Troubled Peoples Gas pipe replacement program continues to struggle

Every quarter, the Chicago gas delivery utility releases a report on its pipe replacement program. Unfortunately, the first quarter report shows the program continues to struggle: not prioritizing public safety and risk reduction, behind schedule and over budget, and increasingly unaffordable.

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Abe Scarr
Illinois PIRG State Director

Author: Abe Scarr

Illinois PIRG State Director

(312) 544-4433 ext. 228

Started on staff: 2002
B.A., Haverford College

Abe is responsible for the program and organizational development of Illinois PIRG. He is a lead advocate in the Capitol and in the media for stronger consumer protections, expanded public transportation, and smarter antibiotics policies for Illinois’ farms. In 2017, he led a coalition to pass legislation to implement automatic voter registration in Illinois, winning unanimous support in the Illinois General Assembly for the bill. Before moving to Illinois in 2014, Abe worked as the state director for ConnPIRG, where he helped pass a landmark solid waste and recycling law. He also serves as a board member for the Consumer Federation of America. Abe lives in Chicago, where he enjoys biking, cooking and tending his garden.

While most of Illinois PIRG’s time and energy is currently dedicated to responding to the pandemic, we’re keeping an eye on priority issues, like the troubled Peoples Gas pipe replacement program. Last year, we wrote a detailed report documenting how the program is failing to achieve its primary purpose of protecting public safety by strategically replacing aging pipes prone to leak, crack, or break.

Every quarter, the Chicago gas delivery utility releases a report on its pipe replacement program. Unfortunately, the first quarter report shows the program continues to struggle: not prioritizing public safety and risk reduction, behind schedule and over budget, and increasingly unaffordable. The report is one more data point in the overwhelming case that Illinois decision makers - whether the Illinois Commerce Commission or Illinois General Assembly -- should take action to comprehensively reform the program.

Not prioritizing public safety and risk reduction

Our primary critique of the Peoples Gas pipe replacement program is that it fails to properly prioritize public safety and risk mitigation. Peoples Gas has known since the early 1980’s that it has a significant amount of deteriorating cast and ductile iron pipes in its system, requiring a dedicated program to remove at-risk pipes and replace them with pipes made of safer plastic material.

The clearest evidence supporting our critique is the consistent findings of outside experts that the pipe replacement program has not resulted in reductions in leaks or pipeline failures in any proportion to the billions invested in the program. This was a topline finding in the May 2015 phase one report by auditors Liberty Consulting Group [1], as well as a finding of the January 2020 engineering study by Kiefner Engineering. [2]

The program fails to achieve risk reduction goals because it is not designed to directly address them. Since the 1990’s, Peoples Gas has maintained a risk ranking index, which uses a collection of data points to create a score to represent a proxy for the riskiness of each and every segment of pipe. For a period of time in the 1990s through the 2000’s, Peoples Gas used this index to organize replacement work, prioritizing the riskiest pipes for earliest retirement. The work Peoples Gas completed during this time was the most successful in reducing the risk posed by aging pipes as measured by the rates of leaks, breaks, and cracks. [3]

In recent years, in contrast, instead of replacing pipe segments in order of risk priority, Peoples Gas has replaced entire neighborhoods of pipes, both high and low risk, at the same time. Peoples Gas takes the neighborhood approach, and does not follow its own neighborhood risk ranking, because the primary driver of its work is not risk reduction, but rather a system-wide upgrade from low to medium pressure. 

For an area of its distribution system to move to medium pressure, all of the pipes in that area need to be upgraded and the area needs to be connected to another medium pressure area of the distribution system. [4] This helps explain why certain neighborhoods, like Old Norwood Park, have consistently ranked high on the neighborhood risk rank (6th in 2018, 3rd in 2019, 2nd in 2020) [5], but work has not commenced, while work in other neighborhoods with a lower risk rank like South Edgebrook (ranked 23rd in 2018) [6] are on track to be completed this year. The neighborhood with the highest risk ranking at the start of 2020, Irving Woods, is not slated to have work commence until 2022. [7]

It turns out a number of these high ranked neighborhoods are on the northwest side of the city, and pressure considerations are holding up work there. As Peoples Gas notes in its preface to the 1st quarter report “These neighborhoods cannot be completed until the Northwest Interconnect Phase 5B and associated Gate Station are finished in 2021.” [8] That is, Peoples Gas is delaying replacing pipes in the neighborhoods it ranks as highest risk because those neighborhoods are not ready to be upgraded to medium pressure

Behind schedule and over budget

When the outside, expert auditors Liberty Consulting Group reviewed the Peoples Gas pipe replacement program in 2014-2015, two of its three topline findings were that Peoples Gas management did not have a credible cost estimate or a long term schedule of work (the third was that it was failing to achieve its public safety objective, discussed above). [9]

Knowing how long a project should last and how much it should cost is project management 101, especially important for a multi-billion dollar, decades-long infrastructure program. It's impossible to evaluate performance and control costs without a baseline “yardstick” to compare to. As Liberty explained, “short-term performance has no context in terms of adequacy unless considered within the framework of long-term objectives for public safety and schedule.” [10]

The lack of a long term schedule of work and credible cost estimate helps explain why the pipe replacement program has been beset by management problems and cost overruns, with total program cost estimates growing from $1.4 billion to $11 billion.

Unfortunately, Peoples Gas never implemented many of Liberty’s topline recommendations, and still does not have a credible cost estimate or long-term schedule of work. [11] Instead, every year, Peoples Gas reworks a “rolling three year plan.” This makes evaluating Peoples Gas’ performance difficult: the yardstick against which to measure performance is constantly shifting. 

That said, every year, and every quarter, Peoples Gas publishes goals and actuals for miles of pipe replaced, and the cost to do so. Against even this imperfect yardstick, Peoples Gas consistently falls short. Over all eight quarters of reporting in 2018-2019, Peoples Gas was behind its planned year-to-date miles retired, and spent more per mile of pipe retired than it planned to. Thus, every quarter we repeat: the Peoples Gas pipe replacement program is behind schedule and over budget. Falling behind on work or going over budget in any one quarter is expected, but doing so quarter after quarter and year after year indicates management problems. 

This trend continued over the first three months of 2020. Over this time, Peoples Gas planned to replace 19.1 miles of gas mains, but only replaced 15.5 miles, or 81 percent of its plan. [12]

Peoples Gas planned the “all-in” cost of its program for the first quarter to be $37.7 million, but instead spent $47.9 million. This means the cost per mile retired, while planned to be $1.97 million per mile, was $3.09 million per mile. [13]

Since the beginning of 2018 when quarterly reporting began, Peoples Gas has replaced, on average, 56 miles of gas mains per year, at an annual cost of $282 million, or $5.02 million per mile of pipe. [14] For comparison, in 2006, before Peoples Gas greatly expanded the scope of the program, it spent $48 million in 2019 inflation-adjusted dollars to replace 47 miles of main, or $1 million per mile retired. [15]

As we detailed in our report, the entire justification for accelerating the pipe replacement program, that is spending more money to replace more miles of main more quickly, was to mitigate the risk of dangerous, deteriorating pipes. But, since Peoples Gas began its accelerated program in 2011, it has only marginally increased the miles of main it replaces each year, while significantly expanding its annual spending. This is because, instead of accelerating its at-risk pipe replacement program, Peoples Gas transformed it into a broad system overhaul program.

Increasingly unaffordable

Because of a 2013 law passed by the Illinois General Assembly, Peoples Gas is allowed to directly and immediately begin charging customers for pipe replacement costs through a surcharge, known as a rider, on customer bills. Because Peoples Gas is spending so much money so fast, its customers are having a harder and harder time affording home heating service in Chicago.

At the end of the first quarter of 2018, the surcharge (which is close but slightly undercounts what customers are paying for the program) on the average customer bill was $5.36 per month, making up 3.43 percent of the average total bill. By the end of the first quarter of 2019, the average monthly charge was up to $7.43 and 4.82 percent of the average total bill. Over the first quarter of 2020, the average monthly charge has grown to $9.93, 6.62 percent of the average total bill. [16]

At the end of March, Peoples Gas customers were already a staggering $25 million behind on their gas bills. [17] For context, Peoples Gas customers did not fall this behind on their bills until the end of September in 2018. [18] Customers of suburban gas utility Nicor, which has a much larger customer base, were on average $13.3 million behind their bills each year between 2016-2018. [19]

The high level of money owed could be in part a result of the pandemic, as many customers facing less or no income in late March may have skipped, or paid less of, their gas bill -- but the pandemic alone cannot explain this extraordinary measure of Chicagoans struggling to afford their home heating bills. The total amount customers were behind on their March bills was lower than January or February, not showing a large spike attributable to the pandemic and stay at home order in March.

Under a 2009 law, Peoples Gas is allowed to collect all of this lost revenue through another surcharge, an “uncollectibles rider,” tacked on to every customer’s bill.  In a recent filing, Peoples Gas raised that surcharge from $2.02 to $4.35 per customer per month. With a high monthly fixed charge, the pipe replacement surcharge and uncollectibles surcharge, many Peoples Gas customers will soon be paying roughly $50 on their gas bill before using a therm of gas. [20]

What’s next

Like so much else during the pandemic, the path forward on our campaign to reform the Peoples Gas pipe replacement program is uncertain. Peoples Gas has already made changes to the program in order to keep its employees and customers safe, most notably temporarily suspending moving meters from inside to outside of customers homes, given the high level of contact involved in such work. 

In April, the Chicago City Council approved a resolution calling on state decision makers to reform the program, and the Illinois Commerce Commission, under its new leadership, is showing some incremental interest in reviewing the program again. State legislation to phase out the bill surcharge supporting this program won’t be taken up until next year. 

One thing is certain, however: the program still calls out for reform, and we’ll keep up our campaign until meaningful action is taken.

 

[1] The Liberty Consulting Group, Final Report on Phase One of an Investigation of Peoples Gas Light and Coke company’s AMRP, May 5th, 2015, F-16.
[2] Kiefner and Associates, Inc., Final Report, Engineering Study of the Cast Iron and Ductile Iron Pipe System to the Peoples Gas Light and Coke Company, January 28th, 2020, (i).
[3] Kiefner and Associates, Inc., Review of the Peoples Gas Light & Coke company Cast Iron Main Replacement Program, March 1, 2007, 11-12.
[4] PGL Ex. 1.0, Andrew J Hesselbach, 16-0376, 17. The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020 1st Quarter Report, 5.
[5] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 2019, 2018 1st Quarter Reports, respectively 24, 22, 22.
[6] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2018 1st Quarter Report, 22.
[7] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 1st Quarter Report, 24.
[8] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 1st Quarter Reports, 5.
[9] The Liberty Consulting Group, Final Report on Phase One of an Investigation of Peoples Gas Light and Coke company’s AMRP, May 5th, 2015, ES-1.
[10] The Liberty Consulting Group, Phase Two of an Investigation of Peoples Gas Light and Coke company’s AMRP Recommendation Implementation Monitoring, Eight Quarterly Report, July 31, 2017, 8.
[11] Abraham Scarr and Jeff Orcutt, Illinois PIRG Education Fund, Tragedy of Errors, June 2019, 35-38.
[12] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 1st Quarter Reports, 7-16.
[13] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 1st Quarter Reports, 7-16.
[14] Author calculations based on 2018-2020 quarterly reports, available upon request
[15] Kiefner and Associates, Inc., Review of the Peoples Gas Light & Coke company Cast Iron Main Replacement Program, March 1, 2007, 3.
[16] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 2019, 2018 1st Quarter Reports, respectively 22, 20, 20.
[17] The Peoples Gas Light and Coke Company, System Modernization Program ICC 2020, 1st Quarter Reports, 18.
[18]  The Peoples Gas Light and Coke Company, System Modernization Program ICC 2018, 3rd Quarter Reports, 17.
[19] Steve Dainels, Crain's Chicago Business, Peoples Gas' bad debt goes under the microscope, March 13, 2020.
[20]  Steve Dainels, Crain's Chicago Business, Chicagoans to pay over $4 a month for neighbors' unpaid gas bills, May 22, 2020.

Abe Scarr
Illinois PIRG State Director

Author: Abe Scarr

Illinois PIRG State Director

(312) 544-4433 ext. 228

Started on staff: 2002
B.A., Haverford College

Abe is responsible for the program and organizational development of Illinois PIRG. He is a lead advocate in the Capitol and in the media for stronger consumer protections, expanded public transportation, and smarter antibiotics policies for Illinois’ farms. In 2017, he led a coalition to pass legislation to implement automatic voter registration in Illinois, winning unanimous support in the Illinois General Assembly for the bill. Before moving to Illinois in 2014, Abe worked as the state director for ConnPIRG, where he helped pass a landmark solid waste and recycling law. He also serves as a board member for the Consumer Federation of America. Abe lives in Chicago, where he enjoys biking, cooking and tending his garden.