STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION · 4 AG Ex. 1.4 Nicor Gas Responses to DR MEM 1.03...

STATE OF ILLINOIS

ILLINOIS COMMERCE COMMISSION

Northern Illinois Gas Company )

d/b/a Nicor Gas Company )

)

Petition Pursuant to Rider QIP ) Docket No. 19-0294

of schedule of Rates for Gas Service )

to initiate a Proceeding to Determine )

the Accuracy and Prudence of )

Qualifying Infrastructure Investment )

PUBLIC VERSION

DIRECT TESTIMONY OF

SEBASTIAN COPPOLA

ON BEHALF OF

THE PEOPLE OF THE STATE OF ILLINOIS

AG Exhibit 1.0

December 13, 2019

ICC Docket No. 19-0294

Direct Testimony of Sebastian Coppola

AG Exhibit 1.0 PUBLIC

2

TABLE OF CONTENTS

I. Introduction ..............................................................................................................................5

II. Summary Conclusions and Recommendations .....................................................................9

III. Infrastructure Cost Incurred ... ...........................................................................................11

IV. Nicor Gas Attestation of Prudency ... ..................................................................................13

V. Assessment of the 2018 Rider QIP Reconciliation .... .........................................................14

VI. Projects with Large Cost Variances ....................................................................................16

A. Copper Services Replacement ..........................................................................................19

B. Norridge Cast Iron Main Replacement ...........................................................................22

C. Franklin Park Main Replacement ...................................................................................23

D. Glenview Main Replacement ...........................................................................................25

E. Oak Lawn Main Replacement .........................................................................................26

F. Princeton Main Replacement ...........................................................................................28

G. Landscaping and Paving Carryover Costs .....................................................................29

H. Carpentersville Main Replacement .................................................................................30

I. Norridge Cast Iron Services Replacement .......................................................................31

J. Ancona Storage Field Gathering Lines ............................................................................33

K. Horizon Station Odorizer Replacement .........................................................................36

L. Summary ............................................................................................................................37

VII. Project Change Order .........................................................................................................38

A. Railway ROE Approval Issues.........................................................................................39

B. Other Change Order Issues ..............................................................................................44

VIII. Acceptance of Higher Cost Bids ........................................................................................54

A. Aux Sable Pipeline Replacement .....................................................................................55

B. Paving Restoration Zone 2 ...............................................................................................58

C. Paving Restoration Zone 3 ...............................................................................................60

D. Paving Restoration Zone 6 ...............................................................................................62

E. Summary ............................................................................................................................64

IX. Project Not Bid Out ...............................................................................................................65

X. Lack of Contractor Audits ....................................................................................................69

XI. Exclusion of Gas Storage Infrastructure Costs ..................................................................71

XII. Other Observations ..............................................................................................................72




3

EXHIBIT LIST

AG Ex. 1.1 Sebastian Coppola Regulatory Experience and Qualifications 1

AG Ex. 1.2 Nicor Gas Responses to DR AG 3.01, AG 5.01, AG 1.07(Docket 18-1775) 2

AG Ex. 1.3 CONF Nicor Gas Response to DR AG 5.16 with Exhibit 1 CONF 3

AG Ex. 1.4 Nicor Gas Responses to DR MEM 1.03 (Ex. 1), AG 4.10 (Ex. 3), AG 5.15 4

AG Ex. 1.5 Copper Services QIP Cost and Surcharge Adjustment 5

AG Ex. 1.6 Nicor Gas Responses to DR AG 4.25, AG 5.28 6

AG Ex. 1.7 Hudson Compressor Capital Additions Disallowance 7

AG Ex. 1.8 Franklin Park Main QIP Cost and Surcharge Adjustment 8

AG Ex. 1.9 Glenview Main QIP Cost and Surcharge Adjustment 9

AG Ex. 1.10 Oak Lawn Main QIP Cost and Surcharge Adjustment 10

AG Ex. 1.11 Princeton Main QIP Cost and Surcharge Adjustment 11

AG Ex. 1.12 Carryover Restoration Main QIP Cost and Surcharge Adjustment 12

AG Ex. 1.13 Carpentersville Main QIP Cost and Surcharge Adjustment 13

AG Ex. 1.14 Norridge Cast Iron Services QIP Cost and Surcharge Adjustment 14

AG Ex. 1.15 Ancona C & D Gathering Lines QIP Cost and Surcharge Adjustment 15

AG Ex. 1.16 Horizon Station Odorizer Replacement QIP Cost and Surcharge Adjustment 16

AG Ex. 1.17 Nicor Gas Response to DR AG 3.11 17

AG Ex. 1.18 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1A, pages 178-182 18




AG Ex. 1.22 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1B, pages 35-40 22

AG Ex. 1.23 CONF Nicor Gas Response to DR AG 5.04 23

AG Ex. 1.24 Railway ROW Change Orders QIP Cost and Surcharge Adjustment 24



AG Ex. 1.27 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1B, pages 67-68 27

AG Ex. 1.28 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1C, page 159 28

AG Ex. 1.29 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1C, page 303 29

AG Ex. 1.30 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1C, pages 188-189 30

AG Ex. 1.31 CONF Nicor Gas Response to DR AG 3.11 Exhibit 1D, page 31




4

AG Ex. 1.32 Other Change Orders QIP Cost and Surcharge Adjustment 32

AG Ex. 1.33 CONF Nicor Gas Responses to DR AG 4.20 (Ex. 3 CONF and Ex. 4 CONF) 33

AG Ex. 1.34 CONF Nicor Gas Responses to DR AG 5.23 CONF (Ex. 1 CONF) 34

AG Ex. 1.35 CONF Nicor Gas Resp. DR MEM 1.02 (Ex. 13 App. B, p.4), AG 4.22, AG 5.25 35



AG Ex. 1.38 Bids Accepted Over Lower Bids QIP Cost and Surcharge Adjustment 38

AG Ex. 1.39 Nicor Gas Response to DR AG 5.06 39

AG Ex. 1.40 Nicor Gas Response to Data Request AG 23.25 from Docket No. 18-1775 40




5

I. INTRODUCTION 41

Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 42

A. My name is Sebastian Coppola. My business address is 5928 Southgate Rd., Rochester, 43

Michigan 48306. 44

Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? 45

A. I am President of Corporate Analytics, Inc., a business consulting firm specializing in 46

financial and strategic business issues in the fields of energy and utility regulation. 47

Q. PLEASE SUMMARIZE YOUR PROFESSIONAL QUALIFICATIONS. 48

A. I have more than forty years of experience in public utility and related energy work, both 49

as a consultant and utility company executive. I have been an independent consultant for 50

more than 15 years. Before that, I spent three years as Senior Vice President and Chief 51

Financial Officer of SEMCO Energy, Inc. with responsibility for all financial operations, 52

corporate development and strategic planning for the company’s Michigan and Alaska 53

regulated gas utility operations and non-regulated businesses. During the period at 54

SEMCO Energy, I also had responsibility for certain storage and pipeline operations as 55

President and COO of SEMCO Energy Ventures, Inc. Prior to SEMCO, I was Senior 56

Vice President of Finance for MCN Energy Group, Inc., the parent company of Michigan 57

Consolidated Gas Company. 58

During my 24-year career at MCN and MichCon, I held various analytical, accounting, 59

managerial and executive positions, including Manager of Gas Accounting with 60




6

responsibility for maintaining the accounting records and preparing financial reports for 61

gas purchases and gas production. Over the years, I also held the positions of Treasurer, 62

Director of Investor Relations, Director of Accounting Services, Manager of Corporate 63

Finance, and Manager of Customer Billing. Additionally, I have been responsible for and 64

have managed several new pipeline and construction projects, as well as the 65

implementation of information technology projects. 66

I have testified in several regulatory proceedings before various regulatory commissions. 67

I have prepared and/or filed testimony in general rate case proceedings, revenue 68

decoupling reconciliations, gas conservation programs, gas cost and power supply cost 69

recovery reconciliation mechanisms, and pipeline and meter infrastructure replacement 70

cases. 71

In recent years, I have filed testimony in several infrastructure replacement cases on 72

behalf of the Illinois Attorney General and the Citizens Utility Board before the Illinois 73

Commerce Commission (“the Commission” or “ICC”) pertaining to Peoples Gas and 74

Coke’s accelerate main replacement program and Rider QIP reconciliations. I also 75

submitted testimony in the last Nicor Gas rate case, ICC Docket 18-1775. 76

AG Exhibit 1.1 describes my regulated-energy qualifications in more detail and a list of 77

cases in which I have testified in different jurisdictions. 78

Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS CASE? 79

A. On November 9, 2018, Northern Illinois Gas Company, d/b/a Nicor Gas Company, 80

(“Nicor Gas, or “Company”) filed a petition under Docket No. 19-0294 before the Illinois 81




7

Commerce Commission (“the Commission” or “ICC”) to initiate an annual reconciliation 82

proceeding, pursuant to Rider QIP of its Schedule of Rates for Gas Service (“Rider QIP”), 83

in order to determine the accuracy and the prudence of the qualifying infrastructure plant 84

investments for the calendar year 2018. 85

I have been asked by the Office of the Attorney General, on behalf of the People of the 86

State of Illinois (“AG”), to provide an independent analysis of the prudency and 87

reasonableness of the qualifying infrastructure costs incurred in 2018, and present related 88

recommendations for adjustments to costs, the Rider QIP Tariff, and management 89

practices. 90

Q. WHAT TOPICS ARE YOU ADDRESSING IN YOUR TESTIMONY? 91

A. My review is mainly limited to the larger QIP capital expenditures incurred by Nicor Gas 92

during 2018, and the processes and practices applied by the Company in planning and 93

completing the construction of various projects. 94

Specifically, I will address the following topics in this case: 95

1. Company witness Patrick Whiteside’s attestation about the reasonableness and 96

prudency of the 2018 QIP costs; 97

2. Cost disallowances related to certain projects with significant cost overruns, or 98

inadequate evidence to support the actual expenditures; 99

3. Cost disallowances related to imprudent approval of contractor change orders; 100

4. Acceptance of higher project bids above the lowest acceptable bid; 101

5. Poor project bidding practices; 102




8

6. Lack of contractor audits of billed costs and lack of transparency on contractors’ 103

work performance; and 104

7. Inclusion of non-qualified infrastructure plant projects within the Rider QIP 105

Tariff. 106

The absence of a discussion of other matters in my testimony should not be taken as an 107

indication that I agree with those aspects of Nicor Gas’s QIP filing. My testimony is, 108

instead, a consequence of focusing on priority issues within the resources available to me. 109

Other AG witnesses may identify other proposed disallowances that may be additive to the 110

recommendations made in this testimony. 111

Q. DO YOU HAVE ANY EXHIBITS SUPPORTING YOUR TESTIMONY? 112

A. Yes. I am sponsoring AG Exhibits 1.1 through 1.40. 113

Q. WHAT INFORMATION HAVE YOU RELIED UPON IN FORMULATING YOUR 114

RECOMMENDATIONS? 115

A. I have relied on Nicor Gas’s testimony, exhibits, and data request responses provided in 116

this docket. I have also relied on pertinent information from the Company’s last general 117

rate case in Docket No. 18-1775 and other select information from Nicor’s prior Rider 118

QIP reconciliation case filings. 119

In addition, I have read, and I am familiar with, the Rider QIP tariff filed by the Company 120

with the Commission, and Section 9-220.3 of the Public Utilities Act that authorized the 121

Commission to establish the Rider QIP tariff surcharge, including the transcript1 of the 122

1 Available at: https://www.icc.illinois.gov/downloads/public/edocket/366197.pdf (approved by ICC

January 7, 2014).




9

deliberations of the Illinois House of Representatives in passing legislation in May 2013 123

authorizing the establishment of the Rider QIP. 124

II. SUMMARY CONCLUSIONS AND RECOMMENDATIONS 125

Q. PLEASE SUMMARIZE YOUR CONCLUSIONS AND RECOMMENDATIONS. 126

A. Nicor Gas incurred several capital expenditures in 2018 which were not reasonable or 127

prudently incurred. The information provided by the Company also showed that project 128

management and cost control processes were deficient in various areas. 129

Therefore, I recommend that the Commission disallow the following capital expenditures 130

included in the calculation of the 2018 Rider QIP surcharge and direct the Company to 131

adjust future surcharges accordingly: 132

1. Remove $27.5 million of capital expenditures related to excessive costs 133

incurred over planned amounts for 11 major projects. As a result, the 134

Commission should order the Company to refund $1.8 million of Rider 135

QIP surcharges to customers. 136

2. Remove $8.0 million of capital expenditures for cost change orders 137

pertaining to imprudent decision by the Company. As a result, the 138

Commission should order the Company to refund approximately $353.000 139

of Rider QIP surcharges to customers. 140

3. Remove $5.2 million of capital expenditures pertaining to higher project 141

cost bids approved over lower acceptable bids received from contractors. 142

As a result, the Commission should order the Company to refund 143

approximately $271,000 of Rider QIP surcharges to customers. 144

In total, I recommend that the Commission disallow $40.7 million of 2018 capital 145

expenditures and reduce the Rider QIP surcharge by $2.5 million in this reconciliation 146




10

through the O Factor adjustment. In addition, I recommend that the Commission instruct 147

the Company to remove the disallowed capital expenditures from the calculation of future 148

Rider QIP surcharges and from the Company’s rate base when filing changes to its 149

distribution base rates in the next general rate case. 150

By removing the disallowed capital expenditures from rate base for imprudence, consumers 151

will not be required to pay the principal amount of capital expenditures, which in this case 152

is approximately $40.7 million. In addition, the Company forfeits the return on the 153

disallowed capital expenditures over the depreciable life of those capital additions. 154

Furthermore, the Commission should: 155

a. Direct the Company that in future Rider QIP reconciliations it will identify all 156

capital projects that were competitively bid, the bids considered and selected, 157

and if capital projects of at least $250,000 in value were not competitively bid 158

individually, or combined with other projects, explain and justify why not. 159

b. Direct the Company to perform annual audits of the amounts billed by any 160

contractor who bills the Company at least $5 million for work performed 161

during the annual QIP program. The absence of such audits in future Rider 162

QIP reconciliations should be considered a failure to attest as to the 163

reasonableness and prudency of the costs included in the QIP program. 164

c. Direct the Company to exclude gas storage related plant additions and 165

retirements from future Rider QIP plans and reconciliations. My conclusion is 166

that storage-related capital expenditures were never intended to be included in 167

the Rider QIP program and the Company has expanded the definition of 168

Qualifying Infrastructure Plant beyond its actual and intended purpose. 169

d. Direct the Company that in future Rider QIP reconciliation filings include 170

testimony and other exhibits to provide through explanations of (1) the major 171

projects completed during the Rider QIP reconciliation year; (2) any 172




11

significant variance of 10% or greater in the cost of the major projects 173

completed during the year in comparison to the plan filed with the 174

Commission; (3) QIP projects that had been planned for the year, but were 175

later deferred and not completed, as well as new projects added that were not 176

initially planned; (4) the number and amount of change orders affecting 177

capital expenditures for QIP projects and an explanation of the more 178

significant cost change orders exceeding $250,000; (5) how the Company 179

prioritized the projects for public safety and reliability; and (6) other useful 180

information that justify undertaking the QIP projects completed during the 181

reconciliation year. 182

The remainder of my testimony provides further details and support to these summary 183

conclusions and recommendations. 184

III. INFRASTRUCTURE COSTS INCURRED 185

Q. PLEASE BRIEFLY SUMMARIZE THE 2018 QIP RIDER RECONCILIATION 186

FILING MADE BY NICOR GAS. 187

A. Nicor Gas filed the testimony and exhibits of Matthew Kim and Patrick Whiteside to 188

provide an accounting of the infrastructure capital costs incurred in 2018 and explanations 189

of how in their opinion they conform to the Rider QIP statute and rate tariff. The Company 190

also filed affidavits and attestations required under the Rider QIP rate tariff. 191

According to the filing, in 2018 the Company incurred capital spending costs of 192

approximately $350.4 million net of retirements, disposal costs and deferred taxes, as 193

shown in Nicor Gas Ex. 1.1. The amount of gross plant additions, including cost of 194

removal and salvage value, for the 2018 Rider QIP was $372.9 million. Table 1 below 195




12

shows the capital expenditures and net recoverable investments requested by the Company 196

for 2018 by account and plant category. 197

198

Capital spending to replace Gas Distribution steel pipelines and copper/steel services with 199

new steel and plastic pipelines is the largest component at $211.3 million. Replacement of 200

Gas Transmission pipelines and related equipment is the second largest component of 201

spending in 2018 at $112.7 million. The third component of capital spending included by 202

Nicor Gas in the Rider QIP is for Gas Storage facilities in the amount of $49 million. Later 203

in my testimony, I will discuss the propriety of including capital expenditures for storage 204

facilities within the Rider QIP. 205

($000) Plant Net Plant

Additions 1 Retirements Other 2 Investment

352.00 - Storage Wells 532$ -$ (18)$ 514$

353.00 - Storage Lines (Gathering Lines) 37,924 (2,837) 323 35,410

354.00 - Storage Compressor Station Equipment (Compressors) 4,131 (10,092) 9,028 3,067

355.00 - Storage Measuring & Regulating Equipment 730 (8) (26) 696

356.00 - Storage Gas Conditioning 5,668 (730) 365 5,303

Total Storage 48,985$ (13,667)$ 9,672$ 44,990$

365.20 - Transmission Right of Way 31$ (405)$ 313$ (61)$

366.00 - Transmission Structure & Improvements - (245) 200 (45)

367.10 - Transmission Main - Steel 96,641 (3,085) (1,026) 92,530

369.00 - Transmission Stations - Reg. & Meas. Equip. 15,998 (2,811) 1,468 14,655

Total Transmission 112,670$ (6,546)$ 955$ 107,079$

374.00 - Distribution Right of Way 29$ -$ (1)$ 28$

376.10 - Distribution Main - Steel 50,154 (4,057) 847 46,944

376.20 - Distribution Main - Plastic 95,007 (1,176) (1,270) 92,561

376.30 - Distribution Main - Cast Iron 211 (215) 155 151

378.00 - Distribution Measuring & Reg. Equip. - Vaults 1,861 (131) 39 1,769

380.00 - Services 58,605 (6,639) 181 52,147

381.00 - Meters 1,449 (1,090) 947 1,306

382.00 - Meter Installations 1,495 (146) (113) 1,236

383.00 - Regulator Installations 2,466 (9) (235) 2,222

Total Distribution 211,277$ (13,463)$ 550$ 198,364$

Grand Total 372,932$ (33,676)$ 11,177$ 350,433$

Net QIP Investments - 13 month average Used for Surcharge Calculation 145,986$ 1 Includes cost of retirement and salvage value. 2 Includes depreciation, deferred taxes and other items.

Table 1 - Nicor Gas - 2018 Rider QIP Investments

Plant Account & Category




13

Based on the net 2018 Rider QIP plant investments of $350.4 million, the average cost base 206

on which the Company could earn a return was approximately $146 million, as shown on 207

page 9 of Nicor Gas Ex. 1.1, and also on line 1, column A, of page 1 of Nicor Gas Ex. 1.6. 208

The return on this cost base is $17.3 million as reported by the Company.2 209

AG witness Mary Selvaggio presents the impact of my adjustments to the 2018 recoverable 210

QIP costs in AG Ex. 2.1, along with other adjustments she has identified. 211

IV. NICOR GAS ATTESTATION OF PRUDENCY 212

Q. PLEASE PROVIDE YOUR ASSESSMENT OF THE ATTESTATION BY 213

COMPANY WITNESS WHITESIDE THAT THE RIDER QIP CAPITAL 214

EXPENDITURES WERE PRUDENTLY INCURRED. 215

A. On page 1 of his direct testimony. Mr. Whiteside states that he is responsible for the 216

Company’s top line growth and for the customer development teams focused on improving 217

gas utilization and streamlining customer additions to the Nicor Gas system. Additionally, 218

he stated that he is responsible for leading the Company’s planning and execution of 219

investment in qualifying infrastructure plant, workforce development, strategic capital asset 220

portfolio design, strategic operational projects and the energy efficiency program.3 221

On page 2 of his direct testimony, he “conclude[s] that the costs of the Rider QIP 222

infrastructure investments for the 2018 reconciliation period were prudently incurred.” 223

2 Nicor Gas Ex. 1.6, page 1.

3 Nicor Gas Ex. 2.0, page 1.




14

In the subsequent pages of his seven pages of direct testimony, Mr. Whiteside provides a 224

summary of the categories of qualifying plant additions allowed under the Rider QIP tariff, 225

plus a summary of the number of units installed or replaced, and a summary statement on 226

the prioritization approach taken to select projects for the Rider QIP program. The rest of 227

his testimony addresses the number of jobs attributable to the Rider QIP program. 228

Nowhere in his testimony does Mr. Whiteside explain what direct involvement he has with 229

the Rider QIP program or on what basis he can attest that the costs incurred in 2018 were 230

reasonable and prudently incurred. In fact, in response to a data request, the Company 231

shows that Mr. Whiteside is not a member of the Project Management Group responsible to 232

manage and direct the execution of the QIP projects. 233

His involvement with the QIP program appears to be so significantly removed from the 234

operation of the program that it renders his attestation of the prudency and reasonableness 235

of the costs incurred in 2018 meaningless. Therefore, I recommend that the Commission 236

disregard the attestation by Mr. Whiteside that all the QIP costs incurred by the Company 237

were reasonable or prudently incurred. Instead, based on my testimony, the Commission 238

should find that certain costs were not prudently incurred and should be removed from the 239

recoverable base on which the Rider QIP surcharges during 2018 were calculated. 240

V. ASSESSMENT OF THE 2018 RIDER QIP RECONCILIATION 241

Q. PLEASE PROVIDE YOUR OVERALL ASSESSMENT OF THE PRUDENCY AND 242

REASONABLENESS OF THE COSTS INCLUDED IN THE 2018 RIDER QIP 243

RECONCILIATION. 244




15

A. In 2018, the Company continued to significantly ramp up its QIP capital expenditures, 245

taking advantage of the cost recovery mechanism permitted by the enactment of the Rider 246

QIP beginning in 2014. As stated earlier, the Company spent approximately $372.9 million 247

on QIP projects in 2018. In comparison, in 2017 it spent $327.2 million. Although the 248

capital spending increased in 2018, the number of miles of pipe replaced decreased. In 249

2017, the Company replaced 84 miles of vintage plastic, vintage steel and bare steel 250

pipelines. In 2018, the number of miles of pipe replaced declined to 70 miles.4 251

Similarly, Nicor Gas replaced 15,847 service lines in 2018, which was a lower number than 252

the 16,346 services replaced in 2017.5 Therefore, with regard to gas distribution projects, 253

the increase in capital spending from 2017 to 2018 does not track with the number of miles 254

of mains and services replaced. 255

It is also concerning that the Company had planned to replace 106 miles of vintage plastic, 256

vintage steel, and bare steel pipe in 2018. However, it actually replaced only 70 miles, or 257

66% of the planned miles, while still increasing 2018 capital expenditures over the prior 258

year. AG Exhibit 1.2 includes the Company’s responses to data request AG 1.07 (Docket 259

No. 18-1775), AG 3.01 and AG 5.01 showing this information. 260

In my review of the Company’s capital expenditures on various QIP projects, I have 261

identified several issues with the level of capital spending, cost change order requests, poor 262

bidding acceptance practices, and other problems with the Company’s actions and practices. 263

4 In Nicor Gas Ex. 2.2 in Docket Nos. 19-0294 and 18-0621, the Company reports 161.2 miles of vintage

and bare steel main replaced/installed in 2018 and 139.3 miles in 2017. Although the number of miles

installed can differ somewhat from the miles retired, it is not clear why these quantities differ significantly

from the Company’s response to data requests AG 1.07 (Docket No. 18-1775) and AG 5.01 included in AG

Ex. 1.2. 5 Nicor Gas Ex. 2.2 in Docket Nos. 19-0294 and 18-0621.




16

These occurrences warrant several cost disallowances from the amount of capital 264

expenditures and related costs that the Company seeks to recover in this reconciliation case. 265

In the following pages of my testimony, I describe the most egregious cases and identify 266

recommended cost disallowances and adjustments to the Rider QIP surcharge billings. 267

Table 2 below identifies my summary assessment of the capital expenditures that should be 268

disallowed for 2018 and the related adjustments to the surcharge billings. 269

270

In total, I have identified approximately $40.7 million of capital expenditure disallowances 271

in the reconciliation of the 2018 Rider QIP. Approximately $27.5 million relate to large 272

cost variances between planned costs and actual costs for 11 construction projects. An 273

additional $8 million of disallowed capital expenditures pertains to change orders where 274

imprudent decisions were made by the Company. The other $5.2 million of capital 275

disallowances pertain to projects where the Company accepted higher cost bids than the 276

lower acceptable bid from contractors. 277

Capital Surcharge

Expenditures Revenue

Large Cost Variance Projects 27,489,988$ 1,836,372$

Project Change Orders 7,995,208 353,090

Bid Amounts Over Lowest Bid 5,219,618 270,707

Total Disallowance 40,704,814$ 2,460,169$

1 Source: AG Witness Coppola Testimony and Exhibits.

Table 2

2018 Nicor Gas Rider QIP Disallowances 1




17

The proposed disallowances for each of these categories are explained in the following 278

pages of my testimony. 279

VI. PROJECTS WITH LARGE COST VARIANCES 280

Q. PLEASE EXPLAIN YOUR FINDINGS FROM REVIEWING MAJOR PROJECTS 281

WITH LARGE COST VARIANCES. 282

A. In discovery, the Company was asked to provide a reconciliation of the projects and costs 283

proposed in the 2018 QIP plan update, filed with the Commission under Section J of the 284

Rider 32 QIP tariff, against the actual costs incurred for the projects completed in 2018. 285

The Company also was asked to provide a comparison of actual costs incurred and units 286

installed in 2018 versus prior years for major project categories. 287

In response to several data requests, the Company provided a report of 189 major projects 288

with planned costs, actual costs, cost variances, units planned and installed, and 289

explanations for cost variances. AG Exhibit 1.3 CONF includes a copy of the report 290

provided in response to data request AG 5.16 along with the confidential exhibit. 291

The 189 major projects planned for 2018 had a total projected cost of $338.9 million. 292

During the year, the Company decided to defer 28 projects to future years. The capital cost 293

of these projects totals $32.7 million. Thus, the remaining 161 projects completed in 2018 294

had a total projected cost of $306.2 million. In comparison, the Company incurred actual 295

capital expenditures of $359.5 million for the remaining 161 projects. Therefore, actual 296

costs for the 161 projects exceeded the projected cost by $53.3 million, an overall variance 297

of 17% over the projected cost. 298




18

Q. DID YOU IDENTIFY LARGE VARIANCES BETWEEN PLANNED AND ACTUAL 299

EXPENDITURES IN CERTAIN PROJECTS THAT RAISE CONCERNS ABOUT 300

THE REASONABLENESS AND PRUDENCY OF THE COST INCURRED FOR 301

THOSE PROJECTS? 302

A. Yes. Of the 161 projects completed in 2018, 134 had variances of 10% or greater. Of the 303

134 projects with variances of 10% or greater, 78 had positive variances (actual costs above 304

planned costs) with 39 of them having variances of greater than 50% above the planned cost 305

amount. The remaining 56 projects of the 134 projects with variances of 10% or greater had 306

negative variances of varying degrees with some exceeding 50%. AG Exhibit 1.3 CONF 307

provides the full list of projects and related cost variances. 308

The explanations provided by the Company for the larger variances are generally attributed 309

to project estimates not being final when the QIP plan was developed. The Company also 310

attributes the increase in costs to higher installation and restoration costs, permit delays, 311

difficult ground conditions, prior year carryover costs, etc. The large variances raise 312

concerns about the adequacy of the Company’s project planning practices, the accuracy of 313

forecasted costs provided to the Commission, and the adequacy of project management cost 314

controls. 315

Based on my review of the information provided by the Company, I have identified 11 316

projects where the explanations and justifications are inadequate or not credible, and a 317

disallowance of a portion of the project actual capital expenditures is warranted. The total 318

capital expenditures disallowance amount for the 11 projects is $27.5 million. The Rider 319

QIP surcharge adjustment refundable to customer from the capital expenditures 320




19

disallowance is $1.8 million. I will discuss each of the disallowances in my testimony 321

below. 322

A. Copper Services 323

Q. PLEASE EXPLAIN YOUR FINDINGS AND DISALLOWANCE OF CAPITAL 324

EXPENDITURES FOR COPPER SERVICES. 325

A. In response to data request AG 4.10, the Company provided the actual cost incurred to 326

complete replacement of 4,630 copper services during 2018 at $23,015,860, or $4,971 per 327

service line. In the plan filed with the Commission, the Company had projected that it 328

would replace 5,500 services in 2018 at a cost of $20,139,000, or cost per unit of $3,662. 329

The Company spent approximately $2.9 million more to replace 870 fewer services at a 330

higher unit cost. 331

The information provided by the Company in response to Staff data request MEM 1.03 332

(Exhibit 1) shows that the unit cost to replace copper service in 2017 was $3,557 and in 333

2016 it was $2,182. In discovery, the Company was asked to explain the cost increase 334

experienced in 2018 over prior years. In response to data request AG 4.10(b), the Company 335

stated that the cost increase was due to completion of more copper service replacements by 336

outside contractor crews than by Company crews. 337

Asked to explain why copper service line replacement costs by contractor crews is more 338

costly than using Company employees, the Company stated that contractor crew sizes are 339

larger than Company crews. The Company also provided service line installation cost data 340




20

that shows Company crews are able to complete an average service line installation for 341

$3,026, while the contractor charges $7,246, or 2.4 times more. 342

The Company was also asked to explain why it did not hire and use more employees to 343

perform service line replacement given the large cost difference. In response, the Company 344

stated that it had limited internal resources to replace copper services, and in an effort to 345

replace copper service by the end of 2019 additional outside resources were required. 346

Instead of hiring additional full-time employees for work that was not sustainable, the 347

Company decided to utilize resources. Although on the surface these reasons appear 348

plausible, they are not credible when reviewing the Company’s practices in prior years. 349

In 2018, Company employees replaced 54% of the total copper services replaced that year. 350

In 2017, they replaced 71% of all copper service replaced that year. The percentage 351

replaced by Company employees reached 88% in 2016. While in 2015, only 59% of the 352

copper services were replaced by Company employees. Therefore, the Company had 353

staffed for and dedicated more Company crews to complete copper service line 354

replacements in 2016 and 2017, and could have kept those internal crews into 2018 to 355

complete more copper service replacements at a much lower cost. 356

AG Exhibit 1.4 and 1.6 include the information provided by the Company in response to 357

several data requests discussed above. 358

Q. DID THE COMPANY BID OUT THE SPECIFIC SERVICE LINE REPLACEMENT 359

PROJECTS TO MULTIPLE CONTRACTORS TO ENSURE THE WORK WAS 360

COMPLETED AT THE LOWEST COMPETITIVE COST? 361




21

A. No. It does not appear that the Company competitively bid out the specific projects either 362

as a total group or by sub-groups in specific areas to multiple contractors in order to 363

determine that the work would be completed at the lowest cost within the applicable 364

standards. In response to a data request, the Company stated that it performs service line 365

replacement under blanket contracts which are not bid out annually.6 The lack of 366

competitive bids likely was a contributing factor to the excessive cost billed by the 367

contractors above the cost per service line incurred through installations by Company 368

employees. Later in my testimony, I will discuss in more detail my concerns with the 369

Company’s contractor work bidding practices. 370

Q. DID YOU CALCULATE THE INCREMENTAL AVOIDABLE COST OF USING 371

MORE COMPANY CREWS INSTEAD OF CONTRACTOR CREWS TO 372

COMPLETE THE COPPER SERVICE LINE REPLACEMENTS IN 2018? 373

A. Yes. I have determined that if the Company had maintained the same average mix of 374

service line replacement with Company crews as it did in 2017 and 2016, it could have 375

reduced capital expenditures in 2018 by approximately $9.7 million. 376

I determined this amount by taking the average cost to replace copper services in 2017 and 377

2016 of $2,870 per service line7 and multiplied it by the 4,630 services completed in 2018 in 378

order to calculate a total cost of $13.3 million. The difference between the $13.3 million 379

and the actual cost of $23.0 million incurred by the Company in 2018 is $9.7 million. This 380

6 Nicor Gas response to DR AG 5.06 included in AG Ex. 1.39 7 In response to data request Staff MEM 1.03 Exhibit 1, the Company reported that it installed 7,232 copper

services at a cost of $25,727,021, or $3,557 per service. It also reported that in 2016 it installed 10,032

copper services at a cost of 21,894,501, or $2,182 per service. The average cost for the two years is $2,870

per copper service installed. AG Exhibit 1.4 includes this information.




22

incremental cost is not reasonable and was not prudently incurred. Therefore, I recommend 381

that the Commission remove $9.7 million from the 2018 QIP capital investments. 382

Assuming the capital expenditures were incurred evenly throughout 2018, the adjustment to 383

the QIP surcharge is $718,301, as calculated in AG Exhibit 1.5 using the Company financial 384

model shown in Nicor Gas Ex. 1.1. 385

B. Norridge-Chicago #119620 Cast Iron Main Replacement 386


EXPENDITURES FOR THE NORRIDGE-CHICAGO CAST IRON MAIN 388

REPLACEMENT. 389

A. In data request AG 4.25, the Company was asked to explain why it spent $6.7 million to 390

retire and replace 1.4 miles of cast iron main in 2018 at a cost of $4.8 million per mile, when 391

in 2017 and 2016 it spent $968,000 and $809,000 per mile, respectively. In its initial 392

response, the Company stated that the main drivers for the cost increase per mile were 393

carryover costs for landscape and paving from the prior year with no associated miles of 394

pipe replaced in 2018. In addition, the Company stated that the last 1.4 miles of cast iron 395

main replaced in the Norridge-Chicago area involved road openings and tight city 396

coordination, which increased the average cost per mile. 397

In a follow up data request, the Company was asked to explain in more detail the amount of 398

carryover costs, the categories of costs where the higher costs were incurred and specifically 399

why. In response to data request AG 5.28, the Company stated that carryover costs were 400

$1.6 million of the $6.7 million, leaving still $5.1 million of costs in 2018 for 1.4 miles of 401

main. The Company also explained that the Norridge-Chicago main replacement required 402




23

$1.5 million in incremental landscaping and paving costs due to City of Chicago permit 403

requirements. After adjusting for this incremental cost, the remaining amount is $3.6 404

million. AG Exhibit 1.6 includes the Company response to data requests AG 4.25 and AG 405

5.28. 406

If we use the cost per mile of cast iron main replaced in 2017 of $968,000 and multiply it by 407

the 1.4 miles replaced in 2018, the expected cost is approximately $1.4 million. Comparing 408

this amount to the $3.6 million of remaining costs from the actual amount spent in 2018 409

leaves $2.2 million of costs incurred in 2018 that the Company has not justified. 410

It is also noteworthy to point out that in the QIP plan filed with the Commission, the 411

Company has projected that it would incur $4.9 million in 2018 to complete this project, 412

including carryover costs. Actual costs exceeded this amount by more than $1.8 million. 413

This is a further indication that the $2.2 million of incremental costs incurred in 2018 for 414

this project are not reasonable, and do not appear to have been prudently incurred. 415

Therefore, I recommend that the Commission remove $2.2 million from the 2018 Rider QIP 416

capital expenditures. Assuming the capital expenditures were incurred evenly throughout 417

2018, the adjustment to the QIP surcharge is $115,331, as calculated in AG Exhibit 1.7 418

using the Company financial model. 419

C. Franklin Park #119662 Main Replacement 420


EXPENDITURES FOR THE FRANKLIN PARK MAIN REPLACEMENT 422

PROJECT. 423




24

A. On line 34 of Exhibit 1 CONF to data request AG 5.16 (AG Ex. 1.3 CONF), the Company 424

reported that it planned to retire and replace 8,287 feet of steel main at a cumulative cost of 425

[BEGIN CONFIDENTIAL] 426

427

428

429

. [END CONFIDENTIAL] 430

Although the installation of additional feet of pipe explains part of the increase in cost, it 431

does not explain the entire increase. Using the planned cost of [BEGIN CONFIDENTIAL] 432

433

. [END CONFIDENTIAL] This leaves $684,739 of higher actual costs due to 434

other reasons. In Exhibit 1 CONF to DR AG 5.16, the Company explained that the 435

additional increase in costs was due to higher restoration costs due to permit delays which 436

required the Company to temporarily backfill and restore areas, and later return to redo 437

some of this work.8 438

Having timely permits is a basic task of scheduling work so that work can be completed in 439

the most cost-efficient manner. It is the responsibility of the Company to ensure it has the 440

necessary work permits to complete the work timely and without the need to redo the same 441

work and incur additional costs. Customers should not pay for imprudently incurred costs. 442

Therefore, I recommend that the Commission remove the $684,739 of higher costs incurred 443

by the Company for this project from the total 2018 QIP capital expenditures. Assuming 444

8 See line 34 of Exhibit 1 CONF to the response to data request AG 5.16.




25

that this incremental cost was incurred evenly throughout the year, the applicable reduction 445

in billed Rider QIP surcharge is $35,888, as calculated in AG Exhibit 1.8 using the 446

Company financial model. 447

D. Glenview #120043 Main Replacement 448


EXPENDITURES FOR THE GLENVIEW MAIN REPLACEMENT PROJECT. 450


reported that it planned to retire and replace 9,462 feet of steel main at a cost of [BEGIN 452

CONFIDENTIAL] 453

454

455

. 456

[END CONFIDENTIAL] 457

The only explanation provided by the Company was that the main installation and 458

restoration costs were higher than the QIP plan.9 This explanation is inadequate and 459

provides no evidence to justify the significant increase in actual cost over the planned 460

amount. Using the planned cost per mile of [BEGIN CONFIDENTIAL] 461

. [END CONFIDENTIAL] The 462

remaining amount of $1,456,186 is unsupported and unjustified. I recommend that the 463

Commission remove this amount from the total 2018 QIP capital expenditures. Assuming 464





26

that this incremental cost was incurred evenly throughout the year, the applicable reduction 465

in billed Rider QIP surcharge is $76,332, as calculated in AG Exhibit 1.9 using the 466

Company financial model. 467

E. Oak Lawn #120058 Main Replacement 468


EXPENDITURES FOR THE OAK LAWN MAIN REPLACEMENT PROJECT. 470


reported that it planned to retire and replace 25,675 feet of steel main at a cost of [BEGIN 472

CONFIDENTIAL] 473

474

475

476


Although the installation of additional feet of pipe explains part of the increase in cost, it 478

does not explain the entire increase. Using the planned cost of [BEGIN CONFIDENTIAL] 479

480

[END CONFIDENTIAL] This leaves $1,514,406 of higher actual costs due to 481

other reasons. In Exhibit 1 CONF to DR AG 5.16, the Company explained that facilities of 482

other utilities encountered in the right of way increased the difficulty of the pipe installation 483

and increased costs.10 484





27

Performing appropriate due diligence upfront about the conditions of the project, including 485

other utilities’ facilities in the common right-of-way, is a basic step at the time the project is 486

designed and before it is let out for construction work to begin. Also, providing all pertinent 487

information in the request for cost bids allows the contractors to provide accurate cost 488

proposals so the Company can properly select the lowest cost bid that meets all other 489

applicable requirements. This avoids subsequent project cost change orders that increase 490

the cost of the project without an appropriate competitive bidding process. 491

From the information provided by the Company, it appears that it did not do sufficient 492

research and due diligence work up-front to establish the true cost of the project. 493

Information about the location of facilities installed by other utilities in the common right-494

of-way should have been readily available to the Company at the time the project was 495

designed by working collaboratively with the city and other utilities. The failure to 496

determine the existence of those facilities and any additional difficulties that would be 497

encountered in the installation of the main rises to the level of imprudence on the part of the 498

Company. The lack of proper planning for the project should not be rewarded by allowing 499

the Company to recover the large incremental costs incurred for this project. 500

Therefore, I recommend that the Commission remove the $1,514,406 of higher costs 501

incurred by the Company for this project from the total 2018 QIP capital expenditures. 502

Assuming that this incremental cost was incurred evenly throughout the year, the applicable 503

reduction in billed Rider QIP surcharge is $79,392, as calculated in AG Exhibit 1.10 using 504

the Company financial model. 505




28

F. Princeton #128621 Main Replacement 506


EXPENDITURES FOR THE PRINCETON MAIN REPLACEMENT PROJECT. 508


reported that it planned to retire and replace 11,903 feet of steel main for a cost of [BEGIN 510

CONFIDENTIAL] 511

512

0 513

514


The only explanation that the Company provided to justify this cost increase was that the 516

main installation and retirement costs were higher than the QIP plan.11 This explanation is 517

inadequate and provides no evidence to justify the significant increase in actual cost over the 518

planned amount. Given that the 10,289 feet of new pipe actually installed was lower than 519

the 11,903 feet planned, the entire amount of cost variance of $637,393 between the actual 520

and planned amounts is unsupported and unjustified. 521

I recommend that the Commission remove this amount from the total 2018 QIP capital 522

expenditures. Assuming that this incremental cost of $637,393 was incurred evenly 523

throughout the year, the applicable reduction in billed Rider QIP surcharge is $33,401, as 524

calculated in AG Exhibit 1.11 using the Company financial model. 525





29

G. Landscaping and Paving Carryover Costs 526


EXPENDITURES FOR CARRYOVER LANDSCAPING AND PAVING COSTS 528

PERTAINING TO PRIOR YEAR MAIN REPLACEMENT PROJECTS. 529


reported that it planned to incur [BEGIN CONFIDENTIAL] [END 531

CONFIDENTIAL] during 2018 for landscaping, paving and retirement costs pertaining to 532

various projects completed or undertaken in the prior year. The Company also reported that 533

the actual carryover costs incurred during 2018 were [BEGIN CONFIDENTIAL] 534

[END 535

CONFIDENTIAL] 536

The only explanation that the Company provided was that carryover costs for restoration 537

and retirement were higher than the QIP plan.12 This explanation states the obvious and is 538

inadequate. It provides no evidence to justify the significant increase in actual costs over 539

the planned amount. I recommend that the Commission remove the unexplained and 540

unjustified cost variance of $3,016,258 from the total 2018 QIP capital expenditures. 541

Assuming that this incremental cost was incurred evenly throughout the year, the applicable 542

reduction in billed Rider QIP surcharge is $158,125, as calculated in AG Exhibit 1.12 using 543

the Company financial model. 544





30

H. Carpentersville #128737 Main Replacement 545


EXPENDITURES FOR THE CARPENTERSVILLE MAIN REPLACEMENT 547

PROJECT. 548


reported that it planned to retire and replace 2,810 feet of main at a cost of [BEGIN 550

CONFIDENTIAL] 551

552

r 553

554


The only explanation that the Company provided was that the main installation and 556

retirement costs were higher than the QIP plan.13 This explanation states the obvious and is 557

inadequate. It provides no evidence to justify the significant increase in actual costs over 558

the planned amount. Although the installation of additional feet of pipe explains part of the 559

increase in cost, it does not explain the entire increase. Using the planned cost of [BEGIN 560

CONFIDENTIAL] 561

. [END CONFIDENTIAL] This leaves $859,889 of actual costs 562

due to other reasons, which the Company has not identified, explained, or justified. 563





31

Therefore, I recommend that the Commission remove this amount from the total 2018 QIP 564

capital expenditures. Assuming that this incremental cost was incurred evenly throughout 565

the year, the applicable reduction in billed Rider QIP surcharge is $45,081, as calculated in 566

AG Exhibit 1.13 using the Company financial model. 567

I. Norridge Cast Iron Services Replacement 568


EXPENDITURES FOR THE NORRIDGE CAST IRON SERVICES 570

REPLACEMENT PROJECT. 571


reported that it planned to retire and replace 285 cast iron services at a cost of [BEGIN 573

CONFIDENTIAL] 574

575

576

. 577


The first explanation for the higher cost provided by the Company was that 150 of the 579

services were located under pavement which increased the replacement unit cost for those 580

services.14 In a subsequent response to a follow up data request, the Company explained 581

that when replacing the cast iron services in the City of Chicago – Norridge area all long 582

14 See the response to data request AG 4.10(b), second bulleted item, included in AG Ex. 1.4.




32

side services had to be open cut as part of the permit requirements. Outside the City of 583

Chicago, the Company replaces service lines by directional boring, not open cut.15 584

Performing appropriate due diligence upfront about the conditions of the project, including 585

determining the site conditions of services being located under pavement, as well as the 586

permit requirements of the City of Chicago about replacement of service lines by open cut, 587

are basic steps that should be taken and understood at the time the project is designed and 588

before it is let out for construction work to begin. 589

Additionally, providing all pertinent information in the request for cost bids allows the 590

contractors to provide accurate cost proposals from which the Company can select the 591

lowest cost bid that meets all other applicable requirements. This avoids subsequent project 592

cost change orders that increase the cost of the project without an appropriate competitive 593

bidding process. 594

From the information provided by the Company, it appears that it did not do sufficient 595

research and due diligence work up-front to establish the basic requirements and true cost of 596

the project. Information about the placement of the services below pavement can be 597

readily determined by performing a site visit to the project before or during the design 598

phase. The Company knows the location of its services because it must mark those 599

locations under the JULIE system before customers and other contractors undertake 600

construction work near those service lines. Also, with a portion of its service area in the 601

15 See the response to data request AG 5.15(g) included in AG Ex. 1.4.




33

City of Chicago, the Company knows, or should know, what the permitting requirements are 602

for replacing service lines in the city. 603

The failure to determine the existence of those requirements and difficulties during the 604

design phase of the project rises to the level of imprudence on the part of the Company. The 605

lack of proper planning for the project should not be rewarded by allowing the Company to 606

recover the large incremental costs incurred for this project. 607

Given that the 252 services actually installed were lower than the 285 services planned, the 608

entire amount of cost variance of $453,376 between the actual and planned amount should 609

be removed as unreasonable and imprudently incurred. I recommend that the Commission 610

remove this amount from the total 2018 QIP capital expenditures. Assuming that this 611

incremental cost was incurred evenly throughout the year, the applicable reduction in billed 612

Rider QIP surcharge is $33,569, as calculated in AG Exhibit 1.14 using the Company 613

financial model. 614

J. Ancona Storage Field Gathering Lines (“SFGL”) Replacement 615


EXPENDITURES FOR THE ANCONA LINE D AND C STORAGE FIELD 617

GATHERING LINES REPLACEMENT PROJECTS. 618

A. On lines 147 and 148 of Exhibit 1 CONF to data request AG 5.16 (AG Ex. 1.3 CONF), the 619

Company reported that in 2018 it planned to replace 475 feet of the Ancona “D” line 620

gathering system at a cost of [BEGIN CONFIDENTIAL] 621

622




34

623

624

625

. [END 626

CONFIDENTIAL] 627

In its initial explanation the Company stated that the higher cost was attributed to 628

unforeseen site conditions that required more pipe to be installed than had been planned.16 629

In a subsequent response to a follow up data request, the Company explained that the 630

original design and construction plan was to open cut the two 16” gathering lines crossing 631

the Moon Creek. As the projects moved into the construction phase, the Company 632

determined that it would not be possible to properly and safely control the volume of water 633

present in the Moon Creek. Instead, the Company decided to utilize directional drilling to 634

cross the creek with new lines. According to the Company, due to the close proximity of 635

the Moon Creek to IL Route 17, the contour of the land, and the deflection of the pipe, the 636

directional drilling required more pipe than planned with the original open cut approach.17 637

Q. WHAT IS YOUR ASSESSMENT OF THE PROJECT PLANNING WORK AND 638

THE RESULTING INCREASE IN PROJECT COSTS. 639

A. There are at least four main issues that arise from the Company’s explanations about the 640

reason for the tripling in the actual costs to $9.3 million for these two projects from the 641

planned amount of $3.2 million. First, it is difficult to understand why the Company would 642

16 See the response to data request AG 4.10(b), page 2, fifth bulleted item from the top of the page, included

in AG Ex. 1.4. 17 See the response to data request AG 5.15(h) included in AG Ex. 1.4.




35

plan to open cut a trench across a creek with a significant running water stream. Diverting 643

the water stream, in order to cut a trench to remove the old pipe and then install new pipe 644

over a period of multiple weeks is not an easy task. Additionally, when cutting an open 645

trench, there is the risk of environmental damage to the creek bed and contamination of the 646

water stream. From my experience working at two gas utilities and reviewing dozens of 647

construction projects proposed by other utilities in several rate cases, utilities perform such 648

crossings usually through directional drilling under the creek or river bed to avoid the 649

problems described above. 650

Second, installation of a 16” pipeline through directional drilling under a river bed can be a 651

lower cost option than cutting an open trench given the challenges and risks discussed 652

above. The Company has often stated this lower cost preference for directional drilling with 653

other pipeline projects. It is difficult to understand why replacing the pipelines through an 654

open cut trench would have been the preferred option with this project. 655

Third, it is also difficult to understand why directional drilling would require between four 656

and five times more pipe than the open trench approach. Unless the Company was making 657

some wide loops of nearly a half mile past the original pipeline crossing area, the increase in 658

the number of feet of pipe from 475 to 2,031 for the D Line and from 528 to 2,609 feet for 659

the C line seems exceptionally high and likely unnecessary. 660

Fourth, this is another case where a simple site inspection and critical assessment of the two 661

projects up-front should have led to the reasonable conclusion that crossing the creek and 662

replacing the existing pipelines through an open cut trench would not be a workable option. 663




36

In conclusion, it seems clear that the Company did not plan the project in a reasonable and 664

prudent manner. The result was a tripling of the cost of the project for an incremental 665

amount of $6,101,804. The lack of proper planning should not be rewarded by allowing the 666

Company to recover the large incremental costs incurred for the two projects. 667

Therefore, I recommend that the Commission remove the $6,101,804 from the total 2018 668

QIP capital expenditures. Assuming that this incremental cost was incurred evenly 669

throughout the year, the applicable reduction in billed Rider QIP surcharge is $488,979, as 670

calculated in AG Exhibit 1.15 using the Company financial model. 671

K. Horizon Station 125 Odorizer Replacement 672


EXPENDITURES FOR THE HORIZON STATION ODORIZER REPLACEMENT 674

PROJECT. 675


reported that it planned to replace the odorizer equipment at the Horizon station at a cost of 677



which is an increase of $865,937 or 156.2% over the planned amount. 680

The only explanation that the Company provided was that the construction costs were 681

higher than the QIP plan.18 This explanation states the obvious and is inadequate. It 682





37

provides no evidence to justify the significant increase in actual costs over the planned 683

amount. This leaves the $865,937 cost variance unexplained and unjustified. 684

Therefore, I recommend that the Commission remove this amount from the total 2018 QIP 685

capital expenditures. Assuming that this incremental cost was incurred evenly throughout 686

the year, the applicable reduction in billed Rider QIP surcharge is $51,973, as calculated in 687

AG Exhibit 1.16 using the Company financial model. 688

L. Summary 689

Q. PLEASE SUMMARIZE THE QIP CAPITAL EXPENDITURES AND RIDER QIP 690

SURCHARGE REVENUE ADJUSTMENTS THAT YOU RECOMMEND. 691

A. The following table summarizes the capital expenditure amounts that I recommend the 692

Commission should remove from the 2018 QIP capital expenditures for the Projects with 693

Large Variances, and the related surcharge revenue that should be refunded to customers for 694

the 2018 Rider QIP reconciliation. 695




38

696

In total for this group of projects, I recommend that the Commission remove $27.5 million 697

of capital expenditures from the amount proposed by the Company, and order the Company 698

to refund $1.8 million of excess Rider QIP surcharges billed to customers. 699

VII. PROJECT CHANGE ORDERS 700

Q. PLEASE DESCRIBE WHAT ISSUES YOU DISCOVERED IN YOUR REVIEW OF 701

THE PROJECT COST CHANGE ORDER DOCUMENTS PROVIDED BY NICOR 702

GAS. 703

Capital Surcharge

Expenditures Revenue

Copper Services Replacement 9,700,000$ 718,301$

Norridge Main Replacement Project 2,200,000 115,331

Franklin Park Main Replacement 684,739 35,888

Glenview Main Replacement 1,456,186 76,332

Oak Lawn Main Replacement 1,514,406 79,392

Princeton Main Replacement 637,393 33,401

Landscaping and Paving Carryover Costs 3,016,258 158,125

Carpentersville Main Replacement 859,889 45,081

Norridge Services Replacement 453,376$ 33,569$

Ancona Storage Field Gathering Lines Replacement 6,101,804$ 488,979$

Horizon Station Odorizer Replacement 865,937$ 51,973$

Total Disallowance 27,489,988$ 1,836,372$

1 Source: AG exhibits.

Table 3

2018 Large Cost Variance Projects - Disallowances 1




39

A. In response to data request AG 3.11, the Company provided several documents pertaining 704

to approximately 60 change orders entered into between Nicor Gas and its construction 705

contractors for QIP projects completed during 2018.19 In my review of the change orders 706

provided by the Company, I discovered 12 situations where the change order was the result 707

of an imprudent action or decision by Nicor Gas which unnecessarily increased the 708

construction cost of the project. The total incremental construction cost from these 12 709

change orders is $7,995,208. These costs were imprudently incurred and should be 710

removed from the QIP capital expenditures included by the Company in this reconciliation 711

case. 712

Five of the change orders pertain to Railway Right-of-Way (“ROW”) approval issues. The 713

remaining seven change orders are for other specific projects. 714

A. Railway ROW Approval Issues 715

Q. PLEASE DESCRIBE THE RAILWAY ROW ISSUES THAT YOU DISCOVERED 716

IN YOUR REVIEW OF THE CHANGE ORDERS. 717

A. In my review, I discovered five change orders where contractors encountered difficulties in 718

completing the project as initially agreed with Nicor Gas. The difficulties arose from the 719

contractor’s inability to complete the work in a railway ROW. In each of these cases, the 720

contractors requested a project cost increase allowance through a change order, which the 721

Company approved. The total incremental cost of the five change orders included in 2018 722

QIP capital expenditures is $5,556,274. I will describe each of them separately. 723

19 AG Ex. 1.17.




40

1. Aux Sable Phase 6 – Project 143642, Change Order 17, Dated 4/12/18: 724

In this change order, the contractor, Precision Pipeline, requested a cost increase allowance 725

of [BEGIN CONFIDENTIAL] 726

727

728

729

[END CONFIDENTIAL]. The 730

full text of the change order and cost is included in AG Ex. 1.18 CONF. The Company 731

approved the change order on April 17, 2018. According to the Company’s response to 732

data request AG 5.04, the actual incremental cost due to the change order included in 2018 733

QIP capital expenditures was $1,639,278.20 734




738

739

740

[END CONFIDENTIAL]. The 741

full text of the change order and cost is included in AG Ex. 1.19 CONF. The Company 742

approved the change order on April 17, 2018. The actual incremental cost due to the 743

change order included in 2018 QIP capital expenditures was $1,906,471.21 744

20 AG Ex. 1.23 21 AG Ex. 1.23.




41




748

[END 749

CONFIDENTIAL]. The full text of the change order and cost is included in AG Ex. 1.20 750

CONF. The Company approved the change order on June 12, 2018. The actual 751

incremental cost due to the change order included in 2018 QIP capital expenditures was 752

$265,114.22 753




757

758

759

e 760

[END CONFIDENTIAL] The full text of the change order and cost is 761

included in AG Ex. 1.21 CONF. The Company approved the change order on June 25, 762

2018. The actual incremental cost due to the change order included in 2018 QIP capital 763

expenditures was $137,196.23 764

22 Id. 23 Id.




42




768

769

770

[END 771

CONFIDENTIAL] The full text of the change order and cost is included in AG Ex. 1.22 772

CONF. The Company approved the change order on April 17, 2018. The actual 773

incremental cost included in 2018 QIP capital expenditures was $1,608,215.24 774

Q. WHAT IS YOUR ASSESSMENT OF THE FIVE CHANGE ORDERS DESCRIBED 775

ABOVE? 776

A. It appears that the Company ran into difficulties in obtaining permission from CN to cross 777

the railway and to work in the railway ROW as early as September 2017. The Company 778

knew since September 2017 following the CN train derailment that CN had notified Nicor 779

Gas to cease any work in the railroad ROW. AG Ex. 1.40 includes the Company’s response 780

to data request AG-23.25 from Docket No. 18-1775 detailing the sequence of events leading 781

to the cease and desist request by CN. 782

24 Id.




43

Nevertheless, the Company proceeded to schedule the contractor to perform work in an area 783

for which it had no permission to do work, resulting in the contractor incurring additional 784

costs which the Company now wants to recover in this rate case. 785

The change orders indicate that the Company released work to its construction contractors 786

before Nicor Gas had obtained permits or permission to do work in the railway ROW. 787

Such a practice is unusual, and can be risky and very costly, as demonstrated by the cost 788

change orders. The Company should not have released the contractors to begin work on 789

the projects before obtaining the necessary permits or permission for the contractors to 790

work in the railway ROW. 791

By proceeding with the projects without the necessary permits or permission, Nicor Gas 792

incurred cost increases through change orders for a total amount exceeding $5.5 million. 793

This happened on multiple occasions in the construction of the Aux Sable pipeline 794

replacement project during 2018. The number of occurrences clearly shows a pattern of 795

imprudent decisions and actions by Nicor Gas. The incremental costs of $5,556,274 796

incurred for the five change orders are not reasonable and should not be included in the 797

2018 QIP capital expenditures. 798

Q. WHAT IS YOUR RECOMMENDATION? 799

A. I recommend that the Commission disallow the $5,556,274 pertaining to the five change 800

orders for the railway ROW problems from the calculation of the Rider QIP surcharge in 801

this reconciliation case. Based on the information provided by the Company in response to 802

data request AG 5.04(j) (AG Ex. 1.23) and the months when the incremental costs were 803

incurred, I have calculated a Rider QIP surcharge adjustment of $256,949. The calculation 804




44

of the surcharge adjustment was determined using the Company’s financial model and is 805

shown in AG Ex. 1.24. 806

B. Other Change Order Issues 807

Q. PLEASE DESCRIBE WHAT OTHER ISSUES YOU DISCOVERED DURING 808

YOUR REVIEW OF THE CHANGE ORDERS PROVIDED BY NICOR GAS. 809

A. During my review, I discovered 7 additional change orders where the Company incurred 810

excessive cost overruns in certain projects or approved change orders for incremental costs 811

caused by its own imprudent action or lack of action. 812

The total incremental cost of the 7 change orders is $2,438,934 I will describe each of the 813

cost change orders separately. 814




818

819

820

821

822

823

824


AG Ex. 1.25 CONF includes the full text of the change order and the related cost. From 826

the information shown in the change order, it appears that the Company did not deliver 827




45

sufficient pipe of the appropriate wall thickness. This failure caused the contractor to incur 828

additional costs for which it requested reimbursement under the change order. 829

Nicor Gas is responsible for providing the contractor with the correct materials at the 830

scheduled time. With this project, it seems clear that the Company failed to deliver the 831

correct material. The result of the imprudent action or inaction on the part of Nicor Gas 832

was an additional cost of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] 833

to complete the project. Customers should not pay for the Company’s errors in completing 834

a project within the specified design and cost parameters. The additional cost is 835

unreasonable, and the Commission should disallow it from the 2018 QIP capital 836

expenditures in this reconciliation case. 837




841

842

843

844

845


AG Ex. 1.26 CONF includes the full text of the change order and the related cost. In 847

response to data request AG 5.04(b), the Company explained that a PCR is a steady state 848

decoupler which allows AC electric current a path to the ground while retaining DC 849

electric current needed on the pipeline. This device is typically utilized on pipelines 850




46

installed within a high voltage transmission electric corridor. The PCR protects the 851

pipelines against corrosive AC current and ensures the long-term integrity of the pipe. 852

In the data request, the Company was asked to explain why the PCRs needed to be 853

relocated, and why they were not initially located in the appropriate area to avoid the 854

additional cost of relocation. In its response, the Company stated that typically when a 855

transmission pipeline is not located in farm fields it places the PCRs on two-foot pedestals. 856

With this project, the Company placed the PCRs on 6-foot pedestals to make them more 857

visible but did not consider the fact that they would be interfering with the equipment used 858

by the farmer to farm the land above the pipeline. 859

Apparently, a site visit by the engineering designing the project failed to discover this basic 860

problem. After the Company completed construction of the pipeline and placed the PCR 861

pedestals in the farming area, the farmer knocked over one or more of the pedestals and 862

complained about their location. The result was that the Company now had to relocate the 863

PCR to a different location away from the farming area. DR AG 5.04(b) included in AG 864

Ex. 1.23 provides more details on the sequence of events. 865

Given the Company’s experience in building transmission lines through farming areas, it is 866

difficult to understand why this problem was not anticipated and avoided. The fact that 867

Nicor Gas initially placed the PCRs on taller pedestals indicates that the Company was 868

concerned with visibility of the PCRs and potential interference with farming activities. 869

However, it still decided to proceed with locating the PCRs in the path of farming 870

activities. This was an imprudent decision. Customers should not pay for the unnecessary 871




47

incremental cost of relocating the PCR to a location where they should have been placed 872

initially. 873

The additional cost of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] is 874

unreasonable and the Commission should disallow it from the 2018 QIP capital 875

expenditures in this reconciliation case.25 876

3. Aux Sable Phase 7A – Project 143645, Change Order 041A, Dated 10/16/18: 877

This change order addresses the same problem as item 2 above for a different phase of the 878

Aux Sable pipeline. The contractor, Precision Pipeline, requested a cost increase 879

allowance of [BEGIN CONFIDENTIAL] 880

881

882

883

884

885

886


AG Ex. 1.27 CONF includes the full text of the change order and the related cost. In data 888

request AG 5.04(c), the Company was asked to explain why this problem reoccurred for a 889

later phase of the Aux Sable pipeline replacement project. In its response, the Company 890

stated that Phases 6 and 7A were built concurrently and the PCRs were located in the 891

farming area before the decision was made to relocate them away from the farming area.26 892

25 AG Ex. 1.23. In its response to DR AG 5.04(j), the Company reported the higher amount of $203,927 being

charged to 2018 QIP construction costs than the $169,355 shown in the change order. 26 AG Ex. 1.23, DR AG 5.04(c).




48

The same issues arise with this cost change order as with the Phase 6 change order and the 893

imprudent decision to locate the PCR in the farming area necessitating a relocation and 894

higher construction costs. Customers should not pay for the incremental cost of relocating 895

the PCR to a location where they should have been placed initially. 896

The additional cost of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] is 897

unreasonable and the Commission should disallow it from the 2018 QIP capital 898

expenditures in this reconciliation case.27 899

4. Oak Brook Station 256 – Project 116006, Change Order COR 008, Dated 10/4/18: 900

In this change order, the contractor, NPL, requested a cost increase allowance of [BEGIN 901

CONFIDENTIAL] 902

903

904

905

906

907

908

909

910

911

912

. 913

914



the information shown in the change order, it appears that the Company did not deliver the 917

correct valves and at the scheduled time to allow the contractor to install the valves as 918

27 In its response to DR AG 5.04(j), the company reported the higher amount of $144,274 being charged to 2018

QIP construction costs than the $124,194 shown in the change order.




49

planned and according to the design specs. Because of Nicor Gas’s errors, the contractor 919

had to incur extra time and equipment costs to complete the construction work, for which 920

the Company reimbursed the contractor. 921

Nicor Gas has the responsibility to provide the contractor with the correct materials at the 922

scheduled time. With this project, it seems clear that the Company failed to meet that 923

responsibility. Nicor Gas’s imprudent action or inaction resulted in the project completion 924

costing an additional [BEGIN CONFIDENTIAL] . [END CONFIDENTIAL] The 925

additional cost is unreasonable, and the Commission should disallow it from the 2018 QIP 926

capital expenditures in this reconciliation case. 927

5. Oak Brook Station 256 – Project 116006, Change Order COR 015, Dated 11/5/18: 928


CONFIDENTIAL] 930

931

932

933

934

935

936

937



the information shown in the change order, it appears that there are three reasons for the 940

higher cost allowance being requested. First, the change order indicates a desire to 941

complete the job by the end of October and the need to work on Sunday and adding crews 942

to meet the deadline. Second, the change order references the fact that the contractor had 943




50

to mobilize and demobilize its crews multiple times due to work scheduling issues, which 944

usually increase costs. Third, it appears that the contractor did not have full access to the 945

gate station, and as a result the project was delayed and likely incurred higher costs. 946

All three reasons for the cost overruns were within the control of Nicor Gas. Not giving 947

the contractor the necessary access to the gate station and forcing the contractor to mobilize 948

and demobilize its crews several times are inexcusable reasons. The resulting higher cost 949

to complete the gate station is the outcome of imprudent actions or decisions on the part of 950

Nicor Gas. The additional cost of [BEGIN CONFIDENTIAL] [END 951

CONFIDENTIAL] is unreasonable and the Commission should disallow it from the 2018 952

QIP capital expenditures in this reconciliation case. 953

6. Oak Brook Station 256 – Project 116006, Change Order 11, Dated 10/11/18: 954


CONFIDENTIAL] 956

957

958

959

960

961

[END 962

CONFIDENTIAL] 963

AG Ex. 1.30 CONF includes the full text of the change order and the related cost. In 964

response to data request AG 5.04(d), the company elaborated further on the reason for the 965

delay stating that the back feed into the system supplied by the station was interrupted. 966

This interruption required a delay in completing the station work until the back feed was 967

restored. Although the delay in completing the station work seems plausible, it is 968




51

perplexing why the Company did not redirect the contractor crews to a different project and 969

still continued to incur costs on this project after it became clear that the project needed to 970

be delayed. 971

Additionally, it is not clear why the contractor was waiting on delivery of the 30” valves 972

and flaring of gas when supposedly work on the project could not proceed. The 973

inconsistencies in the contractor’s statements with the Company’s explanation, and the 974

inaction on the part of the Company to avoid the incurrence of additional costs once it 975

became clear the project needed to be delayed rise to the level of imprudent actions or 976

inactions. Customers should not pay for the Company’s imprudent decisions. The 977

additional cost is unreasonable, and the Commission should disallow the [BEGIN 978

CONFIDENTIAL] [END CONFIDENTIAL] from the 2018 QIP capital 979

expenditures in this reconciliation case. 980

7. Madison Street Main Replacement – Project 155084, Change Order Date N/A: 981

The Company provided an incomplete change order document that shows the incremental 982

cost of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] to complete the 983

Madison Street, Elmhurst, main replacement. AG Ex. 1.31 includes the information 984

provided by the Company about the incremental costs. Nicor included [BEGIN 985

CONFIDENTIAL] [END CONFIDENTIAL] for this change order in the 2018 986

QIP costs.28 987

28 Nicor Gas response to data request AG 5.04(j).




52

Although it could not provide a completed standard charge order document, in response to 988

data request AG 5.04(f) the Company stated that it could not complete replacement of the 989

entire main in 2017, and completion of the second half of the project was extended into 990

2018. The Company also stated that the extension of the project into 2018 increased costs 991

due to additional fittings, taps, paving and other materials needed to temporarily return a 992

portion of the previous main back into service and complete the rest of the project in 2018. 993

The Company also incurred additional costs for using contracted inspection services 994

instead of internal resources, and from additional permit requirements imposed by the City 995

of Elmhurst, which the Company had not included in its initial project cost estimate. 996

These additional inspection and permit costs totaled [BEGIN CONFIDENTIAL] 997

[END CONFIDENTIAL]. AG Ex. 1.23 includes the response to DR AG 5.04(f). 998

Q. WHAT IS YOUR ASSESSMENT OF THIS PROJECT COST INCREASE? 999

A. This project is beset by multiple problems. First, it appears that either a scheduling 1000

problem or field construction problem delayed completion of the project in 2017, therefore 1001

requiring a duplication of effort and materials to return part of the old main into service 1002

again temporarily before the start of the winter season of 2017-2018. The remainder of the 1003

project was then restarted and completed in 2018, which resulted in significantly higher 1004

costs. 1005

Second, it appears that the Company encountered water and sewer lines at locations which 1006

it did not expect. The Company stated that it relied on information provided by the City of 1007

Elmhurst. Although additional fittings and materials were needed to work around the 1008

water and sewer lines, it is not known how significant this additional cost was. 1009




53

Third, the Company stated that, as part of the work permit requirements, the City of 1010

Elmhurst required paving of the entire street, daily street sweeping and digital sign boards 1011

around the project, which increased the cost of the project. It is unknown why the 1012

Company did not anticipate these costs in its original cost estimate given that such 1013

information would be easily determined by consulting the city’s permit department during 1014

the project design and cost estimating phase. 1015

Fourth, the Company decided to use contracted inspection services to inspect the pipeline 1016

construction work instead of its own employees. This increased the cost of the project, but 1017

the Company did not state why this change and additional cost were necessary. 1018

In conclusion, this series of events seems to emanate from poor planning and execution of 1019

the project. The incremental costs do not appear to be prudently incurred. Therefore, it is 1020

not reasonable to burden customers with incremental costs that the Company could have 1021

avoided or significantly minimized through better planning and execution of the project. I 1022

recommend that the Commission disallow [BEGIN CONFIDENTIAL] [END 1023

CONFIDENTIAL] from the 2018 QIP capital expenditures in this reconciliation case.29 1024

Q. WHAT IS TOTAL DISALLOWANCE FOR THE 7 CHANGE ORDERS YOU 1025

HAVE DISCUSSED ABOVE? 1026

A. The total capital expenditures disallowance for the other seven change orders is 1027

$2,438,934. Based on the information provided by the Company in response to data 1028

request AG 5.04(j) (AG Ex. 1.23) and the months when the incremental costs were 1029

29 In its response to DR AG 5.04(j), the Company reported the lower amount of $1,280,000 being charged

to 2018 QIP construction costs rather than the $1,610,000 shown in the change order.




54

incurred, I have calculated a Rider QIP surcharge adjustment of $96,141. The calculation 1030

of the surcharge adjustment was determined using the Company’s financial model and is 1031

shown in AG Ex. 1.32. 1032

Q. WHAT ARE YOUR OVERALL CONCLUSION AND RECOMMENDATION 1033

WITH REGARD TO THE 12 CHANGE ORDERS YOU HAVE DISCUSSED 1034

ABOVE? 1035

A. As discussed in detail above, the Company made several imprudent decisions in the 1036

planning and execution of the 2018 Rider QIP capital projects that resulted in higher 1037

construction costs. My review of the hundreds of documents pertaining to the 60 change 1038

orders provided by the Company determined that 12 projects had cost increases which 1039

were not prudently incurred. The total amount of capital expenditures pertaining to those 1040

12 change orders is $7,995,208. Customers should not pay for those costs. 1041

Therefore, I recommend the Commission remove the $7,995,208 from the 2018 QIP 1042

capital expenditures and order the Company to refund to customers the related surcharge 1043

revenue of $353,090 billed during 2018. 1044

VIII. ACCEPTANCE OF HIGHER COST BIDS 1045

Q. PLEASE DESCRIBE WHAT ISSUES YOU DISCOVERED IN YOUR REVIEW OF 1046

CONTRACTOR BIDS FOR QIP PROJECTS. 1047

A. In response to data request AG 4.20, the Company provided documents showing the 1048

evaluation results of project bids received from contractors bidding on major projects 1049




55

completed in 2018.30 In my review of the bid evaluation documents, I discovered four 1050

situations where the Company accepted higher cost bids without adequate evidence that the 1051

decision was justified by the available information. The acceptance of the higher cost bids 1052

increased the construction cost of the projects by $5,219,618. These costs were 1053

imprudently incurred and should be removed from the 2018 QIP capital expenditures in 1054

this reconciliation case. 1055

I will discuss each of the four situations separately below. 1056

A. Aux Sable Pipeline Replacement (Phases 6 & 7) 1057

Q. PLEASE DESCRIBE THE BID EVALUATION RESULTS FOR PHASES 6 AND 7 1058

OF THE AUX SABLE PIPELINE REPLACEMENT PROJECT. 1059

A. Based on the information that the Company provided in Exhibit 4 CONF to the response to 1060

data request AG 4.20, the Company received four acceptable bids from contractors for 1061

construction of Phase 6 and 7 of the Aux Sable Pipeline.31 The bid evaluation documents 1062

provided by the Company shows the lump sum cost bids ranged from [BEGIN 1063

CONFIDENTIAL] 1064

[END 1065

CONFIDENTIAL] 1066

The Company uses a scorecard approach to evaluate bids that in addition to price considers 1067

construction capability of the contractor, strength of the proposal, safety record, supplier 1068

30 AG Ex. 1.33 CONF.

31 According to Nicor Gas, a fifth contractor bid did not advance to the second stage of bid evaluation.




56

diversity and acceptance of contract terms. The comparative scorecard shows that 1069


1071

1072

. 1073

1074

1075

1076

y 1077

1078

1079

1080

1081

1082

1083

1084

1085

[END CONFIDENTIAL] AG Ex. 1.33 CONF includes DR AG 1086

4.20 and Exhibit 4 CONF showing the scorecard and related information. 1087

The Company tried to explain these inconsistencies in its response to data request AG 1088

5.23(e) by stating that [BEGIN CONFIDENTIAL] 1089

32 Nicor Gas response to DR AG 4.21(b).




57

1090

1091

1092

1093

1094

1095

[END 1096

CONFIDENTIAL] AG Ex. 1.34 CONF includes the response to DR AG 5.23(e) CONF. 1097

Q. WHAT ARE YOUR CONCLUSION AND RECOMMENDATION? 1098

A. Nicor Gas did not perform a fair and reasonable evaluation of the construction bids it 1099

received [BEGIN CONFIDENTIAL] 1100

1101

1102

1103

1104

1105

1106

. [END 1107

CONFIDENTIAL] I recommend that the Commission disallow this higher cost from the 1108

2018 QIP capital expenditures proposed for recovery by the Company. 1109




58

B. Paving Restoration Zone 2 (Crestwood and Glenwood) 1110

Q. PLEASE DESCRIBE THE BID EVALUATION RESULTS FOR PAVING 1111

RESTORATION WORK IN ZONE 2. 1112

A. In response to Staff data request MEM 1.02 and attached Exhibit 13 Appendix B CONF, 1113

page 4, the Company provided the results of its request for proposal (“RFP”) for paving 1114

restoration work in Zone 2 in the Crestwood and Glenwood area. The RFP was for a 1115

multi-year contract spanning from 2017 to 2021. The Company received three cost bids. 1116


1118

1119

[END 1120

CONFIDENTIAL] AG Ex. 1.35 CONF includes the response to data request MEM 1.02, 1121

the bids received, and the bid evaluation scorecard. 1122

In data request AG 4.22 CONF, the Company was asked to explain why [BEGIN 1123

CONFIDENTIAL] 1124

1125

1126

1127

1128

1129

. 1130




59

1131

1132

1133

1134

1135

[END CONFIDENTIAL] In the 1136

response, the Company stated that there were differences between estimated and actual 1137

work performed. No further details were provided as to what specifically changed and 1138

why. AG Ex. 1.35 CONF includes the responses to DR AG 4.22 CONF and AG 5.25 1139

CONF. 1140


A. Once more, Nicor Gas did not perform a fair and reasonable evaluation of the cost bids it 1142

received. [BEGIN CONFIDENTIAL] 1143

1144

1145

1146

1147

1148

1149

33

.




60

1150

1151

[END 1152

CONFIDENTIAL] 1153

C. Paving Restoration Zone 3 (Bloomington, Etc.) 1154





restoration work in Zone 3 in the Bloomington, Kankakee, Ottawa and Paxton area. The 1159

RFP was for a multi-year contract spanning from 2017 to 2021. [BEGIN 1160

CONFIDENTIAL] 1161

1162

1163

1164

1165

1166

1167

. [END CONFIDENTIAL] AG Ex. 1.36 CONF includes the bid 1168

evaluation document, the responses to DR AG 4.23 CONF and AG 5.26 conf. 1169




61

The contract was awarded to [BEGIN CONFIDENTIAL] 1170

1171

1172

1173

[END CONFIDENTIAL] In the response, 1174

the Company stated that there were differences between estimated and actual work 1175

performed. No further details were provided as to what specifically changed and why. 1176


A. From the conflicting information provided in the responses to the data requests and the 1178

information shown in the bid evaluation document, it is impossible to determine what 1179

actually occurred [BEGIN CONFIDENTIAL] 1180

1181

1182

1183

1184

1185

1186

1187

1188

1189

34

.




62

1190

1191

1192

1193

1194

1195

1196

1197


D. Paving Restoration Zone 6 (Crystal Lake, Etc.) 1199





restoration work in Zone 6 in the Crystal Lake, Elgin, Ingleside and Schaumburg area. 1204

The RFP was for a multi-year contract spanning from 2017 to 2021. The Company 1205

received four cost bids. [BEGIN CONFIDENTIAL] 1206

1207

1208

[END 1209




63

CONFIDENTIAL] AG Ex. 1.37 CONF includes the response to data request MEM 1.02, 1210

the bids received, and the bid evaluation scorecard. 1211

In data request AG 4.24 CONF, the Company was asked to explain why [BEGIN 1212

CONFIDENTIAL] 1213

1214

1215

1216

1217

1218

1219

1220

1221

1222

1223

[END CONFIDENTIAL] AG 1224

Ex. 1.37 CONF includes the responses to DR AG 4.24 CONF and AG 5.27 CONF. 1225


A. The discussion above shows how Nicor Gas [BEGIN CONFIDENTIAL] 1227

1228

1229

1230

1231




64

1232

1233

1234

1235

1236

1237


E. Summary 1239

Q. PLEASE SUMMARIZE THE QIP CAPITAL EXPENDITURES AND RIDER QIP 1240

SURCHARGE REVENUE ADJUSTMENTS THAT YOU RECOMMEND FOR BIDS 1241

ACCEPTED OVER LOWER BIDS. 1242

A. From the analysis shown above, it is evident that the Company does not have a consistent 1243

and transparent process of selecting construction bids. The Company’s current approach 1244

has resulted in higher construction costs which the Company seeks to recover through the 1245

Rider QIP and ultimately in base rates. The Commission should instruct the Company to 1246

be better disciplined, and revamp its bid evaluation and acceptance procedures in order to 1247

avoid incurring higher construction costs. 1248

In total for the above four bid contracts, I recommend the Commission should remove 1249

$5,219,618 from the QIP capital expenditures, and $270,707 of related surcharge revenue 1250

from the 2018 Rider QIP reconciliation. 1251




65

IX. PROJECTS NOT BID OUT 1252

Q. PLEASE DISCUSS THE 2018 CAPITAL EXPENDITURES FOR QIP PROJECTS 1253

THAT WERE AND WERE NOT BID OUT TO MULTIPLE CONTRACTORS. 1254

A. In response to data request AG 4.20 and the attached Exhibit 1, the Company provided 1255

information showing that of the 725 projects completed in 2018 at a total cost of $354.1 1256

million, only 6 projects were bid out, representing a total cost of $109.7 million. The 1257

remaining projects at a cost of $244.5 million representing 69% of the total capital 1258

expenditures incurred during 2018 were not bid out and were completed under blanket 1259

contracts or the alliance agreement that the Company has with Northern Pipeline Company 1260

(“NPL”). Of the $244.5 million work not bid out, $143.7 million represents 66 projects 1261

with a cost of $1 million or greater, including a project for $23 million to replace copper 1262

services under a blanket contract.35 1263

Q. WHAT WORK WAS DONE UNDER BLANKET AGREEMENTS, AND AT WHAT 1264

COST? 1265

In 2018, NPL billed the Company $85.8 million for a variety of projects under its alliance 1266

blanket contract which was last bid out 13 years ago in 2005. Other blanket contracts with 1267

major contractors, such as KS Energy, were last bid out in 2014. Blanket contracts with 1268

smaller contracts for paving and restoration work were last bid out in 2017 for a five-year 1269

period, as discussed earlier in my testimony. AG Ex.1.39 includes DR AG 5.06 which 1270

provides additional details. 1271

35 AG Ex. 1.33.




66

Q. DID THE COMPANY ATTEMPT TO EXPLAIN ITS FAILURE TO BID OUT 1272

MORE THAN SIX 2018 PROJECTS? 1273

A. In response to data request AG 3.11, the Company attempts to justify its practice of not 1274

bidding out more projects by stating that historically it has developed three primary 1275

methodologies to drive competitive labor pricing and deliver superior quality and safety. 1276

According to the Company, the first approach is to competitively bid unique and distinct 1277

projects with a defined scope and completion date. This approach supposedly covers the 6 1278

projects identified earlier that the Company bid out for work completed in 2018. 1279

The second approach is to use blanket contracts for repetitive work with competitive 1280

contractor markets and lower risk profiles. According to the Company this work is 1281

competitively bid under 3 to 5-year contract terms to allow for a consistent work product. 1282

The Company defines competitive markets as the presence of multiple suppliers who can 1283

perform this type of work. It also defines low risk profiles as work that is not specialized 1284

and not requiring unique technical skills. 1285

The third approach is for repetitive work with higher risk profiles and certain barriers to 1286

entry which the Company has decided to address by developing alliances with contractors, 1287

such as NPL. The Company defines high risk profile work as work requiring intimate 1288

knowledge of the specific natural gas system and the Company processes. It also defines 1289

barrier to entry as specialized work requiring a steep learning curve for any new supplier to 1290

match the quality and productivity of the previous supplier. AG Ex.1.17 includes DR AG 1291

3.11(c), and AG Ex. 1.39 includes DR AG 5.06, which provide additional details. 1292




67

The second and third approaches supposedly justify not bidding out 99% of the projects 1293

and 69% of all the capital expenditures billed by contractors for 2018 QIP program work. 1294

Q. WHAT IS YOUR ASSESSMENT OF THE COMPANY’S PROJECT BIDDING 1295

PRACTICES? 1296

A. Not competitively bidding hundreds of millions of dollars of construction work should not 1297

be an acceptable practice, irrespective of the explanations and approaches articulated by 1298

the Company, or any modest amount of savings that the alliance with NPL may have 1299

generated. 1300

Repetitive work such as relocating meters, replacing service lines and distribution mains is 1301

not work that should be restricted to only one or two contractors under multi-year blanket 1302

contracts. There are dozens of utility contractors that perform this type of work nationally 1303

and regionally in the U.S. Nicor Gas’s gas distribution system is not unique among 1304

utilities in the U.S. The best work practices used by NPL, KS Energy and other major 1305

contractors used by Nicor Gas under blanket contracts are rather common among other 1306

contractors. Therefore, the justification that the work completed under blanket contracts is 1307

somehow highly specialized with a steep learning curve for any new contractors is a red 1308

herring and unsupported speculation. 1309

Although it may be not practical to bid out every work project, larger projects of at least $1 1310

million in value or larger, whether repetitive or not, should be bid out routinely. Even 1311

smaller projects down to a value of $100,000 could be bundled in a bid package and issued 1312

to several contractors for requests for proposal. Only through a competitive bidding 1313

process can there be assurance that the Company is not overpaying for work completed by 1314




68

contractors. Unfortunately, as we have seen with the high contractor costs incurred to 1315

replace copper services in section VI of my testimony, there is clear evidence that the 1316

Company may be paying more for contractor work than it should. 1317


A. As discussed above, the Company bid out only a small fraction of the QIP work completed 1319

in 2018. The Company’s justification for not bidding out a much larger portion of this 1320

work is not credible. There is also evidence that work completed under blanket contracts, 1321

such as service line replacements, is much more costly than work completed by Company 1322

employees. This is a clear indication that work completed under blanket contracts, which 1323

have not bid out in years, may no longer be competitively priced. 1324

Furthermore, and equally troubling, the Company has granted construction work to 1325

contractors when those contractors’ bids were significantly higher than the lowest bidder, 1326

and the lowest bidder was equally, if not more, qualified than the selected contractor. 1327

I recommend that the Commission require that in future Rider QIP reconciliations, the 1328

Company identify all capital projects that were competitively bid, the bids considered and 1329

selected, and if capital projects of at least $250,000 in value were not competitively bid 1330

individually or combined with other projects, explain and justify why not. The 1331

exceptionally large capital expenditures incurred under the Rider QIP program require that 1332

the Company enter in competitively bid construction contracts to ensure that capital 1333

additions are prudent and reasonable. 1334

1335




69

X. LACK OF CONTRACTOR AUDITS 1336

Q. PLEASE DISCUSS WHETHER THE COMPANY ROUTINELY PERFORMS 1337

AUDITS OF CONTRACTOR INVOICED COSTS AND CONDUCTS 1338

CONTRACTOR PERFORMANCE REVIEWS. 1339

A. In data request AG 4.20, the Company was asked to provide copies of operational audits 1340

performed for amounts billed by contractors for costs included in the 2018 QIP program. 1341

The Company was also asked to provide copies of scorecards or performance reviews of 1342

work performed by contractors during 2018. In a subsequent data request AG 5.23, the 1343

Company was asked to provide the amount of performance incentives paid for superior 1344

performance or penalties assessed for underperformance by its contractors. 1345

In response to those data requests, the Company stated that it did not perform any specific 1346

audits of costs invoiced by contractors in 2018 and pointed to general internal controls and 1347

compliance procedures for assurances.36 1348

With regard to contractor performance reviews, the Company provided 15 performance 1349

reports on some of its contractors. Some of the performance reports show performance 1350

levels where incentive payments should have been made and others show under-1351

performance where penalties should have been assessed under the contracts. However, in 1352

response to DR AG 5.23(c), the Company stated that no performance incentive payments 1353

or penalties were included in the 2018 QIP program costs. This is somewhat surprising. 1354

No explanation was provided as to why. 1355

36 DR AG 5.23(a) included in AG Ex. 1.34 CONF.




70


A. The fact that the Company did not perform audits of the costs invoiced by major 1357

contractors during 2018 is concerning. The experience gained from other gas utilities in 1358

Illinois with a Rider QIP program has shown that audits performed of contractor invoices 1359

has uncovered millions of dollars of improper cost billings. 1360

For example, through audit of contractor billings, one utility discovered that certain 1361

contractors had overbilled for work performed on projects completed in 2014 and 2015. 1362

The audits found billing discrepancies and internal control failures relating to 13 1363

contractors. Some of the audit findings showed excessive mark-ups on subcontracted 1364

services, unsupported third-party charges, billings for more expensive open trenching work 1365

instead of actual directional drilling work performed, and unverified billing rates against 1366

approved contract rates. The audits recommended changes in the utility internal invoice 1367

review and approval procedures and other internal control processes. 37 1368

I recommend that the Commission direct the Company to perform annual audits of the 1369

amounts billed by any contractor who bills the Company at least $5 million for work 1370

performed during the annual QIP program. The absence of such audits in future Rider QIP 1371

reconciliations would be considered a failure to attest as to the reasonableness and 1372

prudency of the costs included in the QIP program. The audit should be performed by 1373

third party auditors who are independent of the Company and of the contractors. 1374

37 ICC Docket No. 15-0209 AG-CUB Ex 1.0 at 10 and Docket No. 16-0197 AG-CUB Ex. 1.0 at 16.




71

Furthermore, the Company should be more transparent about the performance of its major 1375

contractors by reporting in the testimony filed with the annual Rider QIP reconciliation any 1376

under performance by its major construction contractors and the total incentive payments 1377

made and penalties assessed to all its contractors. 1378

XI. EXCLUSION OF GAS STORAGE INFRASTRUCTURE COSTS 1379

Q. PLEASE DISCUSS WHY GAS STORAGE INFRASTRUCTURE COSTS SHOULD 1380

NOT BE INCLUDED IN THE RIDER QIP PROGRAM. 1381

A. In this reconciliation and other recent Rider QIP reconciliations, the Company has 1382

included the cost of reworking gas wells, replacing storage gas lines that move gas from 1383

compressor stations to the storage wells, replacing or upgrading compressors and 1384

compressor stations, replacing and upgrading storage measuring and regulating 1385

equipment, and gas storage heaters and other gas conditioning equipment. For 2018, these 1386

capital expenditures were approximately $49 million. 1387

Although I am not a lawyer and I am not rendering a legal opinion, a literal reading of the 1388

statute that authorized the Rider QIP does not refer to gas storage infrastructure as being 1389

“qualifying infrastructure plant.” The reference to qualifying infrastructure plant seems 1390

limited to distribution and high-pressure transmission plant. It appears that the Company 1391

has expanded this definition to include gas storage plant. 1392

When comparing the text of the Rider 32 Qualified Infrastructure Plant in Nicor Gas’s 1393

tariff to the text of the Rider QIP tariff of Peoples Gas Light and Coke Company (“PGL”) 1394




72

there are some telling differences. For example, Nicor Gas has included a definition of 1395

High-Pressure Transmission Pipelines which includes facilities for compression, 1396

conditioning, and storage field and gathering system appurtenances. The PGL QIP does 1397

not have a definition for High-Pressure Transmission Pipelines at all, much less the 1398

inclusion of storage-related facilities. It appears that PGL uses the more literal definition 1399

of high-pressure transmission pipelines included in Sec. 9-220.3(5) of the Public Utility 1400

Act. Although PGL has also storage facilities, it does not include any capital expenditures 1401

for those facilities in its Rider QIP program cost reconciliation. 1402


A. My conclusion is that storage-related capital expenditures were never intended to be 1404

included in the Rider QIP program and the Company has expanded the definition of 1405

Qualifying Infrastructure Plant beyond its intended purpose. 1406

Therefore, I recommend that the Commission direct the Company to exclude gas storage 1407

related plant additions and retirements from future Rider QIP plans and reconciliations. 1408

XII. OTHER OBSERVATIONS 1409

Q. DO YOU HAVE ANY OTHER OBSERVATIONS YOU WANT TO MAKE WITH 1410

REGARD TO THE COMPANY’S 2018 RIDER QIP RECONCILIATION FILING? 1411

A. From reviewing Nicor Gas Ex. 1.0 and 2.0, it is readily apparent that the Company 1412

provided no useful information about the infrastructure replacement or upgrade projects 1413

completed during 2018. The testimony and exhibits of Mr. Kim and Mr. Whiteside do not 1414

identify any specific 2018 projects as qualifying infrastructure plant under each of the 1415




73

major qualifying plant categories as described in the statute, or address whether the 1416

projects were selected and prioritized to improve public safety and reliability. The 1417

testimony is devoid of any explanation of major variances in the cost of the major projects 1418

completed in comparison to the plan filed with the Commission. The testimony also lacks 1419

any explanation about projects that had been planned, were later deferred and not 1420

completed in 2018. Neither Mr. Kim nor Mr. Whiteside address the number and amount 1421

of change orders affecting capital expenditures for 2018, or explain any of the major cost 1422

change orders. 1423

It would be reasonable to expect Company management to describe the major projects 1424

completed during the reconciliation year and justify major cost increases, as well as other 1425

major project changes from the plan filed with the Commission, and explain why the 1426

Company decided to pursue new projects and defer other previously planned projects. 1427

Unfortunately, the QIP reconciliation filing gives the appearance of a perfunctory filing to 1428

simply reconcile the Rider QIP revenue billed to the revenue recoverable. 1429

I recommend that the Commission direct the Company that in future Rider QIP 1430

reconciliation filings include testimony and other exhibits to provide thorough 1431

explanations of (1) the major projects completed during the Rider QIP reconciliation year; 1432

(2) any significant variance of 10% or greater in the cost of the major projects completed 1433

during the year in comparison to the plan filed with the Commission; (3) QIP projects that 1434

had been planned for the year, but were later deferred and not completed, as well as new 1435

projects added that were not initially planned; (4) the number and amount of change 1436

orders affecting capital expenditures for QIP projects and an explanation of the more 1437




74

significant cost change orders exceeding $250,000; (5) how the Company prioritized the 1438

projects for public safety and reliability; and (6) other useful information that justify 1439

undertaking the QIP projects completed during the reconciliation year. 1440

Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 1441

A. Yes. However, I reserve the right to amend, revise or supplement my testimony to 1442

incorporate new information that may subsequently become available. 1443

Date post:	13-Oct-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

STATE OF ILLINOIS ILLINOIS COMMERCE COMMISSION · 4 AG Ex. 1.4 Nicor Gas Responses to DR MEM 1.03...

Documents