$2.5 million for steam? Allegheny County pact with Peoples raises costs, contracting questions

The county had concerns about heating costs and says it found a better — though more expensive — alternative.

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The City-County Building, on Grant Street, in Downtown Pittsburgh. The city and county are taking different directions in planning to heat Downtown buildings in the future. (Photo by Jay Manning/PublicSource)

The City-County Building, on Grant Street, in Downtown Pittsburgh. The city and county are taking different directions in planning to heat Downtown buildings in the future. (Photo by Jay Manning/PublicSource)

Allegheny County’s bill to heat seven of its biggest buildings is expected to rise under a contract with Peoples Natural Gas, as the county prepares to abandon a cooperative Downtown steam system, following a contracting process that some officials now question.

The county is the anchor member of the 37-year-old nonprofit cooperative Pittsburgh Allegheny County Thermal [PACT] system that heats 47 Downtown buildings via a steam plant and a century-old network of pipes. But county officials have long mulled alternatives to PACT.

In early 2017, the county, City of Pittsburgh and Sports and Exhibition Authority [SEA] — all members of PACT — invited companies to submit proposed alternatives to PACT. Six firms responded, and the county, city and SEA entered into extensive talks with one of them, now Clearway Energy Inc.

But in November 2019, the county — acting alone and without conducting any further competitive process — inked a 121-page contract with Peoples based on the 2017 proposal. Taxpayers will be on the hook for around $2.5 million a year, and likely more later in the 20-year contract term — a cost higher than the $2.1 million the county paid for steam last winter.

In a July interview, County Manager William McKain said his decision to pull the county out of PACT and select Peoples, despite initial higher costs, is “an investment” and “a good match and a good deal for Allegheny County and its taxpayers.”

Told of the contract, county Councilman Sam DeMarco, a North Fayette Republican elected at-large, said the county might be able to justify paying more. “I can understand the county’s wanting to ensure their access to heating that is efficient and reliable,” he said. “I’ll be asking the county for justification on the increase in costs.”

"Without a doubt," the county should have conducted a new competitive process, said county Controller Chelsa Wagner, a Democrat. Picking Peoples, in late 2019, based on proposals submitted 2 ½ years earlier, was legal, but "not the best way to go about things for transparency or for our ability to ensure that we're getting a good deal."

Major takeaways

  • Allegheny County has long chafed at high steam costs.
  • Dissatisfied with a “complicated” plan for shared steam heat, the county picked Peoples Natural Gas to build a separate system.
  • The deal with Peoples, though, was based on a 2 ½-year-old proposal, and is likely to raise steam costs, for now.

An old concept renewed

Sharing steam is nothing new, but the concept of cooperatively warming multiple buildings has been heating up in recent years. So-called “district heat” is a component of the “district energy” movement, which holds that providing heat, cooling or power “from a central plant requires less fuel and displaces the need to install separate” systems in each building, as the Washington, D.C.-based nonprofit Environmental and Energy Study Institute puts it.

Denmark, for instance, bills itself as one of the most energy efficient countries in part because of the provision of “district heating” to more than half of its households. Cities like Duluth, Minn., are upgrading aging shared steam systems.

Mayor Bill Peduto is "a huge supporter of district energy," and the city is working with the government of Denmark to import ideas for improving and expanding district energy, wrote city spokesman Timothy McNulty in an email.

The city isn’t starting from scratch.

Underlying Downtown is a network of pipes built to carry steam from boilers near the Clemente Bridge to more than 100 buildings. PACT was created in 1983 to run the system. It had 102 members in 1992, 56 in 2012, and 43 — with 47 total facilities — now. That includes most of Grant Street’s edifices and buildings from the eastern edge of the Cultural District to the borders of Point State Park.

The Pittsburgh Allegheny County Thermal building and smokestack Downtown. Photo by Jay Manning PublicSource

The Pittsburgh Allegheny County Thermal building and smokestack Downtown. (Photo by Jay Manning/PublicSource)

PACT officials have said the system needs "significant investment" and upgrades. McKain has, this year, expressed concern about the deterioration of its steam pipes and the tunnels they run through.

The county is PACT’s largest user, taking around 27% to 30% of its steam, according to PACT Operations Manager Timothy O’Brien. The county’s payments also make up more than one-quarter of PACT’s revenue. After paying $2.1 million to PACT during the 2019-20 heating season, the county budgeted for $2.3 million in payments for the coming winter’s steam, according to the controller’s office.

The county, though, has long been an unhappy client. A 2013 county controller’s office audit found that PACT gave a handful of its buildings “preferential steam rates," without approval of the collective's board.

In January 2017, the county, city and SEA jointly invited companies to submit proposals for a new district steam supply system for eight public buildings, from the jail, down Grant Street and to the David L. Lawrence Convention Center, plus potentially other, unspecified Downtown facilities. Their request for proposals [RFP] said the three governments would judge the respondents based on their proposed costs and timeframes for implementing plans, plus their experience, the completeness of their proposals and any “other enhancements” they might offer.

The plan was to pick a winner by March 17, 2017.

The county, city and SEA got six responses, according to McKain, and eventually picked two finalists: Peoples (since March part of Bryn Mawr-based Essential Utilities), and NRG Energy, which in 2018 became part of Princeton, N.J.-based Clearway Energy Inc.

DeMarco said he supported the effort. “I was concerned about the aging infrastructure, as evidenced by all of the [steam] leaks that any casual observer can see walking in Downtown Pittsburgh while the heating system is on,” he said.

The three governments initially agreed to enter into discussions with NRG, according to McKain. The company, which specializes in infrastructure investments, knew the terrain. It had been talking with PACT, about a potential partnership, since 2016. Through 2018, the county, city and SEA talked with NRG and then Clearway, said McKain.

But Clearway’s proposal “just had too many hurdles both financially, and perhaps operationally,” he said. “They had so many different entities engaged.” Its plans to dig up streets and recreate a large-scale system “became what I thought was too complicated, too expensive.”


Update (8/6/20): Clearway Energy Inc. released a statement indicating that it "would welcome the opportunity to respond to another RFP [request for proposal]" to provide steam to Allegheny County's office buildings and the jail. ... Our solution would provide budget predictability by eliminating all cost risks associated with the initial project construction and long-term operating and maintenance."

Ali Karvar, East Region general manager and vice president of Clearway's Energy Center Pittsburgh, also said in the statement that if his company's proposal to replace Downtown's shared steam heating system is accepted by the nonprofit Pittsburgh Allegheny County Thermal cooperative, "steam rates will likely increase 25-35% for customers currently on the system due to the infrastructure challenges that PACT is facing." If PACT accepts its proposal, Clearway plans to rehabilitate and use a small portion of PACT's boiler and pipe system, according to the statement, and build a "new Clearway Downtown District Energy System." Karvar said in the statement: "We believe Clearway offers the only economic solution for remaining PACT customers, who otherwise would be compelled to earmark large amounts of capital for heating needs."


No new process

The city, along with PACT, continued to talk with Clearway. The county, though, turned to Peoples.

“In talking to our Law Department, they felt comfortable that I had the ability to negotiate with the finalists or any of the other participants” in the 2017 process, McKain said.

Wagner said the county’s code "doesn't completely preclude" McKain’s decision to make a deal with Peoples. But she added that picking a two-year-old proposal, which doesn’t entirely match the current job with the county alone, isn't in the best traditions of competitive procurement.

The decision to pick Peoples was "shrouded in secrecy, [based on] an RFP that isn't specific to this actual project, so you don't even have parameters through which it could be measured for efficiency and really the best bang for the buck for taxpayers," she said. Without a new competitive process, specific to the county, "We have no idea if the same entities would be bidding on it, nor do we have any idea on whether they might have been priced differently."

“In regards to the signing of the contract in 2019 based on submissions in 2017, I intend to look into it," DeMarco said. "Is there a reason why we didn’t go back out to bid, or was it just that the negotiations took so long?"

In November, McKain and since-departed Peoples CEO Morgan O’Brien signed a contract under which Peoples is to construct, maintain, operate and fuel 16 boilers to heat the County Courthouse, City-County Building, County Office Building, Pittsburgh Municipal Court, Family Court Building, Health Department Administration Building and Allegheny County Jail, plus provide hot water to the jail. Peoples gets at least $137,690 per month to cover construction costs of the boilers and system — an amount that will continue and increase repeatedly over 20 years — plus reimbursement for operations expenses and fuel costs.

Outside of the Allegheny County Jail building

The Allegheny County Jail will get its heat and hot water through Peoples Natural Gas under a contract the county signed in late 2019. (Photo by Ryan Loew/PublicSource)

The controller’s office has estimated the initial cost of the Peoples contract at $2.5 million a year. That’s consistent with figures in emails between county officials and Peoples, obtained by PublicSource through a Right-to-Know request. In those emails, Peoples warned the county that the operations cost figure "has not been updated since our proposal" and likely "will not reflect accurately the operations costs.”

“I won’t really know the final, final costs until the end of the year,” for the Downtown parts of the system, and it’ll be another year before the costs of the jail boilers are finalized, McKain said.

Though he confirmed that Peoples’ steam will initially cost more, McKain said that if the county stayed with PACT, it would eventually get burned. “Because of the lack of investment over decades with PACT, as well as the deferred maintenance, we knew that we were going to have to probably, perhaps, pay more than we do now.”

PACT’s Timothy O’Brien — no known relation to Morgan — disputed McKain’s suggestion that PACT’s prices will surge. "We will continue to always be competitive to whatever the county would probably end up paying” to Peoples, he said.

Competition at the airport

While the county chose its partner based on 2017 proposals, the Allegheny County Airport Authority held a competitive process to pick a contractor to power Pittsburgh International Airport.

The authority decided to build a gas-and-solar-powered electrical system on its property, and in May 2018 asked companies to submit their qualifications. Sixteen companies submitted, of which eight were invited to produce full proposals. Six of those did so.

"At least in that airport process, you can follow it," said Wagner. "You can then analyze and get data that will tell you why one was picked over the other."

Peoples also won the Airport Authority contract. The company’s plan includes plenty of power for the airfield, mostly generated from natural gas drilled on airport land but some from solar power, explained Airport Authority spokesman Bob Kerlik.

Two professionals who were involved with proposals submitted to the Airport Authority, but did not prevail and did not want to be quoted, separately described it as a fair, or good, process.

McKain’s boss, Allegheny County Executive Rich Fitzgerald, a Democrat, appoints the Airport Authority’s board. McKain, though, said he hadn’t really followed the Airport Authority’s process. “Obviously, I run county government, and the Airport Authority is its own entity.”

Hope for PACT?

McKain said construction of the boiler system for the county’s Downtown buildings is underway, and the jail boilers are to be built next year. He said the county will “have a much better, reliable system as a stand-alone system” than it does with PACT.

The city, according to McNulty, "supports the county making decisions it believes are in the best interest of their constituents."

PACT, meanwhile, is planning for "life after the county," said O'Brien.

The county's departure is "a hit to the organization, but it is not an end point," he said. But if PACT were to fold, he warned, “there's 40-some other [Downtown] facilities that would have to install boilers” of their own, adding to the COVID-stricken office market’s "financial hardships."

The County Office Building, on Ross Street, Downtown Pittsburgh, is among the buildings that will soon be heated by Peoples Natural Gas, rather than Pittsburgh Allegheny County Thermal. (Photo by Jay Manning/PublicSource)

The County Office Building on Ross Street is among the buildings that will soon be heated by Peoples Natural Gas, rather than Pittsburgh Allegheny County Thermal. (Photo by Jay Manning/PublicSource)

To avert that, the cooperative is working to finalize, by autumn, plans which could include links to a system run by Clearway in Uptown. The company also runs a district steam network on the North Shore.

"If everything's joined together, you can run the system more effectively. You have multiple plants, you have resiliency," and you can achieve lower costs, O’Brien said.

He said that rather than give up on a century-old system, he’ll instead work to "make sure that district energy remains within this Downtown district for the next 100."

Rich Lord is PublicSource’s economic development reporter. He can be reached at rich@publicsource.org or on Twitter @richelord.

This story was fact-checked by Emma Folts.

Develop PGH has been made possible with funding from The Heinz Endowments.

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