Peoples Gas parent’s Illinois spending plans surpass $3 billion

By Steve Daniels, Crain’s Chicago Business. January 4, 2019

Summary: More than half the record-shattering capital spending is for stuff other than Peoples’ massive pipe-replacement program. Get ready for much higher heating bills.

Capital spending at Peoples Gas is set to explode over the next five years to levels nearly three times what the Chicago utility spent less than a decade ago. And it’s not mainly for the reason you think.

WEC Energy Group, the Milwaukee-based parent of Peoples and its smaller suburban sibling, North Shore Gas, is budgeting $3.1 billion for capital investment at the two utilities in the five-year period beginning in 2019, according to a November investor presentation that laid out the new plan. Less than half—$1.5 billion—is for the massive and controversial pipe-replacement project that permits Peoples to impose a monthly surcharge on all gas bills to recover much of that cost.

The remainder, $1.6 billion, averages $320 million a year. That’s more than the $1.1 billion the Illinois utilities spent in the five years from 2008 to 2012 for all their needs, including replacement of aging gas mains. Peoples retired 39 miles of old pipes annually on average during that time. In 2017, it retired 54 miles and through September 2018 just 32 miles—well below target in both years and at far greater expense than in 2008-12.

Capital spending matters because, for utilities, more spending means higher earnings. Since they’re regulated monopolies, they’re entitled to a preordained profit on investments that regulators deem needed and appropriate. A time-honored utility strategy for boosting earnings is to hike capital spending for projects that may or may not be critical. Regulators historically are loath to challenge utilities after the fact on their spending, so heating costs just climb.

The latest capital spending plan happens to coincide with the remaining authority under a 2013 state law that Peoples uses to charge customers extra each month to help finance the investments. The law, the Natural Gas Safety & Reliability Act, expires in 2023.

David Kolata, executive director of the Chicago-based Citizens Utility Board, says WEC Energy appears to be treating the statute as a license to spend. “The only interpretation is they’re trying to spend as much as they can as fast as they can,” he says.

CUB is supporting legislation in Springfield to remove Peoples’ authority to impose the surcharge. But the opposition of unions, whose workers benefit from the work financed by higher heating bills, has so far kept that bill from advancing.

So what is all the extra money going for? WEC spokesman Brian Manthey cites plans to install automated meters in homes and businesses, build a new North Side maintenance shop and pay for significant needs at the Manlove gas storage field in Champaign County.

But those projects don’t nearly account for all the spending. The North Side shop is budgeted at $50 million and the Manlove work at $400 million.

BREAKDOWN

WEC hasn’t broken out a meter budget for Illinois, but meters planned for all of its gas utilities (which also include Wisconsin, Minnesota and Michigan) are pegged at $500 million, according to investor disclosures. WEC’s 1 million customers in Illinois are less than a quarter of its 4.4 million total gas customers. A quarter of that $500 million in meter spending then comes to $125 million.

So the three projects Manthey cites add up to around $575 million, 36 percent of the $1.6 billion WEC is budgeting for capital projects other than the massive gas-main work.

The remaining $1 billion is about the same as what Peoples and North Shore spent on all capital needs from 2008 to 2012. Of course, the utilities were under different ownership then. WEC’s predecessor, Wisconsin Energy, acquired the Chicago-based parent of Peoples and North Shore in 2015.

In an email, Manthey says it’s not appropriate to compare planned capital spending at Peoples and North Shore to past spending.

“It would seem more appropriate to compare our plan to the city of Chicago’s 2018-2022 capital improvement program that called for the investment of $8.57 billion to support existing infrastructure and new development—$3.2 billion of it for sewer and water,” he says. “Instead, you chose to compare it to the Peoples Gas decisions about safety upgrades and customer service improvements made under different circumstances and at a different point in time.”

Of course, Peoples is a midsize utility responsible only for Chicago’s natural gas infrastructure. Chicago is the nation’s third-largest city, responsible for roads, bridges, water and sewer pipes, airports, public buildings, streetlights, sidewalks and plenty more.

In addition, about a third of the city’s spending plan is for airport expansion, most of which is ultimately paid for by airlines and travelers. The federal government picks up 8.5 percent of the city’s five-year infrastructure cost, and the state of Illinois 3 percent more.

WEC Energy makes plain the benefits to shareholders of the spending binge. In its November investment presentation, it showcased a planned $700 million increase in companywide capital spending.

The capital plan, it said, “extends the runway for 5 to 7 percent (earnings) growth from our core business well into the future.” That means more money directly to shareholders in the form of annual dividend growth, which also is forecast at 5 to 7 percent, the company said.

And where does the money come from? Ratepayers, of course. Peoples already is forecasting higher heating bills this winter over last.

Given the rate of investment, a rate-hike request isn’t likely to be far off. Peoples’ last rate hike took effect nearly four years ago. In the meantime, its monthly infrastructure surcharge has climbed to levels approaching $10 for the average household, serving as a type of rate increase. But those surcharges expire in five years.

In response to rumblings that Peoples will file for a rate hike with the Illinois Commerce Commission after the upcoming mayoral election, Manthey says, “At this time we are not planning to file a rate case in 2019.”

Read the full Crain’s story here.