Peoples Gas blows the pipeline-replacement budget again

By Steve Daniels, Crain’s Chicago Business. February 27, 2019

Another year of pronounced cost overruns for Peoples Gas’ massive pipe-replacement project is fueling a renewed effort in Springfield to bring the utility to heel on spending.

The natural gas utility for the city of Chicago set out in 2018 to replace more than 75 miles of old gas mains at a cumulative cost of $271 million, or $3.6 million per mile. Instead, it fell short by 29 percent, retiring less than 53 miles. Peoples spent a bit less than planned—$256 million—but the per-mile cost of $4.8 million was far higher than budgeted, according to a recent report submitted to the Illinois Commerce Commission.

It was the second straight year that Peoples fell well short of its planned benchmarks with per-mile costs that far exceeded the budget.

Two Chicago House members, Reps. Sonya Harper and Theresa Mah, introduced a bill this month to bar Peoples from continuing to impose a monthly surcharge, now about $8 and rising for the average residential customer, to help finance its $300 million-a-year infrastructure program. Harper represents Englewood, one of the poorest city neighborhoods, and Mah represents Chinatown and McKinley Park. Rep. Will Guzzardi, who represents parts of Logan Square and Belmont Cragin on the Northwest Side, is a co-sponsor.

Last year, the average residential heating customer paid nearly $77 in such surcharges, 6 percent of the total annual cost of $1,271, according to Peoples. The surcharges are authorized for a decade under a 2013 state law that sought to speed up the pace of replacing old cast-iron gas pipes prone to leaks.

In the first three full years since ownership of Peoples shifted from a Chicago company to Milwaukee-based WEC Energy Group, which promised to improve management of the utility’s cost- and scandal-plagued infrastructure program, the program’s cost-efficiency has deteriorated.

Peoples retired an average of 68 miles per year in 2016, 2017 and 2018, the first three full years of WEC Energy’s ownership. It averaged 73 miles per year from 2011, when Peoples first conceived of the accelerated program, through 2015, when the predecessor to WEC Energy acquired Peoples’ parent, Chicago-based Integrys Energy Group.

And WEC-owned Peoples spent $833 million in those three years in total for an overall rate of $4.1 million per mile. Peoples under Integrys spent a total of $1.1 billion over five years for an average rate of $3 million per mile.

There still are 1,801 miles of old gas mains to replace in Chicago. In seven years, Peoples has spent nearly $2 billion, all of which is or will be reflected in higher heating bills, to complete less than a quarter of the task.

Much of the day-to-day costs of the program are passed along to ratepayers in the form of ever-escalating monthly surcharges on their gas bills. The higher costs appear to be leading to more bill delinquencies and write-offs of bad debt.

More customers unable to pay their bills holds little financial risk for Peoples and WEC Energy. Customers of Peoples who are current on their bills eventually make the utility whole for customers who can’t or won’t pay. Those extra charges are embedded each year in the delivery rates Peoples charges.

Peoples in 2018 registered $39 million as unrecoverable. That’s on top of the nearly $60 million in unrecoverable bills Peoples identified in 2017, which the utility attributed to the lack of aggressive bill collection as it installed a new billing system. In previous years, uncollectible accounts averaged around $25 million. The 2018 figure exceeds even the $37 million Peoples registered in 2014, the year of the “polar vortex.”

The utility redoubled collection efforts in 2018, sending a mind-boggling 208,000 disconnection notices to household heating customers. To put that in perspective, Peoples has only slightly fewer than 619,000 heating customers. With many of those notices sent more than once to the same customer, a spokeswoman said that about 92,000 households were threatened with shutoff in 2018. That’s still 15 percent of Chicago’s households.

Despite the high percentage of delinquent customers, Peoples disconnected only just over 14,000 residential heating customers in 2018.

Disconnection, a spokeswoman emailed, “is the option of last resort and we make every effort to work with our customers and provide them with customized options. The intention of the disconnection notice is to provide customers with a warning so they can take action prior to disconnection.”

As to the program’s cost overruns, Peoples in its report to the ICC attributed them to changes in its plans due to the need to cooperate with the city of Chicago on its own infrastructure work that resulted in tearing up city streets.

“Nonetheless, as the process continues to mature and new employees grow their experience, we expect that efficiency will improve without sacrificing the substantial customer benefits this process has delivered,” the report said.

Despite growing support from Chicago lawmakers in Springfield to halt what appears to be a slow-motion heating affordability crisis, the odds aren’t strong that the effort will succeed. Overwhelming support from trade unions, whose members benefit from all the spending, has kept the program going despite the poor performance.

House Speaker Michael Madigan, rarely one to buck unions, and Gov. J.B. Pritzker, also a union cheerleader, would have to get on board. Not coincidentally, Peoples dramatically increased political donations over the past year to various state lawmakers, particularly Madigan. Not a great recipe for action.

To read the full Crain’s story, click here.