Well, let me do it both ways. If there is bond issue insurance and there is a payment default by PGW and it's unable to cure, unable to make the debt service payment, the bond insurance company makes the payment to the bondholders. But unlike life insurance, where you get the money and you have no obligation to the bond -- to the insurance company, with bond insurance, the company would still owe the bond insurance company the amount that had been paid on behalf of the company to the bondholders.
So they're just 55 5/8/01 FINANCE - BILL 010209, 210 fronting the money.
They're fronting the money to protect the bondholders. So in that situation, the company would owe money to the bond insurance company. In the event that --
They would go into, like a bank, a work-out situation, and they would come in and work with the company to figure out the best way to keep the enterprise of the gas company going so that they could eventually get repaid. It's very important for an entity like a bond insurance company that the viability of the company be retained. So they might come in with a work-out plan, you know, where you take five years to pay it back, or something like that. In the event that there was no bond insurance and there was a payment default by the company that wasn't cured, the bondholders would be the ones that were short, and they would form a bondholder committee. They would use the bond trustee to represent them in an action against PGW, and they would in effect become a creditor's 56 5/8/01 FINANCE - BILL 010209, 210 committee of PGW. So, in effect, they would be -- the trustee acting on their behalf would be representing their interests, just as the bond insurance company would be to get the money back.
Why is the City -- and maybe I've misunderstood the relationship between the City and the Gas Works, but it was always my understanding that ultimately, this is an asset of the City and that it is owned by the City and that the City would be on the hook for whatever debt that the bond committee -- or the bondholders committee and the trustee would be pursuing. If there were no identifiable liquifiable assets of the company, it would seem likely to me that the next deep pocket they would turn to would be the City of Philadelphia.
Okay. As a legal matter, Councilman, these bonds -- when a bondholder buys a bond that's issued under the First Class City Revenue Bond Act, which is issued by the City of Philadelphia, for the Water Department, for the Airport, for the Gas Works -- those are the three utility that we finance this way -- the holders 57 5/8/01 FINANCE - BILL 010209, 210 are getting a bond from the City, but the contract with the bondholder is, the City of Philadelphia will pay you, but only out of the revenues of this enterprise and from no other funds of the City. So you, bondholder, are making an agreement that your recourse to the City's assets is limited to the revenues of those utilities. So if I have a water bond, I know I can't have any other resources of the City to get paid. If have a Gas Works revenue bond, I know when I buy it -- and we put it in big, bold letter on the cover of the offering document: Payable soley out of the gas works revenues. The general credit and taxing power of the City of Philadelphia is not pledged or available to pay this bond.
And the bond insurer is subrogated, steps into the shoes of the bondholder and has the same limited recourse. So in either creditor scenario, there is no contractual liability on the part of the City of Philadelphia to pay this obligation from anything other than Gas Works revenues. 58 5/8/01 FINANCE - BILL 010209, 210
Now, let me ask you a question from -- just to take it one step further in the hypothetical absurd. Does the Philadelphia's Gas Works' $18 million payment to the City establish a line of revenue from the Gas Works to the City on an annual basis, which would give some creditor claim that, in fact, the money in the pool of reserves that the City may hold, or some City dollars, were in fact originally Gas Works dollars and, therefore, we have claim for recovery from the City itself?
Every year, we get an $18 million payment of revenue from the Gas Works revenue to the City.
Yeah. I want to understand the hypothetical because, you know, this supplemental ordinance that's before you is supplemental to the General Gas Works Revenue Bond Ordinance.
And there's a priority-of- payment schedule in that general ordinance that 59 5/8/01 FINANCE - BILL 010209, 210 controls the bonds.
If the company fails, you know, the City payment is at the bottom of that bucket. The bondholders would be --
But you're saying that the past history of the payments to the City would entitle a bondholder to claim that because the City received the base payments for prior years, the City now has to just (indiscernible) all those past payments?
Or add up what the past payments have been over how many years times the number, and these were monies that were moved -- again, I'm not a finance exert and I'm not a lawyer. These monies were taken on an annual basis by right of the City and agreement with the Gas Works; therefore, you have a share of our revenue that should be coming to us to pay the bonds.
And, you know, I would say 60 5/8/01 FINANCE - BILL 010209, 210 that --
It's almost like Act 46 with the School District. I mean, you've been giving us this money now for all these years; now if the School District fails, God forbid, we want you to continue paying that because that was our money in the first place.
I think that, you know, it's a very creative theory, and I would ask if somebody's been practicing public finance law for a long time that you please not represent any bondholders because it's very creative. But the bondholders' contract with the City is, you are payable from Gas Works revenues and Gas Works revenues only. Once the revenues have been spent for a proper purpose, whether it's to pay the City of Philadelphia its base payment or to pay the vendor of the gas utility for gas, you can't convert it and say now, you know, it's under some tracing theory, "Texas-something Pipeline Company" has to give back the gas revenues or the City does.
What's the likelihood of anyone purchasing any of these bonds 61 5/8/01 FINANCE - BILL 010209, 210 if there's no insurance?
It would remain an investment grade rating despite the lack of insurance?
They have an investment grade rating right now, without insurance.
And, again, I don't want to belabor this 'cause I know it's getting long, but explain to me how the City of Philadelphia, in a similar financial condition in 1991, had no investment grade rating, but this company, which seems to be maybe not as bad as the City but pretty close to it in '91, has an investment grade rating. I don't understand how the rating agencies determine that. I mean, it can't be because of past performance.
One thing that's important to understand is that the rating doesn't change from bond issue to bond issue. It's a --
Right. It's an existing 62 5/8/01 FINANCE - BILL 010209, 210 rating, which they look at periodically. In the case of the Gas Works to say periodically, is to say weekly. Over the course of the past year, we have spent an enormous amount of time with each of the three rating agencies, providing them with endless information, endless meetings, and we have sustained the -- you know, the investment grade. As a result of that, there would be access to the market.
Thank you, Councilman Kenney. You should ago over to Joan Stern's office and let her give you a whole lesson like she did me back in 1991. (Laughter.)
Okay. I want to go back to the procurement discussion. According 63 5/8/01 FINANCE - BILL 010209, 210 to the agreement between the City and PGW -- and the agreement is an ordinance of City Council -- the Gas Commission does have the power to establish procurement rules and regulations for PGW. And at one point, there was some effort to try to begin a dialogue on addressing some of the issues that have been raised here today, but somehow it got (indiscernible) by somebody at PGW. Since we are here now before the Council and not before the Gas Works, which singly did not have the teeth to do it, but this body does, we will ask Kumar, Mr. Kischinchand, to assign your staff to work with the Gas Commission staff to review the procurement policies and practices of PGW and establish a participation program for this Finance Committee and for this Council.
Madam Chair, do you mind if I ask, is that in the form of an amendment?
This is not an amendment because it's already a law. I mean, it was already a part of the agreement under the 64 5/8/01 FINANCE - BILL 010209, 210 agreement between the City and PFMC that the Commission does have the power to do that. I'm just stating it for the record, that this is what we want done.
Okay, you want PGW staff to work with the PGC staff as well as MBEC to work out some agreements on procurement.
And if I may, if it could be considered a friendly suggestion, I would like to add the issue of professional services to that investigation.
My request to the Treasurer was for the entire city. My addendum to Councilmember Tasco's request is for Gas Works.
Just one point of information. Under the prior administration, when Wilson Goode was the mayor, he had a rotating policy of participants for professional service that really was very inclusive and gave a lot of 65 5/8/01 FINANCE - BILL 010209, 210 different professional-service providers an opportunity to do work with the City of Philadelphia. So you might want to -- I know that is a political decision that has to be considered by the second floor, but I put that on the table.
I understand, per the US Department of Energy's May 2001 report, that the price of natural gas was $2.12 per MCF in January 2000 and $8.06 per MCF in January 2000, a fourfold increase, while consumption was up just 7.2 percent month over month. So this gives us -- how do you respond to that and how will that affect us?
I brought all of the technical experts here to help me answer.
If you don't mind, Madam Chair, I'd like to have Craig White, who is our Senior Vice President for Gas Supply and Marketing, to answer that, please. 66 5/8/01 FINANCE - BILL 010209, 210
My name's Craig White. I'm Senior Vice President of Marketing and Supply Services for Philadelphia Gas Works. And I must apologize, I couldn't quite hear all of the question. Could you please repeat it.
We were talking about a fourfold increase from January 2000 to January 2001. Consumption was up just 7.2 percent in month over month gain, but the price went up fourfold percent, from $2.12 per MCF to $8.06 per MCF. How will that affect us and our gas rates and the bills to you are customers?
Well, this past January, it is correct that the all-time highs for natural gas costs were incurred. One of the things that the company has done to mitigate that cost was to enter into some flexible contracts that will allow us to avoid some of this higher-priced gas and also to use the LNG facility that Mr. Kischinchand spoke of earlier. The projections for next year 67 5/8/01 FINANCE - BILL 010209, 210 are in the neighborhood of $5.70 in the January time frame. As far as how things go to affect the customers, what has occurred over the last year has been incorporated in subsequent modifications to our gas cost recovery filing; our most recent being a month or so ago, when we increased the gas cost rate to $6.69.59. We have just filed our gas cost rate for the 2001-2002 fiscal year beginning September 1, and the rate is in the $5.70 range. So we expect a drop in the GCR factor from the current level to the level that will be in effect on September 1.
We certainly need a drop someplace because these customers whose bills have doubled and tripled, who can't pay their bills as they have gone up, thank God the gas cost rate went down, because certainly, I wouldn't be the one to stand in front of them and say, We want to give you a 35 percent increase, or whatever the figure turns out to be. Thank you very much. Are there any other questions from members of the committee? 68 5/8/01 FINANCE - BILL 010209, 210 (No further questions.)
All right. Then we will conclude our stated hearing. And before we do that, Madam Treasurer?
If it pleases the committee, we are respectfully requesting a suspension of the rules.
All right, that will be fine. This will conclude our public hearing. - - - 69 5/8/01 FINANCE - PUBLIC MEETING
We will now enter into our public meeting. Councilman Kenney, we will ask you for a motion to amend Bill 010209, per the amendments that were circulated and read into the record.
I move the adoption of the amendment. (Duly seconded.)
It has been moved and properly seconded that the amendments to Bill No. 010209 be approved. All in favor? Opposed? Bill 010209 has been amended. We will now ask Councilman Kenney for a motion to approve to report out of committee Bill 18 010209, as amended.
Thank you, Madam Chair. I move that Bill 010209, as amended, be reported out of this committee with a favorable recommendation and with a request for a suspension of the rules to allow for first reading at our next Council session. (Duly seconded.) 70 5/8/01 FINANCE - PUBLIC MEETING
Thank you. It has been move and seconded that Bill 010209, as amended, be reported out of committee with a favorable recommendation and also a recommendation for the suspension of the rules so as to permit first reading at our next session of Council. We also note for the record that Councilman O'Neill is here. Thank you. Councilwoman Tasco, we will now ask you for a motion to approve the amendments to Bill No. 12 010210.
Madam Chair, I move that the proposed amendment to Bill 010210 be approved as presented to the committee. (Duly seconded.)
Thank you. All in favor? Opposed? The amendments to Bill No. 010210, as circulated and read into the record, are approved. I will now ask Councilwoman Tasco for a motion to approve to report out of committee Bill 24 010210, as amended, with a suspension of the rules. 71 5/8/01 FINANCE - PUBLIC MEETING
Madam Chair, I move that Bill No. 010210, as amended, be reported out of committee with a favorable recommendation and with a request for a suspension of the rules so as to have this bill read at the next City Council session. (Duly seconded.)
All in favor? Opposed? The ayes have it and Bill No. 010210, as amended, is reported out of committee with a favorable recommendation and also a recommendation for a suspension of the rules so as to permit first reading at our next session of Council. This ends our Finance hearing. Let me thank all members of the committee and thank all of you who have come, and our business at hand is done. Thank you. (Adjourned 2:51 p.m.) 72 C E R T I F I C A T E I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of Tuesday, May 8, 2001, were reported fully and accurately by me, and that this is a correct transcript of same. RE: COUNCIL COMMITTEE ON FINANCE BILL NO.'S 010209, 010210 __________________________________, JOSEPHINE CARDILLO, Registered Professional Reporter