Peoples blows away record with first-quarter profit growth

By Steve Daniels, Crain’s Chicago Business, June 3, 2020


The first three months of this year may be hard to recall given all that’s happened since, but the first quarter in Chicago was among the warmest such periods in the past two decades.

It may come as a surprise then that Peoples Gas, which delivers the fuel heating Chicagoans’ homes and businesses, posted profit for the period that blew past the record set just the year before.

The utility posted net income of $97.6 million in the first quarter, a 20 percent increase from $81.3 million in the same period last year. That also was a record for Peoples.

Temperatures in the first quarter of last year averaged 27 degrees, more than 7 degrees colder than this year’s balmy first three months, according to National Weather Service data.

It wasn’t long ago when Peoples’ profit over an entire year wouldn’t approach the nearly $100 million it collected in the first quarter. In 2016, its net income was $66.3 million. The year before that it was $87.8 million.

The most recent first quarter in which temperatures were as warm as this year was 2017. In that first quarter, Peoples posted net income of $77.1 million.

The dramatically higher earnings are largely the product of a series of laws and rules the state has passed over the past decade to remove virtually all the risk of weather and unpaid bills from utilities coupled with the green light for gas utilities to add a monthly surcharge covering much of the soaring cost of infrastructure upgrades.

In years in which volumes of gas delivered fall below a set threshold, Peoples and other gas utilities are permitted to charge for delivering the fuel as if the volumes were at the threshold. It works the other way as well; Peoples credits customers for the amounts above the threshold it makes for delivery in colder-than-normal years.

Consumption of gas in the first three months of 2020 was 14 percent less than the same period a year before, according to Peoples’ filings with the Illinois Commerce Commission.

Likewise, the cost of unpaid bills is passed along to ratepayers in a monthly surcharge that’s recalculated each year. Currently, that extra charge in Chicago is more than $4 a month, a record since state lawmakers first gave gas utilities that authority in 2009. That charge is expected to keep rising. First-quarter bad debt at Peoples was nearly $26 million, more than double $12.4 million for the first quarter last year.

It wasn’t many years ago that Peoples used to incur $25 million in unpaid bills over the course of an entire year.

In an emailed response to questions, the company said, “Our strategy continues to be the disconnection of accounts with higher arrears balances, leaving more customers still receiving our essential service while we work with them on flexible payment solutions with their bills. Any uncollectible dollars we ultimately report to state regulators—the ICC—are subject to an annual . . . review.”

That has been Peoples’ strategy since 2018, and the pile of unpaid bills only has grown during that time.

The monthly charge for infrastructure also has continually risen during that period. It’s now over $10 a month for the average Chicago household. Peoples collected nearly $31 million in such charges in the first quarter, up 16 percent from $26.5 million the year before.

Expect more increases. Capital spending in the first quarter of this year was $141 million, up 57 percent from $90 million in the same period last year.

In its email, Peoples said a recent ICC-ordered engineering study found that 80 percent of gas pipes in Chicago have an average remaining life of less than 15 years.

“When over 90 percent of state legislators passed the (infrastructure-surcharge) law in 2013, they were thinking about safety and placed a 4 percent cap on the amount we can recover from customers in a year. Additionally, (the surcharge) provides a timely recovery mechanism with regulatory oversight that ensures investments are available to fund the program. We continue to believe the existing (surcharge) is the right approach when it comes to infrastructure investment in our business—our work is capital-intensive and the rider’s built-in cost protections, coupled with its ability to capture real-time recovery, ensures stability.”

Peoples also defends the collection of laws that have removed virtually all financial risk. “The laws you referenced are the result of legislative compromises with every consumer stakeholder, including the (attorney general), and the ICC. Additionally, each law has a built-in safety mechanism and check and balance—such as annual reconciliation (regulator) reviews and cost caps under the purview of the ICC.”

The Chicago City Council has passed a resolution asking the state to rein in Peoples’ infrastructure program in the interest of consumers who are increasingly struggling to afford the cost of heat. The ICC earlier this year directed all utilities to provide detailed information on items like unpaid bills, late payments and other signs of affordability struggles.

In the meantime, the higher profits at Peoples are helping its Milwaukee-based parent, WEC Energy Group, boost quarterly dividend payments to shareholders. The payout increased 7 percent this year following a 6.7 percent increase the year before.

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