Facing a tightening pool of workers and a steady stream of urgent pipeline replacement projects in Allegheny County, Peoples Natural Gas is done relying on construction contractors.
In an unusual move, the North Shore-based natural gas utility this year is creating a new construction division and plans to hire 300 field workers, in addition to superintendents, managers, supervisors, technicians and engineers. Peoples is also purchasing its own vehicles, equipment and tools to outfit the unit.
The company disclosed its plan to phase out construction contractors with the state Public Utility Commission in revisions to its Long-Term Infrastructure Improvement Plan, which lays out five years of capital projects. The company has committed to invest roughly $120 million each year, on average, until 2020 to dig up and replace aging pipeline.
Peoples pays for the projects through a special surcharge, already approved by the PUC. The plan does not ask for a change in rates or an adjustment in the surcharge, and the company plans to make the shift to an in-house construction division without a need to raise more revenue.
A consistently staffed, in-house construction unit, the company said, will speed up construction timelines by allowing better coordination among project crews, which range from planning and design to restoring a site to its original look. In recent years, about 80 percent of such work at People has been performed by independent contractors.
Barry Kukovich, spokesman for Peoples, said the utility’s CEO Morgan O’Brien is a big driver behind the shift. He wanted greater oversight of projects and better quality control, uniformity and consistency across the board, Mr. Kukovich said.
The company is also competing with other utilities and larger natural gas pipeline projects throughout the Appalachian Basin, which is seeing a surge of activity due to Marcellus Shale drilling activity. That’s driving up labor costs.
“We’ve seen some of the contractors in high demand, and we pay the premium for the work,” Mr. Kukovich said. “You’re kind of at the mercy of the market.”
Columbia Gas of Pennsylvania, which has 421,000 customers across 26 counties, is facing the same pressures. The Canonsburg-based natural gas utility has blamed cost overruns partly due to rising labor costs. It recently asked state regulators to double the amount it can collect from customers to pay for projects or else it said it could be forced to hike base rates more often.
While that request is pending before the commission, Columbia on Friday filed a request to raise residential base rates by 12 percent. The company hopes to generate an additional revenue of $55 million annually.
But the rising labor costs aren’t tied to Columbia’s use of contractors, said spokeswoman Jennifer DuBois. Columbia Gas of Pennsylvania, one of six gas utilities across six states owned by Indiana-based NiSource Inc., uses its parent company’s purchasing power and uses contractor crews as an “on-demand” workforce, she said.
“Industry best practices recommend the use of contract crews for this type of program,” Ms. DuBois said. “The use of contractors allows us to flex our crew requirements based on the season and weather-related events,” she said, estimating that at peak season the company will bring on as many as 115 construction and restoration contract companies employing 800 workers.
She added, “We can easily scale down in the winter and quickly ramp up for spring, summer and fall.”
That flexibility is one reason so few utilities decide to employ full-time workers themselves, said Mark Bridgers, a principal at Raleigh-based Continuum Capital, a consulting firm that works with both utilities and pipeline contractors to most efficiently complete capital projects.
“The logic is absolutely there, if you’re sitting in Peoples’ seat,” Mr. Bridgers said. “Why would we — if we know we’re going to do the work — why would we subject ourselves to the vagaries of the marketplace? Why not just control it?”
But more control over a labor force, he said, comes with challenges. During any given 12-month period, a utility’s revenue is hit with the unexpected — such as the significantly warmer winter season this year, he said.
With a contracted workforce, “that entire cost goes away during that time period” utilities are getting their income in line.
Plus, contractors are by design much more aggressive at managing costs, Mr. Bridgers said.
“In the contractor world, a contractor that is inefficient, has high costs, has poor performance, will die. They will not be allowed to survive,” he said.
Under Peoples’ plan, the company estimates the construction season will run 10 months — from March to December. To account for the seasonality, pay and benefits for 10 months of construction work will be paid across a 12-month period, according to the company’s filing.
Some of those workers could also fill in on operations and maintenance calls if needed, the filing said.
Mr. Kukovich said an in-house construction unit isn’t for every utility. The majority of Peoples’ gas distribution network is underground below Pittsburgh and surrounding Allegheny County — an area to which the utility is shifting focus.
If Peoples’ system were more widely dispersed, it might not make sense to house a construction unit in the company. Peoples provides natural gas distribution service to about 640,000 customers in 16 counties.
Among replacement projects in the more densely populated areas, Peoples is planning to remove 110 miles of duplicative pipeline formerly owned by Equitable Gas, which Peoples acquired in 2013. That removal will save ratepayers $130 million in avoided costs of replacement, Mr. Kukovich said.
Daniel Moore: dmoore@post-gazette.com, 412-263-2743 and Twitter @PGdanielmoore.
First Published: March 22, 2016, 1:28 p.m.
