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Illinois AG Asks Regulators to Investigate Chicago NatGas Utility

Illinois Attorney General Lisa Madigan on Monday asked state regulators to open two investigations into a Peoples Gas utility’s multi-billion-dollar distribution pipeline replacement program in Chicago. She cited a third-party audit that was highly critical of the utility program.

Madigan's action comes at a time when the newly merged Peoples' parent company, Integrys Energy and Wisconsin Energy forming WEC Energy Group, is working with the Illinois Commerce Commission (ICC) to restart the distribution main replacement program and has committed to filing a new plan with the ICC at the end of this month (see Daily GPINov. 9).

Calling an audit of the Peoples program by Liberty Consulting Group "shocking," Madigan filed separate petitions with the ICC -- one to investigate whether Peoples violated state laws in allegedly withholding a proposed $8 billion price tag for the pipeline replacement, and a second one seeking to open an investigation into restructuring the replacement program, something WEC CEO Gale Klappa said the utility is already working on.

"The project is a disaster that raises serious questions about the safety, reliability and affordability of Peoples Gas service," Madigan said. "The shocking report from the ICC auditors is a call to action to completely reexamine the accelerated main replacement program  [AMRP] and immediately address whether Peoples Gas executives misled consumers."

Klappa said the previous outside consultant and internal management team on the project have been replaced with a group made up largely of executives from Wisconsin Energy who are experienced in large-scale pipeline replacement projects. "One of our most immediate and important goals is to improve the management and performance of AMRP," Klappa told financial analysts on an earnings conference call last week.

WEC Energy also has hired outside experts to zero in on an independent review of the cost, scope and schedule for the program that will be submitted to the ICC Nov. 30.

An expert retained by Madigan's office determined that if the AMRP cost $8 billion that could saddle Peoples' residential customers with an average added bill of $7,700 during the life of the replacement program. This would be added to current Peoples' rates, which Madigan characterized as "some of the highest natural gas rates in the Midwest."

Klappa said Peoples' previous management for the project did not accept the $8 billion estimate as realistic, and currently he said the estimates are in the $250-300 million/year range, which at the highest would be $6 billion over 20 years.

"I don't think the previous management had confidence in the [$8 billion] estimate; we did not have confidence in it, and that is why we brought in our experienced team and another outside, nationally known firm to basically take a complete bottoms-up review," Klappa said. Liberty Consulting's Sept. 30 audit called Peoples' AMRP "out-of-date and out-of-touch."

The nature of the work in densely populated city areas and the limitations of weather make it physically impossible to complete much more than $250 million of replacement work in any given year, Klappa said. As part of the Nov. 30 ICC filing, he said, Peoples will provide longer-term cost estimates for the 20-year period.

"In trying to estimate the cost of a construction program that spans 20 years, you know the only thing for sure is the estimates will be wrong," Klappa said, adding that is why the future estimates will probably give a range of values -- low, medium, high -- for each year of the program. Overall, it will be a broad range, but the WEC utility also will give more specific numbers and goals for the next three years -- "what the costs of that are and what the progress will be."

In terms of impact on ratepayers, Klappa said rate increases to support the replacement program would not exceed 4% of base rates annually, and the base part of the customer's total bill amounts to about a third. "We're not talking about tremendous rate pressure here," he said.

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