The Citizens Utility Board and Illinois Attorney General Lisa Madigan have accused Peoples Gas of deliberately misleading regulators about the ballooning cost of a huge program to upgrade gas lines around Chicago.
The company released an updated cost estimate for the program shortly after its merger with Wisconsin Energy Corp. was approved, but CUB and Madigan claim Peoples knew of the program's true cost months before and withheld that information.
"We think that possibly one of the big reasons for doing this was that there was a fear that releasing that $8 billion figure could possibly derail a very lucrative merger that the company was planning with Wisconsin Energy," Citizens Utility Board Communications Director Jim Chilsen said to Phil Ponce. "It's a $5.7 billion merger and key executives tied to Integrys, which is the former parent company of Peoples Gas, and Peoples Gas made about $61 million in payouts, including some executives who were at a May 20, 2015 meeting with the Illinois Commerce Commission [ICC] where the topic was brought up often about the lack of an accurate cost estimate, and never did anybody at that meeting ever reveal this $8 billion cost estimate."
When asked by Ponce whether Peoples Gas lied to Illinois regulators about the cost of implementing the program of replacing pipes, Peoples Gas Vice President for Construction Andy Hesselbach said, "I can't speak for what prior management did that was before the acquisition."
Hesselbach did stress, however, that the program costs were in line with similar work done in other U.S. cities, such as Philadelphia, New York, Baltimore, Washington, D.C.
"The cost per mile, which is a common metric in this industry, we're right in line with those other cities," he said. "So while we can all agree that the initial estimate missed the mark ... Regardless of that, what's important is, when people talk about the cost of the program, they've been right in the market. Every one of the contracts was competitively bid, they were picking the lowest-cost provider. The costs were in line with market."
Watch the video to hear our full conversation.
Peoples Gas’ Accelerated Gas-Main Replacement Program
Peoples Gas’ pipe-replacement program was originally proposed in 2009. The project called for the replacement of more than 2,000 miles of natural gas pipes in Chicago at a cost of $2.2 billion by the year 2030, according to a July 2015 Crain’s Chicago Business article.
That was the estimated cost in 2009 “when Peoples Gas asked the Illinois Commerce Commission to approve a surcharge on Chicagoans’ heating bills to more quickly recover costs of accelerating work,” the Crain’s article states. “That estimate soon increased to $2.6 billion.”
Nearly 568 miles of distribution pipe has been installed since the program’s launch in 2011, according to Peoples Gas.
“By making these improvements sooner rather than later, we'll reduce long-term costs to our customers,” Peoples Gas’ website states. “Being proactive about making improvements means avoiding more expensive replacements later. And by removing aging pipes that require frequent maintenance, we can reduce the cost of ongoing repairs.”
Acquisition of Peoples Gas’ Parent Company by Wisconsin Energy
While work on the accelerated gas-main replacement program continued, it was announced in June 2014 that Integrys Energy Inc., the parent company of Peoples Gas, would be acquired by Wisconsin Energy Corp in a $9.1 billion deal (which includes assumed debt).
According to a June 23, 2014 Crain’s Chicago Business article, Integrys CEO Charlie Schrock would retire upon completion of the deal and “all leadership positions after the acquisition will be assumed by senior executives of Wisconsin Energy.”
The article goes on to say that Wisconsin Energy would maintain Integrys’ “five-year capital investment plan to make $3.5 billion in ‘infrastructure and operational’ investments,” including People Gas’ accelerated gas-main replacement program. The merger was subject to approval by the Illinois Commerce Commission (ICC).
Questions Arise About Gas-Main Replacement Program
In May 2015, the ICC released a report that questioned the safety and effectiveness of Peoples Gas’ accelerated gas-main replacement program. The report was based on the results of an independent audit ordered by the ICC in 2013 “because of concerns over the slowing progress of the pipe replacements,” a May 2015 Chicago Tribune article states. “The one-year investigation, which the commission said has cost $1.3 million as of March, was conducted by The Liberty Consulting Group. Peoples Gas can pass that cost to customers.
“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 current cost estimates could be significantly higher.”
Integrys Acquisition Approved As Costs Soar
A month later the merger between Integrys and Wisconsin Energy was approved by the Illinois Commerce Commission.
That approval “is conditional on more than 40 items being met, including a two-year freeze rate for consumers,” according to June 2015 Chicago Tribune article.
At the time of the acquisition, it was reported that Integrys executives couldn’t provide the ICC with an updated figure as to the cost of the accelerated gas-main replacement program.
In July 2015, one month after the approval of the merger, WEC Energy Group (the new name of Wisconsin Energy Group after its acquisition of Integrys), informed the ICC that the company will be replacing the manager of Peoples Gas’ accelerated gas-main replacement program and would take the program “in-house” while it launched a nationwide search for another engineering firm.
“Post-acquisition, the new management team was provided a preliminary cost update for the full 20-year program, which exceeds $8 billion,” the company said in a Crain’s Chicago Business July 2015 article.
As part of the approval of the acquisition, the ICC required WEC to provide a complete plan for fixing the accelerated gas-main replacement program by Sept. 5, 2015.
On Nov. 30, 2015, WEC submitted a plan with the ICC outlining its proposed schedule for continuing the accelerated gas-main replacement program. Under this plan, the company “proposes to spend $250 million to $280 million annually over the next three years to replace 250 miles of aging gas mains. That's an average of 83 miles of pipe per year at a cost of $3.2 million per mile,” a Nov. 30 2015 Crain’s Chicago Business article states. “The overall cost estimate for completing all main replacement by 2030 now is $6.8 billion.”
On the heels of that report, the ICC suspended the accelerated gas-main replacement program, but according to a Crain’s Chicago Business article that means the replacement of underground gas mains will continue.
“The ICC rejected Peoples' new management's Nov. 30 plan to replace 250 miles of gas mains at a cost of $800 million over the next three years,” the Dec. 16, 2015 article states. “Instead, the commission is launching a process that will take most if not all of 2016 to reboot the multibillion-dollar program to replace nearly 2,000 miles of aging, leak-prone gas mains below the city's streets.”
Illinois Attorney General Says Peoples Gas “Misled” State Regulators
In February 2016, Illinois Attorney General Lisa Madigan said People Gas’ executives “knowingly misled” state regulators about the costs associated with the accelerated gas-main replacement program.
“In detailed testimony filed with the commission Dec. 23, WEC Energy said that Integrys and Peoples officials had commissioned development of the new cost estimate in July 2014,” Crain’s Chicago Business reports. “The estimate was largely completed in January 2015 and presented in final form to Schrock and others in April 2015.”
A third-party consultant was hired to check the cost estimates prepared by Jacobs Engineering Group for Peoples Gas. Consultants found those numbers to be accurate, confirming the $8.2 billion cost estimate in early July 2015.
According to the attorney general’s testimony, at least 14 people at Integrys or Peoples Gas knew about the $8 billion price tag before the May 20, 2015 ICC hearing.
“It is reasonable to question whether the completion of the merger would have been impacted by (the company's) disclosure of the estimate, and whether completion of the merger was the primary concern of Integrys executives given the tremendous financial incentives that were conditioned upon the completion of the merger,” Madigan’s office said. “No matter the motivation, this consistent pattern of nondisclosure of material information is without justification, violates (the law) and should be penalized.”
Fines could reach up to $500,000 per violation. According to Crain’s Chicago Business, WEC Energy was also left in the dark about the $8 billion estimated cost before the merger.
Related "Chicago Tonight" stories
June 2014: Wisconsin Energy Corp. will acquire Integrys Energy Inc., parent company of Peoples Gas, in a $9.1 billion deal. We look at what the acquisition means for Chicago energy consumers.
July 2015: Crain’s Chicago Business senior reporter Steve Daniels takes a closer look at the soaring cost of Peoples Gas' massive gas main replacement program and higher charges coming to Commonwealth Edison customers.