faster. But under might look better.
Water and gearshafts can share space (I run my power along the sea floor in the 1000 islands map), so I don't see why not.
Edit: This is what I have been trying to implement for a while, but it can be difficult to do without rebuilding your town and moving all of your production buildings off of green space by your farms.