May 20--The agency that oversees utilities in Illinois released a sweeping report Wednesday that found Peoples Gas has mishandled its multibillion-dollar gas main replacement program, pointing to shoddy management, control and oversight that may lead to significant cost increases for consumers.
At the same time, the audit found that the company's swapping of high-risk, leak-prone iron pipes for new plastic lines has failed to achieve a significant reduction in leak rates, raising questions about safety and the program's overall effectiveness.
The report, released by the Illinois Commerce Commission, comes as the commission continues a separate whistleblower investigation into allegations that the audit was undermined by Peoples Gas parent Integrys Energy Group and Wisconsin Energy Corp., which is seeking to acquire Integrys, and that former members of management have benefited from outside contracts on the gas main project.
"The (commission) will work aggressively to oversee these detailed reforms and ensure that the costs of the program's mismanagement are not borne by Peoples' customers," commission Chairman Brien Sheahan said in a news release on the audit.
Peoples Gas is replacing roughly 2,000 miles of pipe in Chicago and charging its utility customers to help pay for the project.
Under state law, utility companies can seek rate increases from the commission to recover the costs of big infrastructure projects. Peoples last received a bump from the commission in January that raised average monthly bills by about $2.70.
Peoples Gas has previously blamed the city and legislators for the increase in costs, pointing to new Chicago regulations and legislative requirements.
John Kleczynski, president of Peoples Gas and North Shore Gas, said in March that the company has undertaken some of the recommendations from The Liberty Consulting Group, based on an interim report. Among those were breaking down segments of the project into smaller chunks to shorten the length of time that customers are disrupted.
Following the audit's release, Charlie Schrock, chairman and chief executive officer of Integrys Energy Group said in a release the company has already implemented changes and will continue to work to improve the program.
"Peoples Gas is proud of the work we are doing to upgrade Chicago's natural gas infrastructure. Our Accelerated Main Replacement Program (AMRP) is one of the largest and most ambitious natural gas modernization programs in the country, and the Liberty audit is an opportunity to further improve the program," he said in a statement. "Peoples Gas has already implemented many of the recommendations included in the audit, and we will continue to collaborate with the Illinois Commerce Commission, Liberty, and our own internal auditors to ensure the program is a success. Delivering AMRP in a timely and cost efficient way is a critical part of our responsibility. Our customers and the city of Chicago deserve a world class natural gas distribution system, and that's what we will deliver."
The commission ordered the audit in 2013 because of concerns over the slowing progress of the pipe replacements. The one-year investigation was conducted by Liberty and paid for by Peoples Gas, which passes along those costs to consumers.
The audit found that program costs "have increased dramatically" from estimates in 2009 of about $2.6 billion to a 2012 estimate of about $4.5 billion. Moreover, Liberty auditors reported that the 2012 estimate did not account for inflation or unforeseen costs and that they think the current cost estimates would be significantly higher."
"Because of the inadequacy and poor quality of current information available from Peoples Gas, Liberty cannot provide any credible estimate of either yearly or total (program) costs," according to the report.
Peoples Gas received approval from the commission last year to increase rates to recover costs associated with the accelerated replacement of its infrastructure. The program cannot increase delivery base rates for utility customers by more than 5.5 percent in a given year under current state law.
Illinois Attorney General Lisa Madigan, who intervened on behalf of consumers in the whistleblower case, has previously said that a cost increase to $4.6 billion would, in effect, double base rates for Chicago households in nine years.
The accelerated gas main replacement program launched in 2011 and had been slated for completion in 2030, which would have required Peoples to replace about 100 miles of pipe annually, according to the audit. But the audit found that the actual rate of replacement from 2011 to 2014 was significantly below that level, leading to the program falling behind about a year.
"Losing a year to schedule in only four years of operation makes it appropriate to question the Company's current ability to complete high-risk pipe replacement by, or even close to, 2030," the audit said.
That audit also touched on leaks, finding that reductions have been marginal despite the gas main replacements. Liberty said that Peoples needs to re-examine which lines it chooses to replace first and whether trying to accomplish other fixes during the replacement has contributed to delays.
The report warns that Peoples will also have to manage an anticipated increase in city street work that could set the project back even further.
The required changes "will require massive effort and in some cases more than a year to complete," according to the audit.
At the same time, Liberty praised the program for successfully replacing high-risk, leak prone pipes with new ones that should not leak.
The program "has used a sound approach to physical configuration, reasonably-effective engineering and construction standards, experienced contractors selected through competitive solicitations, and materials well suited to providing leak risk reduction, pressure increase, and meter relocation," the audit states.
The idea behind the replacement program is to swap out old iron pipes for new plastic ones that will allow the utility to boost pipe pressure, preventing water from seeping into pipes and freezing and cracking them.
Peoples Gas has about 4,200 miles of main, 40 percent of which remains cast and ductile iron. Some of the iron piping dates to the 1800s, and the archaic system poses "great risk," according to the report, because failures can prove both unpredictable and "catastrophic" by suddenly releasing large volumes of gas.
"These circumstances make continuation of accelerated replacement a matter of high public importance," the Liberty report said.
Another factor affecting service is that Peoples Gas has the highest rate of contractor damage in the U.S., with 25 incidents per 100 miles of main in 2013, according to the report. Liberty recommended Peoples Gas perform a study on contractor-caused damage, and report its findings and a plan to mitigate the problem to the commission within six months.
The 354-page report makes 95 recommendations, including that Peoples and Integrys should combine project management into one office in Chicago and that the staff should be able to produce reliable data on the program's progress that will allow Peoples to move forward most efficiently.
Liberty also suggests that Peoples develop a strategy to get better deals from contractors, empower inspectors to halt unsafe work and make plans to improve employee accident rates, reduce leak rates further and provide a new and reliable cost model.
Over the next two years, Liberty will check to ensure that Peoples is implementing the recommendations. Peoples has to submit its implementation plan by Sept. 30. At that time, Liberty will begin filing quarterly reports with the commission and will file a final report at the end of two years.
The main replacement project has also complicated Wisconsin Energy's proposed $5.7 billion acquisition of Chicago-based Integrys Energy, the parent company of Peoples Gas and North Shore Gas. Wisconsin regulators approved the deal in April, but it is still pending approval by the Illinois Commerce Commission.
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