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Struggling Peoples Gas Pipe Program Once Again Over Budget, Behind Schedule

As its long-troubled pipe replacement program comes under increased scrutiny from the Chicago City Council, Peoples Gas filed its first 2019 quarterly program report to the Illinois Commerce Commission last Wednesday. It shows that the program is once again over budget and behind schedule. Adding insult to injury, at least 7 percent of the average March residential customer bill is going toward pipe replacement work.

"The Peoples Gas pipe replacement program is a poorly designed, mismanaged, bad deal for Chicago," said Illinois PIRG Education Fund Director Abe Scarr. "For a project spanning decades, falling behind schedule or going over budget any one quarter or year is not necessarily a sign of failure, but doing so every quarter, every year, is. Forcing Chicago heating customers to pick up the tab for this program is unacceptable"

Peoples Gas spent $48 million over the first three months of 2019, and retired 7.9 miles of gas mains, or $6 million per mile. In contrast, over the entire year in 2006, Peoples Gas spent $48 million in 2019 inflation-adjusted dollars to retire 47 miles of main, or $1 million per mile.

The average residential Peoples Gas customer has already spent $463 on gas bills in 2019, 5 percent of which went to pay for a bill rider for pipe replacement. In March, the average residential customer paid $7.72 on the rider, 7 percent of the total bill, which does not even reflect the full cost customers pay for the program, because a significant amount is already included in "base rates."

On April 24th, the Chicago City Council Committee on Health and Environmental Protection passed a resolution sponsored by Ald. Cardenas calling on "Governor JB Pritzker and the Illinois General Assembly to restore necessary oversight of this troubled program, and take adequate action to protect Peoples Gas customers and the public interest."

When asked by an investor about the resolution on an April 29th earnings call, Gale Klappa, the CEO of Peoples Gas' parent company WEC, said he was not "overly concerned" and dismissed Crain's Chicago Business reporting on the program as "fake news." In presentations to investors, WEC management regularly tout aggressive capital investment as a key strategy to driving increasing earnings per share.

State Rep. Sonya Harper (D-Chicago) introduced House Bill 3044 so that Peoples Gas can no longer use a special cost recovery mechanism to charge customers for the program. Similar to legislation filed last year by Rep. Will Guzzardi (D-Chicago), the bill was never given a hearing or opportunity for committee vote.

Advocates including Illinois PIRG, AARP Illinois and the Citizens Utility Board continue to call on decision-makers to protect Chicago gas customers and reform this failing program. The Chicago City Council resolution passed by committee in April is expected to be considered by the new city council this summer.

More findings from the report:

* Peoples Gas planned to retire 12.6 miles of gas mains during the quarter, but only retired 7.9 miles.

* Peoples Gas planned to spend $43 million during the quarter, but spent $48 million.

* Peoples Gas retired more miles of gas mains (4.8 miles) through its reactive, more expensive, less efficient "Public Improvement/System Improvement" program than its "Neighborhood Program" (3.1 miles).

* Uncollectibles, the amount Peoples Gas customers are behind on their bills, rose to over $4 million in March.

* Peoples Gas neighborhood risk rankings, which multiple third parties have critiqued, are only one factor in determining its schedule of work. While work has commenced in the neighborhood with the highest risk ranking (Mayfair), work is not scheduled to begin in the neighborhood with the 3rd highest risk ranking (Old Norwood Park) until 2024.

* Other neighborhoods ranked by Peoples Gas as in the top 10 for risk are scheduled to being work between 2020 and 2026, while work in a neighborhood ranked 36th for risk (Kenwood) is scheduled to begin this year.

* On May 10th, Peoples Gas submitted a supplement to its 2018 year-end report, showing a $6.8 million increase in operations and maintenance costs between 2017 and 2018. In theory, the pipe replacement program should be decreasing O&M costs as older pipes requiring more frequent maintenance are replaced.

* Peoples Gas has still not submitted multiple metrics ordered by the Illinois Commerce Commission in January 2018, including an "Earned Value Metric" and the "cost to complete [the] remaining neighborhoods."

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Illinois PIRG Education Fund is an independent, non-partisan group that works for consumers and the public interest. Through research, public education and outreach, we serve as counterweights to the influence of powerful special interests that threaten our health, safety or well-being.

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Beachwood added value:

About that 'fake news' charge, here's the full take of what Gale Klappa, CEO of Peoples parent company WEC, said in that earnings call:

"There have been, as you know, a number of articles in Crain's. And I hate to use the [term] 'fake news' but that's about what it is with Crain's. But I think we've responded to those very well. And the compelling piece here is just how important from a safety and efficiency standpoint this program is. And I think that message is beginning to carry today. So we're not overly concerned. It's business as usual and we're doing this as quickly and as effectively as we possibly can."

A summary of what Crain's has reported on Peoples and the program over the last year:

* January 10, 2018: State Blesses Peoples' $900 Million Budget For Gas Pipes.

* February 23, 2018: Revolving Door Spins Again At State's Utility Regulator.

* March 2, 2018: What's Chicago Getting For Peoples Gas' Spending Spree? Less For More.

* June 15, 2018: Peoples Gas: Here Are The Facts On Pipe Replacement Program.

* July 27 2018: We Have A Crisis In Chicago. Where's Our Mayor?

* September 14, 2018: As Heating Bills Rise, Peoples Gas Comes In Last In Customer Satisfaction Ranking.

* November 2, 2018: Peoples Gas Suddenly Is Extraordinarily Generous With Campaign Contributions.

* January 4, 2019: Peoples Gas Parent's Illinois Spending Plans Surpass $3 Billion.

* February 6, 2019: ICC Staff Calls For Hefty Peoples Gas Giveback On Past Spending.

* February 27, 2019: Peoples Gas Blows The Pipe Replacement Budget Again.

* April 5, 2019: Peoples Gas Spending Inflates Parent's Profit.

* April 20 2019: What's The Price Of Safety? About Two Cups Of Coffee.

An op-ed by Peoples president and CEO Charles Matthews.

"What has Crain's got against natural gas safety?

"Virtually every month, Crain's pens another piece focusing on the same themes regarding the Peoples Gas System Modernization Program, a critical and ongoing upgrade to the vast network of pipes that provide natural gas to Chicago homes and businesses.

"Crain's bends facts to make a point, takes information provided out of context, and raises issues and questions that were examined and answered by state regulators during an 18-month public process that concluded last year. Conclusions are reached to support personal bias. Seldom do they provide new information.

"We're beginning to think Crain's doesn't like the System Modernization Program - although we're not sure why."

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Also, from WBEZ, April 29, 2019:

"The Chicago City Council is calling on Gov. JB Pritzker and state lawmakers to increase oversight of Peoples Gas following reports that Chicago residents pay 80 percent more for heating than their suburban neighbors.

"Peoples Gas has been accused of 'using propaganda' to justify raising heating prices, but company officials say the rising costs help pay for its ongoing pipeline modernization project.

"Morning Shift talks to Steve Daniels of Crain's Chicago Business for more on this issue."

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Comments welcome.



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Posted on May 18, 2019


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