Peoples Gas spending inflates parent’s profit

By Steve Daniels, Crain’s Chicago Business. April 5, 2019

Record spending at Peoples Gas is boosting profits at the utility’s Milwaukee-based parent, while Chicago heating bills rise.

Net income at Peoples surged to an all-time high of $132 million last year, accounting for 12 percent of total earnings at WEC Energy Group, which acquired Chicago’s natural gas supplier in 2015. Peoples’ share of WEC Energy’s earnings was only 7 percent two years earlier.

Driving the profits are billions of dollars in capital spending at Peoples for pipe-replacement and other projects. The utility has spent $1.26 billion on capital projects since the acquisition, with an additional $1.91 billion budgeted for the next three years. The capital budget is a record $706 million in 2019, up 47 percent from last year’s $481 million, itself a historically high figure.

Capital spending is a surefire profit accelerator for utilities, because regulators allow them to raise rates to recover their costs, plus a guaranteed profit.

Also guaranteed are higher bills for utility customers. Thanks to Peoples’ spending, Chicagoans’ heating bills are rising faster than those of suburbanites served by Nicor Gas. The average city household paid 80 percent more for heat in the winter of 2017-18 than did Nicor’s average suburban household.

The Illinois Commerce Commission, which regulates utilities, so far has shown little inclination to challenge Peoples, despite concerns voiced by Chairman Brien Sheahan that too many Chicago residents soon will be unable to afford heat.

In an emailed response to questions from Crain’s, Peoples says: “Replacing century-old pipe is capital-intensive. Any increased earnings as a result of those investments allows (us) to support continued investment in (the pipe-replacement program) through reinvestment of those earnings.”

Peoples has budgeted up to $300 million a year for the foreseeable future to replace old cast-iron gas mains prone to leaking. In addition, Peoples cites needed investment in its central Illinois gas-storage facility, as well as a new North Side shop and advanced meters for its customers.

The capital budget at Peoples in 2019 approaches the $753 million much-larger Nicor spent on capital needs last year. Nicor spreads the cost of that investment among 2.1 million customers, while just 870,000 foot Peoples’ capital bill.

Peoples imposes a monthly surcharge, authorized by a 2013 state law, to help pay for the pipe work. Last year Peoples generated $82 million in revenue from the surcharge. That wasn’t much less than the $94 million in additional revenue Nicor won through a fully adjudicated rate hike a little over a year ago. Nicor generated another $26 million through the surcharge in 2018, which it, too, is allowed to impose for infrastructure under the law.

The comparison to Nicor, Peoples says, “is like comparing apples to oranges—different number of customers, different customer base, different geographic territory, different capital needs and different age of the system.”

Peoples is on track so far to hike surcharges by about 60 percent in 2019 based on tariffs it’s filed with the ICC through March. That would provide about $130 million in revenue and cost the average household about $10 per month versus $6 a month in 2018. With many apartments and condos in the city, most of those in single-family homes will have to pay considerably more than that 10 bucks.

In 2018, the average city household spent $1,281 on natural gas, according to Peoples. So $10 a month would amount to nearly 10 percent of the yearly bill.

Peoples won’t predict surcharge revenue for 2019 but says “the impact on customer bills will be in line with previous years.”

Under the law, the utilities can impose surcharges unilaterally, subject to a generous cap on one-year rate hikes. The ICC can order refunds after the fact if reviews reveal a project wasn’t qualified under the statute or wasn’t managed properly.

UNCOLLECTIBLES

The higher heating bills are taking a toll despite a strong economy. Last year, Peoples added $36 million in uncollectible accounts to its growing backlog of such costs. That was just $1 million less than the $37 million recorded in 2014, when a polar vortex drove up heating gas consumption and prices.

Peoples reported $77 million in uncollectible accounts at the end of 2018, up from $39 million in 2016. State law allows Peoples to recover the costs of unpaid bills over time through yearly rate hikes.

Peoples says it’s quadrupled the number of available heating-assistance grants, with $26 million earmarked last year for such help. It also has eliminated requirements for matching funds from delinquent ratepayers.

Legislation introduced in the Illinois House to take away Peoples’ surcharge authority has attracted seven sponsors, six of whom represent Chicago districts. But the bill has stalled amid opposition from unions that benefit from the work created by Peoples’ capital spending.

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