What's Chicago getting for Peoples Gas' spending spree? Less for more.

By Steve Daniels, Crain’s Chicago Business, March 2, 2018

The Illinois Commerce Commission in January approved Peoples Gas’ plan to continue spending unprecedented amounts on a massive multiyear pipe-replacement program without knowing how the Chicago utility performed in 2017.

The panel wouldn’t have had to wait long. Those results came in last month, and they aren’t encouraging. Last year Peoples spent $348 million, 13 percent more than it budgeted, and replaced just 53.5 miles of gas mains, according to a report the utility submitted to the ICC. That comes to $6.5 million per mile, by far the worst cost efficiency since the utility was acquired in 2015 by Milwaukee’s WEC Energy Group.

Single-year snapshots can be misleading, however, since the pace of work can change from year to year. In 2016 and 2017 combined, Peoples replaced nearly 153 miles—76.5 miles on average—at a cost of $538 million, or $3.5 million per mile.

That’s more in line with how the utility has performed under WEC Energy, but it’s still pricey by any measure. Like Peoples, gas utilities around the country are accelerating the replacement of aging cast-iron pipes that are more prone to leaking than modern plastic ones. In far more expensive New York City, for example, Consolidated Edison replaced 86 miles in 2017 at a total cost of $295 million. That comes to $3.4 million per mile, slightly better than Peoples’ two-year average.

In 2016, the most recent figures available, Baltimore Gas & Electric spent $114.5 million to replace 48 miles, a rate of $2.4 million per mile, a spokesman says.

Perhaps most worrying, Peoples under current management is doing the work more expensively than Peoples did under its prior, discredited management team. When it was owned by Chicago-based Integrys Energy Group before Integrys sold to WEC Energy, Peoples managed a $3.2 million-per-mile pace after moving in 2011 to accelerate its pipe-replacement work.

That’s the same management team that Liberty Consulting, an independent auditor the ICC hired to probe the gas-main program’s out-of-control costs, wrote in 2015 didn’t place a “high priority on developing and maintaining a strong cost-management culture.”

The current team doesn’t foresee things improving on the cost front, either. In a plan Peoples recently submitted to the ICC, it budgeted a little over $900 million to replace 249 miles from 2018 through 2020. That’s $3.6 million per mile, slightly higher than it achieved in 2016 and 2017.

The rampant spending has raised alarm bells for consumer advocates and city officials who say it will lead within a matter of years to far higher rates and unaffordable heating bills for up to a quarter of Chicago’s households.

State Rep. Will Guzzardi, D-Chicago, last month introduced legislation to take away Peoples’ authority under a 2013 state law to impose a monthly surcharge on ratepayers to help cover the expenses of the mammoth program. “If Peoples Gas wants to persist with this . . . go through the usual (regulatory) process,” he said at a news conference.

For its part, the commission says in a statement that the two-year investigation of Peoples’ program it just completed “was not the framework to discuss the prudence, justness and reasonableness of Peoples’ (program) expenditures.” Instead, the process was to approve the “merits of the plan and flexibility to adapt and make schedule changes when necessary.”

On the Guzzardi bill, the commission won’t take a stand, but will “provide input, technical assistance and research.”

At the Jan. 10 meeting at which the ICC approved Peoples’ plan, Chairman Brien Sheahan effectively said current law tied the commission’s hands, and the regulators could do little to help ratepayers in the short term. That said, he asserted, “the long-term annual costs they have proposed will cause too great a burden for too many households in Chicago.”

Despite that remarkable declaration—that the law bars utility regulators from keeping home heating affordable even when they see it won’t be without taking action—Sheahan refuses to call for a change in the law. At his news conference, Guzzardi said he would welcome Sheahan’s support.

Andy Hesselbach, Peoples’ vice president of construction, says in an interview that many of the program’s costs are outside his company’s control. For instance, last year there was a doubling in the amount of pipe-replacement work the utility did on the heels of other below-ground labor the city of Chicago performed, like on water mains.

That kind of work is inherently more expensive because Peoples hasn’t planned for it in its yearly budget, he says.

That argument, though, flies in the face of what Peoples has budgeted for its scheduled neighborhood-by-neighborhood work. In 2016 and 2017, Peoples replaced 118 miles of gas pipes in the neighborhoods it targeted for $236 million, a $2 million-per-mile clip.

For 2018 through 2020, it’s projecting to spend $634 million to replace 182 miles in its scheduled neighborhoods. That’s $3.5 million per mile.

In an email, Hesselbach says the discrepancy stems from conservative budgeting and the actual numbers likely will be closer to the recent track record.

In addition, Hesselbach says in the interview that comparing Peoples’ cost per mile to utilities in other cities isn’t accurate because the work encompassed in Peoples’ program isn’t exactly the same as what other utilities are doing. Also, the higher the density of a neighborhood, the more expensive pipe replacement is, and Chicago is more dense than, say, Baltimore, he says.

In that, New York’s ConEd agrees. While providing statistics on ConEd’s program, spokesman Allan Drury says some of that work was in suburban Westchester County, which is cheaper than the city.

Of course, ConEd also serves the Bronx, parts of Queens and all of Manhattan, which is much denser than any part of Chicago.

Hesselbach also emphasizes that the commission is requiring the hiring of two outside auditors to monitor the program in the future. Peoples will have to report quarterly on its performance as well.

He doesn’t contest the growing affordability concerns, but he says lowering the yearly budget would make the project less cost-efficient. The first projects to be delayed in that scenario are the ones planned in advance, which are the most cost-efficient.

“It would increase the cost to customers overall,” he says.

Read the full story here.

CUB Note: Visit CUB’s Action Center to fight for HB 4898, legislation that would reform the Peoples Gas pipe-replacement program.