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This morning, the Illinois Commerce Commission (ICC) approved a settlement regarding 2014 spending on its troubled pipe replacement program.
The settlement itself is a good outcome for ratepayers, including a direct bill rebate, money for and management improvements to low income utility affordability programs, and a five year moratorium on Peoples Gas reporting late customer payments to credit reporting agencies. The negotiating parties, including the Office of the Attorney General, City of Chicago, and Citizens Utility Board did a commendable job winning concessions from Peoples Gas in negotiating the settlement.
However, the outcome is a far cry from the necessary reforms to the pipe replacement program itself.
Peoples Gas began replacing the gas mains that deliver gas to our neighborhoods in 1981.
Aging gas mains leak gas, costing consumers money and releasing a powerful greenhouse gas, and can explode, a threat to public safety. Everyone agrees it is important to replace the old gas mains.
In 2009, Peoples Gas sought regulatory approval to speed the program up, spending more money each year to complete the program sooner. After initial approval by the ICC was thrown out by the courts, the Illinois General Assembly approved the accelerated program in 2013. The legislation authorized Peoples Gas to finance the pipe replacement program (and a couple other infrastructure projects) through a special bill surcharge called a “rider.” The rider allows Peoples Gas to circumvent the normal rate making process and start charging customers for investments immediately on monthly bills.
Unfortunately, since it started, the accelerated program has been a disaster. Originally estimated to cost $2 billion, current cost estimates range between between $7 and $11 billion. An outside audit in 2015 found significant management deficiencies. What’s more, for all the money pouring into the program, gas leaks were found to be increasing, not decreasing. Peoples Gas executives were also revealed to have lied to regulators about the cost of the program.
After the audit, the ICC initiated an investigation into the program, which took two years to complete. In compelling testimony, the Office of the Attorney General demonstrated how the level and pace of spending on the project will lead to severe rate increases for Peoples Gas customers -- potentially doubling heating bills by 2037 and tripling heating bills before the program is completed.
Shockingly, on January 10th, 2018, the ICC voted to not rein the program in, but instead to allow Peoples Gas to proceed as planned, spending $300 million per year over the next three years, an increase in spending compared to recent years.
The ICC justified this decision by arguing they had no legal authority to direct Peoples Gas to adjust the pace or scope of the program, an argument that confuses the ICC’s authority to regulate utility rates with its authority to regulate utility operations. The ICC not only has the authority to rein the program in, but the responsibility to (see Article VIII sections 501 and 503 of the Public Utilities Act).
In defense of their decision, the ICC has cited the annual “reconciliation” process as providing meaningful oversight of the program. Today’s settlement covers the reconciliation of 2014 investments, so let's investigate this claim.
The rider, the special financing mechanism, allows Peoples Gas to circumvent the normal ratemaking process when making investments in the pipe replacement program. Instead of presenting their investments for regulatory review and approval through a rate case, Peoples Gas is free to spend as they wish and begin recovering costs from ratepayers immediately.
Each year, in an after-the-fact process, Peoples Gas must present their investments to the ICC and other interested parties for review. Those investments are reviewed on a “prudency” standard - basically: were specific investments reasonable under the circumstances? If any spending is found “imprudent”, ratepayers can get some of their money back. Any spending not found imprudent is added to the utility’s rate base at the next rate case, meaning they can recover those costs from ratepayers - including a rate of return - for the useful life of the infrastructure they invested in.
As such, the reconciliation process only reviews the reasonableness of specific investments, not the overall design, scope, pace, or rate impacts of the program. In a recent filing, the Office of the Attorney General dedicated a section to this point: “After-the-fact Prudence Evaluations in Rider QIP Reconciliations Are Not a Plausible Substitute for Commission Regulation of Utility Operations and Ensuring the Overall Affordability of Rates.”
Recall, 2014 was the year of the scathing outside audit, where auditors found significant management problems. Noting this, ICC staff recommended disallowing a full 20% of spending, over $36 million, a remarkably high amount.
The settlement agreement is not that aggressive, but does have several positive outcomes for consumers. The Office of the Attorney General, City of Chicago, and Citizens Utility Board are to be applauded for their work negotiating a good settlement under the circumstances.
Under the settlement, $4.7 million will be returned to ratepayers, including over $2 million through a one-time bill credit. Some money will go to help reconnect customers whose service has been disconnected, and management improvements will be made to the “share the warmth” program for low income customers. No late payment notices will be sent to credit reporting agencies through the end of 2013.
While the settlement itself is a positive outcome for ratepayers, it in no way constitutes meaningful regulation of the pipe replacement program. Some of the problems with the program include mismanagement and “imprudent” spending, but the fundamental problem is that Peoples Gas is spending too much money on the program, too fast, while not achieving its stated goals, leading to severe rate increases and a lack of value for ratepayers.
If the ICC were to exercise its regulatory authority as it should, it would direct Peoples Gas to slow the pace of investment and invest more strategically to replace the riskiest pipes first. The Office of the Attorney General, for example, has suggested annual spending of $130 million compared to the planned $300 million. Spending at this level would complete the program by 2053, a timeline consistent with the recommendations of the last engineering study completed by Peoples Gas.
While the ICC abdicated its responsibility to provide meaningful oversight of utility operations and investments, there are still options to rein in the troubled pipe replacement program. Last week, The Office of the Attorney General, City of Chicago, and Citizens Utility Board all petitioned the ICC to reconsider is January 10th decision. While the ICC will most likley deny the appeals, these filings are a necessary step to keep open the option of going to the courts to overturn the ICC decision. Reading the briefs, it is clear the parties have a strong legal argument for the courts.
The legislature can also take action, and should. The General Assembly granted Peoples Gas special permission to use the rider financing mechanism and it can take that permission away. Next Monday, a coalition including Illinois PIRG, AARP Illinois, Citizens Utility Board and others will announce just such an effort.
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