Peoples Gas’ plan to replace all pipes in Chicago could cost consumers much more
The utility, which acknowledges its original estimate was way off-base, comes in for sharp criticism in a new report by a consumer group.
A massive project to replace all of the natural gas pipes that run beneath the city of Chicago could leave hundreds of thousands of Peoples Gas customers paying 10 times what they do now by the time the work is finished in 2040, a new analysis finds.
Peoples Gas’ 686,000 customers now pay, on average, about $75 a year toward the replacements, according to a new report by the Illinois Public Interest Research Group, a private, not-for-profit consumer advocacy organization. It estimates that, by 2040, they could be paying 10 times more — as much as $750 a year — toward the cost of removing and replacing the public utility’s old, leak-prone cast-iron pipes.
That’s on top of what they pay for the natural gas they use.
The report also finds that:
- According to Peoples Gas’ own ranking of neighborhoods with the greatest chance of leaks, the company doesn’t always replace the most at-risk gas pipes first.
- The utility’s pipe-replacement program, initially just for risky pipes, has been greatly expanded into a project that will hit ratepayers much harder.
- The gas company originally put the cost of the replacement program at $1.4 billion, but estimates by Peoples Gas and its consultants say it could end up costing from $8 billion to $11 billion.
“Peoples Gas is spending more money on pipe replacement than ever but not mitigating risk in any proportion to its massive outlay of capital,” says the report by Abe Scarr, state director of Illinois PIRG, and Jeff Orcutt, president of the consulting firm Chapman Energy Strategies.
Peoples Gas acknowledges that its previous cost estimates “missed the mark” but says the work now is “very competitive” on cost.
The utility, which serves customers in the city of Chicago, has about 1,800 miles of pipes still to be replaced out of a total system of 4,400 miles.
‘That building was just gone’
Because of occasional gas leaks, Peoples Gas began a regular program of replacing its underground pipes more than 30 years ago.
The potential danger of old, deteriorating gas pipes was seared into the minds of many Chicagoans on Jan. 17, 1992. That afternoon, people east of the Kennedy Expressway near Racine and Milwaukee avenues in River West started hearing odd noises coming from their gas appliances. One resident said: “My daughter came out of the kitchen and said the stove was hissing at her.”
At 937 N. Racine Ave., a woman in her 80s watched in horror as the pilot lights on her gas stove shot up almost to the ceiling, and her gas space heater ignited. It was one of a series of natural gas fires and explosions in Chicago that day so bad that fire Cmsr. Raymond Orozco called them “the worst I’ve ever seen” in his 33 years of firefighting.
Tim O’Mahoney owned the building then and was the woman’s landlord.
“The fire came out underneath the space heater and caught items in the apartment on fire,” says O’Mahoney, who sold the building on Racine but still owns another apartment building at 911 N. Willard Ct., where a historical marker memorializes the gas fires.
All of O’Mahoney’s tenants got out safely.
Nearby, though, a gas pipe at 824 N. Racine Ave. exploded, leveling the building and killing three people: Alan Bass, 40, a professional photographer who lived in the building and had a studio there, Stephen Hoenig, 19, of Glencoe, and Victoria Opeka, 31, a makeup artist from Waukegan.
“That building was just gone, down to the foundation,” O’Mahoney says.
A separate fire, in the 800 block of North May Street, left a 75-year-old woman badly burned. Frances Kosiba died two weeks later.
In addition to the four who were killed, the River West explosions and fires destroyed 18 buildings.
A federal investigation resulted in a report a year later that blamed a Peoples Gas worker for not properly closing a valve at a regulator station — something the worker insisted he had done.
The disaster put a spotlight on what can happen when there are problems with natural gas delivery and the gas can’t easily be shut off.
Peoples Gas broadens replacement work
After the 1992 accident and an engineering study that examined Chicago’s aging infrastructure of gas pipes, Peoples Gas spent several years targeting and replacing pipes it considered high-priority.
Then, in 2007, the utility’s executives decided, instead of going after only the pipes deemed most at risk, to begin a bigger program to replace all of the pipes in its system and also to increase them from low-pressure to medium-pressure as a safety precaution.
“Medium is dramatically safer,” says Andy Hesselbach, vice president of construction for Peoples Gas. “It’s not even close.”
Individual pressure regulators on newer, outdoor gas meters need medium pressure to be able to work, according to Hesselbach.
Also included in the upgrades: an “excess-flow valve” on each home’s gas service line, enabling the system to be automatically shut off if there’s a pipe rupture.
The gas company’s cost estimate for its replacement work started at $1.4 billion in 2007, grew to $2.47 billion by 2009 and eventually to $8 billion to $11 billion.
In 2013, the Illinois General Assembly passed a law, sought by Peoples Gas, allowing it and other gas companies in Illinois to add a “rider” on customers’ monthly bills to pay for pipe-replacement work. Peoples Gas quickly did that.
That lets the utility get the money upfront, before the work is done, rather than have to go to the Illinois Commerce Commission to justify the work and get approval to bill for what was done.
That gave Peoples Gas less incentive to control costs, according to Scarr of Illinois PIRG.
Some Chicago neighborhoods at risk still wait
Peoples Gas’ project schedule shows that some of the neighborhoods rated more likely to have leaks are being worked on after other, less risky areas.
Peoples Gas assigns each Chicago neighborhood a “risk rank” based on factors including how old its pipes are and how many leaks they’ve had.
In its first-quarter report on the program to the the ICC this year, the work schedule shows that Kenwood, the South Side neighborhood that Peoples Gas ranked No. 36, is slated to be done from 2019 to 2021. But Old Norwood Park on the Northwest Side, ranked far worse, at No. 3 on a list in which No. 1 is deemed to have the greatest risk, isn’t scheduled to be done until 2024 to 2026.
Similarly, Avalon Park on the South Side, ranked No. 31, is slated for work from 2020 to 2021, while Oriole Park on the Northwest Side, ranked worse at No. 7, isn’t slated to be done until 2025 to 2027.
According to Peoples Gas, new pipes have to be laid adjacent to areas that already have been upgraded so the new, medium-pressure pipes can flow easily from one area to the next.
Hesselbach says that’s why some neighborhoods will get the work done sooner than others: “We’ve got to build our way there.”
Slowed pace of work, higher costs
Peoples Gas often piggybacks on the work being done by city water crews, going in to do pipeline replacement based on whatever street the city crews happen to be digging up, Illinois PIRG found.
The gas company says it’s more cost-effective to go in where streets already are being worked on.
The utility initially set a goal of replacing 74.9 miles of pipes in 2018. But it put in only 52 miles of new pipe last year, the consumer group found.
And it spent $5.7 million per mile, sharply higher than the $1 million spent per mile in 2006, before the program was expanded, the report says.
An audit done for the Illinois Commerce Commission by Liberty Consulting Group beginning in 2014 echoed some of Illinois PIRG’s concerns. It found that the utility hadn’t been able to accurately predict the program’s total cost and duration. And it noted that, even after pipe replacement work was done in some areas, the rate of gas leaks in those areas didn’t significantly decline.
According to Illinois PIRG, the average Peoples Gas customer now pays about $75 a year toward pipe replacement. But if that figure goes up, as forecast, to about $750 per customer per year by 2040, gas service could become unaffordable for some.
According to the gas company, last year about 92,000 Chicago households — 13.4% of its customers — faced possible disconnection of their gas service for nonpayment.
Donna Carpenter, a 54-year-old grandmother who lives in Englewood and cares for an adult son who is disabled, had her gas shut off a couple of years ago.
“It’s a struggle,” Carpenter says of being able to pay the bill. “When you get to the point where you think you can manage it, here they come with something else.”
Program refined, utility says
Hesselbach wasn’t working for Peoples Gas when the company made its initial cost estimates. Of those, he says, “There’s no question they were making estimates before they began the program, and they didn’t match the costs to execute the program.
“The first estimate missed the mark,” Hesselbach says. “It was maybe too optimistic.”
Besides consumer groups like Illinois PIRG, the Illinois attorney general’s office also wants the ICC to do more to ensure the pipeline program is a good deal for Chicago ratepayers. The attorney general’s office is involved in litigation, begun by former Attorney General Lisa Madigan, to try to force the commerce agency to a greater role in controlling costs.
The office “continues to fight to ensure the main replacement program is managed in a way that minimizes rate impacts on residents,” according to a spokeswoman for Attorney General Kwame Raoul, who succeeded Madigan.
UPDATE: The Illinois Appellate Court ruled June 28 that the ICC’s 2018 approval of the pipeline program was legally sound, with three judges ruling against the attorney general’s appeal and agreeing that the agency provided the oversight intended by the Illinois Legislature.
Raoul’s spokeswoman says he’s worried that rising costs are “putting affordable gas utility service out of reach for a growing number of Chicagoans.”
An ICC spokeswoman would not comment but points to a report the agency did that recommends an engineering study be done to look at the utility’s work this year.
A worry over climate change
Peoples Gas sees natural gas as an energy source consumers will continue to choose for many years to come, part of the reason the pipe replacement program is needed.
“Natural gas is abundant, is domestically produced, it’s the cleanest-burning fuel that’s available,” Hesselbach says.
But some consumer advocates say it’s difficult to know whether the decades-long program ultimately will even be necessary, given that climate change is prompting a growing number of consumers to choose alternative energy sources.
David Kolata, executive director of the not-for-profit Citizens Utility Board, points to past changes in home energy use. For instance, Kolata says no one uses lumps of coal in a basement furnace to heat their homes these days. And someday far fewer people will still be using natural gas, he says.
“We want policymakers to get ahead of this,” Kolata says. “We know it’s coming.”