COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE ON TRANSPORTATION AND PUBLIC UTILITIES - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, October 11, 2005 2:10 p.m. - - - RESOLUTION 050845 PRESENT: COUNCILMAN MICHAEL A. NUTTER, CHAIRMAN COUNCILMAN DARRELL L. CLARKE COUNCILMAN FRANK RIZZO COUNCILWOMAN DONNA REED MILLER COUNCILMAN JACK KELLY COUNCILMAN BRIAN O'NEILL COUNCILWOMAN JANNIE BLACKWELL Resolution No. 050845, Resolution authorizing City Council's Transportation and Public Utilities Committee to hold public hearings to discuss the impact of the proposed PGW 19.4 percent rate hike on the citizens... - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
Good afternoon, Ladies and Gentlemen. This is the Committee on Transportation and Public Utilities. We're going to take testimony regarding Resolution No. 7 050845. This is a resolution authorizing City Council's Transportation and Public Utilities Committee to hold public hearings to discuss the impact of the proposed PGW 19.4 percent rate hike on the citizens of Philadelphia and explore methods of providing resources and relief to those most severely affected by such a dramatic increase. I am Councilman Michael Nutter, Chair of the committee. Councilman Darrell Clarke is a member of the committee and is the sponsor of this resolution, which was introduced in Council on September 29, 2005. Participating and in attendance at today's hearing is Councilman Frank Rizzo. Councilman Clarke may have an 3 10/11/05 - TRANSPORTATION - RES. 050845 opening comment, and I may wish to make one comment myself, and then we will proceed with the testimony. Councilman Clarke.
Thank you, Mr. Chairman. Good afternoon. Mr. Chairman, first, I'd like to thank you for expediting this public hearing. We previously had scheduled to have it on Thursday, but because of the untimely demise of our colleague, we postponed it until today. This is actually a cause that I know where he's still with us. He will be right here asking some tough questions.
Councilman, one of the things that I was interested in today was, first of all, talking to representatives from PGW to talk about the basis for what I call, and I think most call, the dramatic increase in rates that subsequently was approved. We 4 10/11/05 - TRANSPORTATION - RES. 050845 anticipate that they will put on information that justifies that increase, but we will feel more comfortable having it in this particular public forum. Second, we have to figure out, I think, on a local basis. Although City Council has limited or no jurisdiction as it relates to rate increases, I think we have a responsibility to the citizens that we represent to talk about the impact and to come up with some solutions that help those of us in this ever-increasing or larger group of those of us who cannot afford to pay some of those exorbitant rates that are being thrust upon us, not only by PGW but some of the other utilities, some of the electric, some of the gas costs associated with vehicular situations. So we want to talk about some solutions today, and I think we have a pretty good group of people that can come up with some creative ideas. So with that, Mr. Chair, I pass 5 10/11/05 - TRANSPORTATION - RES. 050845 the mic back to you, sir.
Thank you, Councilman. My only opening comment is, there has certainly been a significant amount of attention, as appropriate, to the then-proposed and now approved 19.4 percent increase for PGW. I'm going to ask the first witnesses to come up to the table. I know there's what may have been a PowerPoint presentation. Mr. Hershey and Mr. Knudsen, is there written testimony? It's a part of the -- okay. Why don't you come up to the table. One of the issues I'm going to ask you to address in the course of your comments are to at least explain not only, as the Councilman's resolution 22 points out, why the significant size of increase, but also there have been press reports that indicate that at least one other utility, commonly known as PECO, 6 10/11/05 - TRANSPORTATION - RES. 050845 has proposed a gas cost hike but, at least as reported in the news accounts, of a significantly lesser amount, possibly I think I've read 3 percent. If you could please, in the course of your testimony, explain to us why PECO's proposed increase would be so much less than what PGW is proposing, in addition to everything else you want to tell us, that would be helpful. Please identify yourselves for the record.
Good afternoon, Councilmen. I'm Tom Knudsen. I'm President and CEO of the Philadelphia Gas Works, and we're pleased to be here today to testify before you as to our actions and why we felt they were necessary. I've passed out a set of charts and slides. I don't have prepared testimony in terms of written form, but we will talk to these slides, and I hope that will complete the picture for you. And to the point that you raised, we will 7 10/11/05 - TRANSPORTATION - RES. 050845 address the PECO question, as well as the fact that we have a substantial program at the ready, in fact starting this week, to address these concerns that we share with you about our customers' ability to pay. On of the handout, what we show there is the increase in the cost of gas as the commodity of gas, not our rates, but as the commodity of gas. And understand that this is a pass-through charge for us. We make no money. We make no profit on these amounts. But what this shows is that as little ago as August the 7th of 2002, we were paying $3.33 for a thousand cubic feet of gas, an MCF. Understand that the average home consumes about 100 MCF a year. So multiply that by 100. And the gas portion of someone's bill on average is about $333. Over the course of the last three years, this is how the commodity 8 10/11/05 - TRANSPORTATION - RES. 050845 charges that PGW is confronted with and has had to finance, this is the progression of those charges over this period of time.
Mr. Knudsen, let me mention one thing to you. And let me also take this moment to recognize another member of this committee, Councilwoman Donna Reed Miller. I don't mean to interrupt your testimony, but I think you're kind of doing it from a PowerPoint. And we're also joined by Councilman Jack Kelly. I have heard you in public and private sessions on any number of occasions try to explain that PGW does not make money from selling gas, and as much as I would certainly want to believe you and have no reason to doubt otherwise, you must understand that that could be a very difficult concept for any of the customers to understand. Since 9 10/11/05 - TRANSPORTATION - RES. 050845 you are Philadelphia Gas Works, the assumption is that you sell gas, and while you're a public utility, you may not, quote/unquote, make money, but certainly generate some additional revenues from it. So you don't necessarily need to explain it at the moment, but it would probably be helpful if we understood the businesses that you're in, what you actually make money from and what you don't, and why is it that you don't make any money from selling gas, because you must make some money from doing something.
We do. The reference to our not making money is with regard to the commodity portion of our bill. We have two pieces to the bill, the gas that flows through the pipes to the burner tip in everyone's home and then there is a series of charges that we have in our bills that pay for salaries, for interest on the debt, for supplies. That portion of the bill is essentially 10 10/11/05 - TRANSPORTATION - RES. 050845 then given a profit margin for most utilities. It is only on that portion of the bill that we essentially have a markup or a profit element. For these costs -- and that's why we have what's called a gas cost rate quarterly adjustment. These costs are essentially treated separately from all of our other charges, and it is on these costs that there is no markup, there is no profit made. So we're talking only about the gas flowing through the pipes.
So just to finish the thought on , what we see is a progression of charges to us by the pipelines by our suppliers for gas, and what we have is as late as September 28th, the cost per MCF, per thousand cubic feet, is $12.70. Now, these are wholesale natural gas prices in New York. What we have seen now is almost a 300 percent increase in the commodity charge that we are faced with. 11 10/11/05 - TRANSPORTATION - RES. 050845 Now, it's a very -- and I know we have Sonny Popowsky, who is from the Office of Consumer Advocate, is a recognized expert on these issues for Pennsylvania, having been in his position for many years, and I know he's going to speak to some of this, and there may be a slight amount of redundancy, but what I want to emphasize is that this is not a Philadelphia issue. This is not a Pennsylvania issue. This is a national issue. And what you see in the developments of particularly the last three bars on this chart are the consequences from the hurricanes of the last month or so.
Mr. Knudsen, hold on. I'm going to interrupt you. With respect to this being a national phenomenon, in terms of your purchase of commodities -- I want to ask the question as a lay person, because some of this I truly am in fact a lay 12 10/11/05 - TRANSPORTATION - RES. 050845 person -- are you saying that the cost of commodities is uniform across the board? Is there a process that allows PGW or other municipalities to purchase commodities at different levels, or are you saying the cost is regardless of whether there's spot purchasing or --
There are various ways that one can buy gas. This is not to suggest that the prices are uniform across the country, but the basic commodity cost, it is monitored at various places, and it is from a pool of gas that we buy our gas, and that basic cost is essentially the same. Now, if we buy gas more effectively, we may take advantage of a slight movement in prices if we purchase at that point versus another point. We take full advantage of whatever slight market conditions exist. But my point in this testimony is that the basic underlying cost of gas has been going up, and as best as we can, we have tried to 13 10/11/05 - TRANSPORTATION - RES. 050845 anticipate that and buy as effectively as we can, but ultimately we have to pay what the market is charging us. Now, one of the things I'd like to emphasize is that PGW has one of the best reputations of the eight local distribution companies in this state. We do one of the best jobs and have historically done one of the best jobs of buying gas economically. So these costs represent and these charges represent our very best effort, and amongst the best efforts in the state, to purchase gas.
Okay. And I only asked that question because you brought it to a national perspective. You're saying that PGW, and at least as it relates to the state in terms of comparables of your ability to purchase at a most effective rate, far surpass or is better than other municipalities or the eight -- what did you say?
Local 14 10/11/05 - TRANSPORTATION - RES. 050845 distribution companies.
Local distribution. What about on a tristate or multi-state area, or do you only compare with what's in Pennsylvania?
We only compare directly with our sister utilities in the State of Pennsylvania, because that's how we're regulated by the PUC. But I will assure you that we are quite competitive in terms of our purchasing around the area as well. I mean, we know generally what other people are paying for gas, and we're quite comfortable that we're doing a good job on that basis.
We can give you some comparative statistics on other utilities. 15 10/11/05 - TRANSPORTATION - RES. 050845
The national aspect of this, there are a number of reasons. Certainly the spike since August of this year when we were purchasing gas on the wholesale basis at something close to $8.61, the spike from $8 to $13 is a direct result of the supply interruption that came about as a result of both Katrina and Rita. There was a great deal of destruction of gas infrastructure in the Gulf region, and that is what we are now gradually -- and we'll see this over the next several months, prices will come down slowly as that infrastructure is repaired. So that spike from August until now is a direct result of those problems in the Gulf region. Prior to that, there is and has been a supply and demand imbalance over the last four, five years, since 2001 when prices really started to move up. 16 10/11/05 - TRANSPORTATION - RES. 050845 Let me be very brief about that and we'll go on to talk about the solution. The supply problem is that there are whole sections of the country that have gas reserves that are off limits for exploration and development, and those include both coasts, California and the Atlantic coast, the west coast of Florida, the Colorado Rockies or the Rocky Mountains and Alaska National Wildlife Reserve. It represents about 90 percent, I'm told, of what we think are available reserves in North America. Those fields are not being explored now for reasons of laws that were created and passed back in the '70s and '80s dealing with environmental issues. So we have a problem on the supply side with so much gas not being exploitable and not being explorable. On the demand side, what we have is an artificial, I believe, problem, and, that is, that in the 1990s, environmental laws were passed that 17 10/11/05 - TRANSPORTATION - RES. 050845 restricted the amount of pollution from electric generation. Well, the effect was that the utilities, the electric utilities, acting rationally could only use one source of fuel to meet the bulk of those requirements, and that was natural gas. So what you have is, since 1996 or '97, all of the incremental, the additional generation that's come on stream to supply electricity, has, by and large, been a gas requirement as opposed to oil or nuclear or anything else. That supply and demand problem is what has constrained the market, driven the prices up, and then we had Katrina and Rita on top of that. And I think Mr. Popowsky and other witnesses may address some of that. On , you asked for some comparatives, and let me address the PECO issue, Councilman Nutter. Utilities update their GCR's, their gas cost recovery, at various times during the 18 10/11/05 - TRANSPORTATION - RES. 050845 year. It happens to be that there are several of us in October, and you have the comparison of the filed-for rates in front of you there, PGW at $12.56 up to Equitable, which is $13.72. By the way, these four utilities represent Pittsburgh and Philadelphia. Now, to answer your question about PECO, PECO will file, I believe, next month or December 1st -- December 1st they will file for a substantial increase. They are on public record as saying so. So they will wait now until the 1st of December and then they will file. It happens to be that we are in the cycle where we are.
Can you explain then what the press reports mean when they say that PECO was only anticipating a 3 percent increase?
In most of the same stories that PGW was being 19 10/11/05 - TRANSPORTATION - RES. 050845 reported.
They filed on September 1st and that was a 3 percent increase.
Yes. And the problem that we faced that PECO doesn't is that we don't have a deep pocket. What we were confronted with was looking ahead for our cash flow purposes and saying, We don't have the money to buy the gas to deliver to the customer before the customer pays. PECO has substantial resources in Exelon and they can absorb this kind of delay. We could not. That's why I made the decision to seek this interim rate relief that the PUC has approved.
How does that relate to same , Peoples, 20 10/11/05 - TRANSPORTATION - RES. 050845 Columbia and Equitable? What would they be showing in their jurisdictions in terms of overall --
As I recall the numbers, they're in the to 30 percent 7 increase as well. 8
If you 9 could get that information, that would be 10 helpful. 11
We can supply 12 that information for you as well. 13 Absolutely. 14 So the point on is that 15 when you compare us to the other 16 utilities in the state that are filing in 17 the same context, in the same time frame, 18 we're right up there with them. In fact, 19 we happen to be the lowest at this point. 20 we basically talked about in terms of gas costs not being a pass-through. Let me assure you, Councilmen and Councilwoman, that were prices to break and come down, we will file as quickly as we can to pass that 21 10/11/05 - TRANSPORTATION - RES. 050845 benefit along. We have no interest in sustaining these rates at these levels for any period of time. Understand, we don't want these rates at these levels because of the fact that at these levels, people are challenged to pay and we're assuredly going to have folks who can't pay their bill and we will have an increase of bad debt associated with these incremental and larger bills. We don't want them. So the faster we can bring them down, the better. And I think the other issues there or the other points we've already made. The PUC did review this filing and they do scrutinize our gas costs on a regular basis, and as I say, we will make that adjustment. On , I included some comments from the PUC proceeding that approved our order just to give you a sense of how Vice-Chairman Cawley at that time as he looked at our filing was 22 10/11/05 - TRANSPORTATION - RES. 050845 responding. I think the important point is in the middle quotation, "Delay would only serve to magnify the price increase that will otherwise occur on December 1st, 2005." We sought the interim increase in order to help the company for sure, because we needed the additional cash flow to buy the gas in November and December that we're going to deliver and then charge for in January and February, but it is also, we feel, a benefit to the customer. Although it's an increase, it is not the sizable increase that we would have anticipated bringing to you and bringing to the customers on December 1st. It's kind of a gradual slide into the problem as opposed to leaving it where it was and then a huge spike. The other problem that we have is, I have no working capital other than that which we get from our customers, and we needed to get an additional $20 or $30 million, which this rate increase will 23 10/11/05 - TRANSPORTATION - RES. 050845 provide to us in the next six to eight weeks, in order to have the money to buy the gas. We have no working capital in the same sense that an investor-owned utility has. On --
Mr. Knudsen, I'm sorry, before you go into that, I will need to leave these chambers to take care of another Council-related matter. In my absence, as it is Councilman Clarke's resolution, I will leave him in the Chair to conduct the rest of the hearing. I will return. So please continue. Thank you.
Mr. Chairman, you had asked for a discussion about what we were doing. We have a number of major initiatives underway, and I'm going to ask Steve Hershey, who previously is with Community Legal Services and served in that capacity and is now our Vice-President of Community Initiatives.
Excuse me. Before we proceed, we had a couple of questions of you.
Thank you. This is just a very quick question. Do you have to go back to the PUC to do a price reduction?
Yes, we will. We have to file formally and get their approval to reduce our rates. I assure you that it will not be a problem.
Thank you. Hello, sir. You said something that's very interesting. You referred to 25 10/11/05 - TRANSPORTATION - RES. 050845 the PECO situation, deep pockets, Exelon Corporation. You indicated that you don't have that luxury.
So are you saying that a municipally-owned company will never be in a good financial situation? Are you telling me as a member of City Council that this may not be the best for the City of Philadelphia, being municipally owned, and you did refer to publicly owned? So could you just go over that with me one more time, because I think I heard something that interests me.
Well, as Council is aware, and I met with many of you personally and presented the company's position, over the last few years, we have made a substantial turnaround in both the operations of the company and in the financial outlook for the company. And when we could buy a thousand cubic 10/11/05 - TRANSPORTATION - RES. 050845 feet at $5, $6, $7 and we looked forward in time, we had the wherewithal to run the company, have the cash we needed at the appropriate time during the year, and we were looking forward to both paying the $45 million loan back, which Council was gracious enough in 2001 to grant us, as well as the reinstatement of the $18 million City payment in 2008. What I am saying to you is that when the price of the commodity shoots up from $6 or $7 or $8 in MCF to $13 or $14, that we do not have as much financial flexibility in that circumstance as we need. All right? And that was one of the reasons that I filed for the interim increase, was in order to essentially more closely match our purchasing and our collection for the gas. Now, to answer the spirit, I think, of your question, there is no 23 question that this kind of an increase in the cost of gas represents a threat to this municipality, because PGW must 27 10/11/05 - TRANSPORTATION - RES. 050845 collect from its customers or we will have to come back to the City Council for financial help sometime during the winter. That's why this conversation, that is why my seeking the interim rate relief, that is why what you're about to hear in terms of our efforts to both reach out to our customers to help them pay their bills and as well as advertise for conservation, why that is important and then, most importantly, why the recent statement by the Governor last Thursday that he is actively considering a state contribution to LIHEAP. All of those elements are extraordinarily important now for the future of PGW. And I am doing nothing with my time other than to manage our efforts toward the end of collecting enough money and getting enough money in our coffers this winter to make sure that PGW remains financially viable.
I don't see that situation honestly changing 28 10/11/05 - TRANSPORTATION - RES. 050845 drastically.
It will change. If the price of gas comes back down, and it very well may -- we see some softening now, and there's no doubt that as these rigs in the Gulf of Mexico come back on, you'll see a readjustment in the price of gas. If we can get it back down to the point where in our own forecasts, again gas in the $5, $6, $7, $8 range, we can be okay. We will be all right. It's just that we have this spike in gas costs that PGW as a municipal utility doesn't have the reserves to underwrite.
I know this is a difficult question for you to answer, but I'm going to ask it anyway. For years we've been hearing based on what you just described today, that this company is on the block, that there are people interested. Is there an active effort right now? Do you have people looking at the purchase of PGW, of the utilities, Exelon and others? 29 10/11/05 - TRANSPORTATION - RES. 050845
I am not aware of any utility at the present time actively thinking about acquiring PGW.
Yes. Just a quick question. I was listening to news the other day and the Governor apparently was calling on PUC to reconsider its decision. I think I heard that. And I was just wondering, can they?
Can the PUC reserve itself? It can, but it would be very unusual and very unlikely at this 30 10/11/05 - TRANSPORTATION - RES. 050845 point.
That's all I want to know. I heard it and I said, Whoa. They make a decision and they -- is there a time period --
What the Governor said was that he kind of wanted a moratorium on the PUC taking any further action with any other utilities, exempting us at the time, with any other utilities. It was more of a general statement.
It appears not, because we took the action of putting the rates in place, and the Governor understood that that was something we had to do. But the spirit of what he said was, before utilities ask for more money 31 10/11/05 - TRANSPORTATION - RES. 050845 from the customers, let me, Governor, think about and propose to you ways of mitigating that impact before we raise rates. That's really the sum and substance. So I think there's --
But I think the Governor has a press conference or some sort of a conversation this week and there will be some further information coming forward.
I guess there's two questions, then. Since this is a pass-through, if you did not get the increase -- I'm sure you testified somewhat in this way at the PUC hearings -- would you be able to make it as a going concern without City help?
The answer is, it would be more difficult. We think right now with this increase and with some funds that are available as we sort of timed our cash flow, we think we'll be 32 10/11/05 - TRANSPORTATION - RES. 050845 all right, but it's going to be very tight, and the reason --
So without the increase, you don't want to really discuss?
If prices move further away from us, then I'm going to come back and talk to you, but right now, we think with the increase with the funds flows the way we're anticipating, I think we can get through the winter okay.
But you'd be in very dire straits without the increase?
I would feel very nervous without the increase, very nervous.
Councilman Kelly. 33 10/11/05 - TRANSPORTATION - RES. 050845
Mr. Knudsen, I just want to go back to what my colleague, Councilman Rizzo, was alluding to, and, that is, the comparison between, of course, a public utility and a privately-owned firm, such as PECO. I know this Council many years ago has put restrictions on your business. I just want to level out the playing field, if I might use that term. We put on a moratorium on shut-offs, which you had to live with for many years. We also have, of course, a 15 percent senior citizen discount, which is 16 still active today, and I don't think 17 that PECO has those same restrictions. I 18 don't think they have the same problems 19 that you had in running that PGW. 20 I just wanted to go on record as saying that there should be a level playing field somewhere along the line, if you're going to compare private versus public, and that's one of the things that we have to look at in this Council. 34 10/11/05 - TRANSPORTATION - RES. 050845 I was just wondering, if the price of gas goes down maybe more so than what you're contemplating over the next year or two years, whatever, would this perhaps give you the freedom or the level of at least thinking about putting decreases in rather than increases in your rates?
Oh, it will be more immediate than that, Councilman. I mean, if we see a break in the cost of gas that we think will apply for the next six or eight or 12 months, we will file 15 for a rate reduction immediately. I mean -- and I don't think I would get any objection from any of the regulators in doing that. To your other point of a longer term reduction, we will bring the price -- we will bring our rates down as the commodity comes down over time as well. This is not just this winter.
It doesn't happen too often, that's for sure. 35 10/11/05 - TRANSPORTATION - RES. 050845
It doesn't happen too often, when you see prices going down.
No. We can only hope that that's the case. Let me just respond to one thing you did say. Yes, when PGW was overseen by the Gas Commission and the City Council, we did have a moratorium put in. You should understand that the moratorium still applies, and it applies to all of the utilities in the state, not just us. So it is a part of what we call Chapter 56, which are the customer service regulations.
I just want to follow up on something again that you said earlier. You talked about some of the restrictions on exploration, the hurricanes. Do you believe that this is 36 10/11/05 - TRANSPORTATION - RES. 050845 all real or do you believe that there is some gouging going on in the industry? I mean, we've seen the price of gasoline, diesel fuel, and there was a lot of speculation that it was not real. In your industry, do you believe that some of that may exist also in this?
To your point, do I believe that these price increases are legitimately supply and demand driven? I have to believe. In the large majority of cases, there may be some manipulation. I can't go there, because I don't know, but the answer is yes. I've just come back from a meeting of the American Gas Association on which I sit as a Board member and we explored across the country what these issues are. For example, we had a lecture speaker from Dow Chemical and they are talking about what's known as demand destruction, which is to say that the price of gas has risen and has stayed so high that you have companies 37 10/11/05 - TRANSPORTATION - RES. 050845 essentially leaving the United States and starting chemical plants in places where natural gas is more affordable. Those are the issues that are very real and those aren't issues of price manipulation. Those are basic issues of supply and demand setting a price and that price being too high.
That's happened in the electric utility industry also where companies that are heavy electric users have located to regions where power is cheaper.
But, again, not to belabor this, but I don't believe the gas industry is just going to charge Philadelphia more. If they're going to pull some kind of a scam on the United States, they're going to do it everywhere. So you as a professional, you believe that the reason that gas is so expensive right now, what you're paying 38 10/11/05 - TRANSPORTATION - RES. 050845 from, what did you say, to -- 3
-- is 6 really -- the production in the Gulf 7 wasn't affected that long, but you 8 believe that that short interruption -- 9 because I read a report recently that 10 said it's all back, the natural gas 11 production. It's still affected? 12
Very much. We do 13 not have our sources of supply back to pre-hurricane levels. In other words, we cannot transport on the pipelines what we were bringing before.
So if that issue is fixed, that would be relief in itself?
Yes. I think that's what we're looking at. We're looking at forecasts that suggest somewhere by January, February, March, a lot of the destruction, the rigs that were affected, the gathering fields that 39 10/11/05 - TRANSPORTATION - RES. 050845 were affected, those will start to be corrected and we'll see the price come down. Now, let me make another plug here. What we have and what we're sensitive to as a nation is the concentration of all of this infrastructure and these resources in a very small and very highly vulnerable-to-weather area of the country; namely, the Gulf Coast and Texas. One of the reasons why we are proposing the liquefied natural gas project for Philadelphia, and I'll get my plug in --
-- is to diversify the ports of entry and ways of getting gas into the Northeast, and one of the lovely things about the LNG project is that were we to get that gas here, Philadelphia has first claim on the 40 10/11/05 - TRANSPORTATION - RES. 050845 gas. We would not have some of these supply uncertainty issues going into a winter period particularly. We would have a source of supply that we could count on.
Councilwoman Miller, and then I want to follow up on the LNG issue. I was actually going to wait for a while to bring it up, but since you voluntarily brought it up, I'd like to go there.
Just a follow-up to the question Councilman Rizzo raised. You said that there are still moratoriums. You have a moratorium. Can you tell me exactly what it is? I thought actually they stopped the moratoriums.
No. No. Under the rules of servicing our customers, it's called Chapter 56 under the public 41 10/11/05 - TRANSPORTATION - RES. 050845 utility regulations, there are rules that deal with the winter period, from December 1st to March 31st. Essentially, we don't shut our customers off, except under the new modifications to those rules last year, we can shut people off for non-payment, but under very highly controlled circumstances. So a lot of it would require our going back to the PUC in some instances, and we would have to be very careful how that was done. But, by and large, the moratorium is in place to protect customers from having their gas discontinued for non-payment during the winter period.
There was a change, and it gave us some additional flexibility for those people who can 42 10/11/05 - TRANSPORTATION - RES. 050845 afford to pay and don't pay, we're able to take some action. And if you recall, a year and a half ago, I sat in this body and I asked for that right, and I was told very clearly that I had to go after the people who could afford to pay and make them pay. And that's what this law does for PGW. We will be very careful and very judicious in how we use those powers. We are not interested in having problems with our customers in that regard.
So basically it's based on income and ability to pay?
There are various parts of the rules that apply depending upon whether you're 150 percent of poverty or less, 150 to 250 percent of poverty, 250 percent or more. There are different aspects of the law that apply. 43 10/11/05 - TRANSPORTATION - RES. 050845
All right. I just wanted to be clear that I heard you say that there's still a moratorium, because I actually thought that the moratorium no longer existed.
No. It is very much with us, and we're very respectful of the need for it and the value of it. What we were concerned about last year was that people did take advantage of it, and we wanted to have the option to go after the folks who we knew could afford to pay and weren't and were essentially gaming the system, gaming PGW.
I have more questions around the low-income customers on that you haven't gotten to yet, but I'll wait, because I think the Councilman wants to --
Mr. Hershey, I would like him to go through our program so that you understand what we have in mind to help our folks who are having trouble paying these huge bills. He's 44 10/11/05 - TRANSPORTATION - RES. 050845 our expert on the low-income program, so let him speak to that.
Mr. Hershey, I understand you wanted to discuss your portion of the presentation. What I do want to get to to have a little time to think about it is, you talked about a somewhat limited geographical area where you're able to access this natural gas, and what I'm going to want to hear you talk to us about is what strategies that you have in place to give you other options. You talked about LNG that could potentially provide some additional support for your company, but I really would like to see you get a little creative in terms of where you're going to go as opposed to simply when there's a crisis, you raise the rates on the citizens to deal with the short-term need, and if in fact that crisis reduces, you decrease the rates. I'd like to see 45 10/11/05 - TRANSPORTATION - RES. 050845 us have a little more creativity, and you may have in fact had some discussions about that, and I can wait until after Mr. Hershey --
Well, let me just answer that, because you asked the question. The most direct opportunity PGW has to affect supply in this area is the LNG project. I mean, it can't be more direct than bringing the gas to our LNG tanks on the Delaware and immediately vaporizing that gas and putting it into our system. That's essentially what we're after.
For those of us who don't know the details, because we weren't privy to the presentation at the level that we would like to ultimately have, I know there were some meetings up in the Northeast. Can you just briefly go through the specifics of the proposal?
Well, it's built on the fact that we have two facilities 46 10/11/05 - TRANSPORTATION - RES. 050845 on the Delaware in Richmond, at Richmond Point. These are two tanks that hold two billion cubic feet of gas each in liquefied form, and they have been there for the last 35 years. And having those plants there in that form has allowed us to essentially buy less expensive gas in the summer, liquify it, which is to say freeze it, and it goes from a gaseous state to a liquid form at 325 degrees --
We bring it by pipeline to the facility. It then gets essentially frozen, it gets liquefied, and put into the tanks. And then we maintain it in the tanks until the winter, and then when the gas coming from the Gulf from our pipelines is the most expensive because there's the most demand for it, we then have less expensive gas in our tanks that we then vaporize, put into our pipes, and the customers have a financial benefit. And we have 47 10/11/05 - TRANSPORTATION - RES. 050845 quantified that benefit that since that plant went in 1970, it's been well over $2 billion of savings for our customers over that 30-plus-year period. What we're looking about with the LNG now is rather than bringing the gas up by pipeline and liquifying it, freezing it, super-cooling it, we will bring ships who already contain the gas in this liquefied form, and it might come from the Caribbean, it might come from Norway, it can come from a variety of places. The ship is then essentially emptied into our tanks, and then from the tanks, it again is just like it is now, it gets vaporized and put into our pipes.
Yes. Do you now not have to liquify the gas on site? Is that where the cost savings come in? 48 10/11/05 - TRANSPORTATION - RES. 050845
No. The cost savings -- yes, we will not have to liquify ourselves on site. We'll only vaporize on site. The savings come from the fact that right now we can only use the contents of the tanks once a year, because it's a very slow process for us to liquify our own gas and put it into the tanks. What the shipping will allow us to do is, twice or maybe three times a month, the ship will come, we will have emptied the tanks in the meantime, and what we essentially have now is a toll, that we will get money simply for sitting there with our tanks ready to receive liquefied natural gas several times a month. In other words, the value of the tanks is multiplied because we're going to be using them --
Continually 49 10/11/05 - TRANSPORTATION - RES. 050845 replenishing and using. And it's the gift that keeps on giving for us. It's a wonderful asset. And I would be remiss as the Chief Executive Officer for not bringing it to the attention of the Mayor and to the City Council to say this is an answer for Philadelphia going forward. This is a possibility for avoiding just the situation we have right now, where you have a substantial supply interruption because of all of the concentration of the infrastructure in the Gulf and we have the ability to answer part of that question right here in Philadelphia.
So the downside of this is what? Security? Volatile nature of the liquefied gas? I mean, why haven't we done this?
Right. What's 50 10/11/05 - TRANSPORTATION - RES. 050845 interesting is that the LNG facility at Richmond Point was designed as a terminal to receive liquefied natural gas from ships. It was never used in that way, because the price of natural gas in this country was less than $4 a thousand cubic feet. That is what's known in economic terms as the clearing price. It had to get above that $4 in order to be economic. At $13, this is a very economic project. At $8 or $7 or $6, it's a very attractive project for us.
Okay. What about the security issues, the safety issues? I mean, I don't live in the Northeast, but I've heard from some of the representatives and some of the people that don't feel that this particular process creates an environment that's conducive to living adjacent to.
Well, I think it's very important and we're reaching out to the folks who live along the river in that area particularly to say, We have 51 10/11/05 - TRANSPORTATION - RES. 050845 been there for 35 years, we have successfully operated this plant, there has never been an incident, and we have saved $2 billion for the City of Philadelphia. Isn't that a fairly good track record to look to in terms of this project? Now, the issue that's more relevant, I think, in the discussion is the new aspect of this, which are the ships coming up the river. Understand that we are only now at the beginning of a very detailed and somewhat lengthy process over the next year and a half wherein this project will be fully reviewed by the Federal Energy Regulatory Commission. There will be public hearings. You will have your opportunity for public hearings, we hope, in the early spring or late winter. There will be lots of opportunities to explore this project. What I'm concerned about is that there is a sense of rejection 52 10/11/05 - TRANSPORTATION - RES. 050845 building when the facts of this aren't even known yet. We are in the process of negotiating this deal. We don't even have something to present to you yet, and yet those who would kill this project are already out talking about it as something terrible. And the issue is that liquefied natural gas has been transported around the world for 50 years without incident and that many countries and several cities of this country, Boston being one, receive very regular shipments of LNG. Japan Harbor has something on the order of 15 of these facilities. I don't mean to go on about this.
That's why I wanted to wait. Councilman Rizzo had a quick follow-up question on that and then we'll proceed.
When the plant was built -- I think I remember when it was -- I think it was the '70s. 53 10/11/05 - TRANSPORTATION - RES. 050845
Right. Is there a way to get gas to that facility other than actually bringing the ship to the facility? Is there a pipeline further down river that that gas could come through to get to the plant?
Right. My other question, you're going to get a lot of community opposition, but I read a book recently that was talking about landfills, that people that live in the area of a landfill, there's something in it for them. They get tax breaks, they 54 10/11/05 - TRANSPORTATION - RES. 050845 get all kinds of things because they live near a landfill. There's one community that doesn't pay any real estate tax. The company pays the real estate tax. Could one of the concepts be that there is something in it for the people that would be near that facility or within an area? I know what's going to happen, the area is going to keep getting bigger and bigger, but could there be something in the plan that's in it for people that would have to live in an environment near that facility?
Well, there's certainly room in any negotiation to make something like that happen. I mean, this remains essentially our facility, and in terms of tax policy, you would be determining that anyhow, but in terms of creating some kind of amenity or something else for those folks --
-- that's very 55 10/11/05 - TRANSPORTATION - RES. 050845 much and can be very much a part of the conversation about this project.
It's been there for all these years. If you wanted to bring a ship up river tomorrow, legally can you do that today?
Why? What happened that changed? In other words, how was gas getting to that facility when it was designed and ever operational, or was it never operational?
As a terminal, it was never operational, and in the intervening 35 years, you have a whole layering of federal and state laws and regulations that were not in place in 1970 that are in place now that we would have to work our way through in order to bring --
If you had zero community opposition, how long would it take you to have a ship at the terminal? 56 10/11/05 - TRANSPORTATION - RES. 050845
Well, we're looking right now, assuming you all approved it, and I'm counting on that, in the spring we would look to bring ships in the 2009 period.
But obviously Council approved this place a long time ago.
What happened in 30 years? Did we let something slip? Is there a time line associated with it? What happened in 30 years that you need to do all this again if you were planning to basically operate it the same way it was designed? Unless you've changed something, I'm not getting it.
It was designed to be a terminal. It was never completed as a terminal. So there are lines that have to go underground, there has to be port facilities that have to be built, and there has to be a federal approval 57 10/11/05 - TRANSPORTATION - RES. 050845 process.
So for all these years, it's been just dormant, it's been mothballed, or whatever word you want to use?
But the economics weren't there. It made no economic sense to build it, because gas at $2 a thousand cubic feet didn't make it an economically viable project. It's only now that this makes sense economically. We would have been paying to have this facility as opposed to reaping the benefit.
Let me just clarify that point, if I may. The facility has been used to take gas from the pipelines, liquify that gas, store it and then return it to a gas state and send it to our customers since 1970. The only portion that has not been used as designed is the terminal portion, and that's the portion that we're seeking to utilize now, with your approval, with 58 10/11/05 - TRANSPORTATION - RES. 050845 the approval of FERC. And the FERC approval will also be a key piece, because that involves the regulation of shipping up the Delaware. So that's the difference. The plant has been used, used effectively and safely since 1970.
So basically what you're telling me is that if back in the '70s we completed the project, on occasion had a ship come up river once or twice a year, we would have been able to use it as a terminal?
I'm taking too much time with this. I'll ask you these questions maybe at a later time.
Councilman, it was never a terminal. It was designed to potentially be a terminal. We never completed that portion of the project, because it made no sense to do that.
Mr. 59 10/11/05 - TRANSPORTATION - RES. 050845 Hershey, I know you've been waiting. One last question, is the PUC the final arbiter of this rate increase request?
Not really, no. 10 I mean, they are the decider in this situation.
I mean, if you wanted to appeal this to the courts as a citizen, one could do that, but you're not going to prevail, because as an administrative agency, they have enormous latitude in making their determinations and it's highly unlikely that anybody would be able to overturn this. And I'm standing here and sitting here saying to you, I will turn it around myself as soon as I can.
Okay. I 60 10/11/05 - TRANSPORTATION - RES. 050845 just want to know the process. Thank you.
I want to go back to one point first. The bar graph on , which Mr. Knudsen referred to, you'll see at the bottom there's a tag that says "Pennsylvania Office of Consumer Advocate." I want to be very clear that that graph was produced by the Office of Consumer Advocate, except for the last bar dated September 28th. The graph was produced before September 28th. We received it, looked at it, then saw that the prices continued to increase. So the only portion -- we added the last line, and you can certainly ask Mr. Popowsky if he believes that it's accurate based on his position in our GCR filing. I believe that he'll concur, but I want to be very precise that he didn't do that last graph even though we've tagged it as his production.
Now, Mr. Knudsen 61 10/11/05 - TRANSPORTATION - RES. 050845 said earlier that gas prices at current levels hurt PGW and hurt our customers. We know that. And even at lower levels, the same was true. We have tried very hard to find ways to mitigate the impact of gas prices and to make sure that in particular that vulnerable customers are as well protected as we can manage. We can't solve all the problems of poverty. We can't solve all the problems of those of our customers who are vulnerable, but we can work very hard to do our best and put in place some protection. And let me begin to address some of what we have done already. First, you've read in the papers that PGW does not want customers on our CRP program, which is our low-income program. We are the only utility in the state that has a low-income program approved by the PUC which does not have a maximum number of participants. That's the way it was when 62 10/11/05 - TRANSPORTATION - RES. 050845 I helped design that program in 1989. That's the way it remains today. It has been PGW policy to make sure that every customer who qualifies for CRP participates in that program. A year ago we went to DPW with assistance from Community Legal Services and we asked DPW to provide us with a list of every family in Pennsylvania -- I'm sorry; in Philadelphia who is receiving welfare benefits, and they provided us with an electronic listing of all of those families, and we matched that list against our own list of customers, and when we found a family that was receiving welfare benefits that was not in our CRP program, we reached out to them and said, There's a better deal for you. If you're not in CRP, you're struggling and you may not be paying your bill, if you get into CRP, you will do better. This Council has to understand that PGW is making every effort possible trying to be creative to make sure that 63 10/11/05 - TRANSPORTATION - RES. 050845 every eligible customer is in CRP. It's in their interest. It's in the interest of PGW. It's in the interest of this City. And that has been the company policy, and that policy has filtered down very directly in terms of articulation of policy, in terms of training our Customer Service Representatives to make sure that any time a customer contacts PGW, the Customer Service Representative is trained to ask when there's a payment problem, when there's a shut-off notice, what is your income? Because the PUC requires that we ask that question. And when there's an indication that that customer might be eligible for CRP, we pursue it and we tell them about CRP, because that is our policy. You may hear, you may already have heard anecdotally of stories of customers who they claim were not told about CRP. It's very important to understand that for some customers because of prior payment arrangements 64 10/11/05 - TRANSPORTATION - RES. 050845 that they entered into with us or because of what they've told us, we knew that they were not eligible for CRP, or maybe we did tell them and they forgot about it when they retold the story later on. But it is our policy, it is our intent to make sure that every customer who is eligible for CRP is in the program. And in addition to going to DPW, in addition to training our Customer Service Representatives to do that, we have distributed literature, pamphlets all over the City, in the School District, in every public agency, in every City agency, at shopping centers, every place we could think of to provide literature and information about CRP and other programs that I'm going to tell you about. We've tried to get the word out. We have gone to the City's Department of Human Services. We have helped to train their social workers to understand the CRP program, because their clients are almost certainly eligible for 65 10/11/05 - TRANSPORTATION - RES. 050845 CRP.
We have given them materials to train them, and we tell them, If you have customers who are non-CRP, please help them get into CRP, contact us, and we will get them in, if they are indeed eligible.
Excuse me. I just have one quick question. How many of your customers are in this CRP program?
It's roughly half of the customers who are eligible for CRP who are actually participating. And that is a statistic that is not a good one. We've been trying to get more people into it, but I'll tell you that in my 29 years 66 10/11/05 - TRANSPORTATION - RES. 050845 in Legal Services, it was my experience that every public benefits program, federal, state or city, was woefully undersubscribed, that no matter what federal agencies did, state agencies did, city agencies did, advocates did, you couldn't get everybody in those programs who was eligible who deserved to be in, and that goes not only for our CRP program, it goes for the LIHEAP program, it goes for WIC, it goes for Earned Income Tax Credit. Every program you can think of is not fully subscribed with people who are eligible. That's a bad thing.
And you can lay the burden of that at the agency that runs the program, at various social factors. It's a broad and complicated problem. Many factors go into it.
The one question I have is, if you did have 100 67 10/11/05 - TRANSPORTATION - RES. 050845 percent of the eligible people that should go on to that CRP program, would this be beneficial to PGW? Would it help you in any way? In other words, you have 65,000 current customers on the CRP program; is that right?
I just want to know, is it beneficial to you to have all of those people that are eligible to be on that program?
Yes and no. And the reason I answer that way is because it's beneficial to ensure that all customers who are vulnerable, low income, have difficulty paying a higher bill, be in a program that allows them the ability to pay. What everyone must understand is that that comes at a cost to other customers. We have a universal service 68 10/11/05 - TRANSPORTATION - RES. 050845 surcharge, and one component of that surcharge, which all of the other customers pay, is the difference between our full rate and the CRP rate. The CRP customer pays a percentage of income depending on where they are in the income.
Other customers make up the difference. And that is the primary reason why PGW rates are the highest in the state even though we are very good at buying cheap gas, usually at least as good or better than the other utilities, but the cost of these programs, as well as the cost of maintaining hundred-year-old cast iron mains, roughly 3,000 miles of them -- there are numerous factors, but the universal service programs are a key part of that. So you're very perceptive in noting that difference. It benefits us 69 10/11/05 - TRANSPORTATION - RES. 050845 because people will be able to pay to keep up, but it shifts a burden to other customers. And right now as things stand at current levels, there is roughly $160 million of burden shifted from customers who can't pay the full rate or don't pay it to all other customers.
Could I just follow up on that momentarily? The question is, can't at some point you just put people on CRP? If they owe you money and you have these thousands of people that are not in the program, why is it voluntary? Why can't you do what you have to do and put those people that aren't in in?
There are a couple of reasons. One is -- and I think Mr. Popowsky and Mr. Bertocci will agree with me -- that the PUC wouldn't allow us to do it without the customer's permission. And one of the reasons why we wouldn't be allowed to do it is 70 10/11/05 - TRANSPORTATION - RES. 050845 because there are some people who, while they are eligible for CRP, would not benefit. The formula is complicated, but there are some people who actually pay a lower rate when they pay the normal rate than they would if they were paying a percentage of their income even when they're below 150 percent of poverty, and that's particularly true of customers between roughly 125 and 150 percent of poverty. So as with many other things, it's never as simple as it appears.