Committee Hearing, October 23, 1997

VOLUME II COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC MEETING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Thursday, October 23, 1997 8:45 a.m. - - - BILL 970647 - Authorizing the Mayor to enter into an amendment to the Agreement authorized by ordinance approved Dec. 29, 1972, as amended between the City of Phila. and PFMC relating to the operation and management of PGW, by authorizing PFMS, on behalf of the City and PGW, to enter into the electric supply business. - - - PRESENT: COUNCILMAN JOHN F. STREET, Chair COUNCILWOMAN ANNA C. VERNA, Vice-Chair COUNCILWOMAN HAPPY FERNANDEZ COUNCILMAN JAMES F. KENNEY COUNCILWOMAN AUGUSTA A. CLARK COUNCILMAN DAVID COHEN COUNCILMAN FRANK RIZZO COUNCILMAN ANGEL ORTIZ COUNCILMAN FRANK DiCICCO COUNCILWOMAN JANNIE L. BLACKWELL COUNCILMAN MICHAEL A. NUTTER COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILWOMAN MARIAN B. TASCO COUNCILMAN BRIAN J. O'NEILL - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center Plaza, Suite 600 Philadelphia, PA 19103 (215) 561-2220 147 I N D E X BILL 970647 Stephanie L. Franklin-Suber, Solicitor, City of Philadelphia---------------------------------- Bud Z. Karachiwala, Vice-President, Energy Management Division, PGW---------------------- James Hawes, President, CEO, PGW----------------- Joseh Horan, Citizen----------------------------- Steven P. Hershey, Esq., Attorney, Community Legal Services-------------------------------- Steve Corwell, Vice-President, QST--------------- Ben Hayllar, Director of Finance, PFMC----------- - - - 148 BILL 970647 P R O C E E D I N G S

Good morning, ladies and gentlemen. This is a recessed hearing. The record should reflect that it is now about five minutes after 8:00, Council Committee of the Whole time, and we are reconvened here as a Council Committee of the Whole to take further testimony on Bill No. 970647. I think it is appropriate that this record reflect that I, along with the City Solicitor, had a meeting, a brief meeting, with the Mayor to kind of bring him up-to-date on where we are in this hearing. He, of course, was out of the country making arrangements for us to have a revitalized Navy Yard. So we appreciate your patience. At this time the Chair recognizes our City Solicitor, who, at our request, has done some work on indemnity issues and a couple of other questions we asked yesterday. If there are no comments from any member of Council, the Chair recognizes the City Solicitor. 149 BILL 970647

Good morning. Thank you, Council President Street. Good morning, members of Council. Thank you for the opportunity to briefly try to respond to a number of the issues that arose yesterday in connection with certain of the legal issues that I addressed in my formal testimony. I would like to touch on a few points briefly, and then I would like to provide additional written materials to Council which would support the legal conclusions that we have reached on certain of the issues. First, Council President Street, you requested that I be prepared to discuss briefly the viability of a declaratory judgment action. I have brought copies of the Act, as well as the City Solicitor's opinion, which I think is pertinent to the question. I'd like to make copies of those materials available to members of Council. A declaratory judgment action, in my opinion, may be premature at this point in time. I have briefly reviewed the Declaratory Judgments Act, 150 BILL 970647 did some additional legal research. I would like to point to the fact that I base my conclusion primarily on a 1986 City Solicitor's opinion, which hopefully will have some weight with the Council. It was authored by Thomas Ericson. The issue addressed was whether or not a lawsuit could be brought to test the legality of a bill before it was enacted by Council. The conclusion was that a Court may dismiss such an action on the basis that it is premature. At this point the pending legislation has not been enacted. There have been no protests filed, no threats of litigation. So, in short, there really is no real dispute among adversarial parties at this point. The City could certainly sue to bring a declaratory judgment action, but it is not clear who the defendants would be at this point. Litigation is certainly always a possibility, but there is no imminent or inevitable threat of litigation at this point. In short, there is no case or 151 BILL 970647 controversy for a Court to decide. A declaratory judgment action may, of course, be viable after the Council enacts a bill. But, again, we would need a real case or controversy, meaning that the possibility of litigation, as I said previously, is imminent and inevitable.

Thank you very much. I understand that you have some testimony that you would like to offer at this time on the indemnity questions.

Yes. Thank you, Council President Street. There were several questions raised with regard to liability. Council President Street, you specifically raised the question of Tort Claims Act protection, insurance requirements. These are certainly issues that we will deal with more definitively in the context of the Venture Agreement, which is currently being negotiated and drafted with QST. Briefly stated, PGW has the 152 BILL 970647 protection of the Tort Claims Act. I have taken the liberty of bringing cases to distribute to members of Council which speak directly to that issue. PGW, also the City of Philadelphia, also has insurance. PFMC has insurance. It is required to have insurance under the Management Agreement. We expect to receive the policies today. We will review them not only with the Risk Manager, but also with the Graham Company. We will also request copies of QST's insurance policies. That's standard practice with City of Philadelphia contracts. We would deal with those issues specifically in the context of the Venture Agreement. QST, it is my understanding, has agreed to indemnify the City and PFMC. There is a representative of QST present here today who is willing to represent to the Council QST's position on indemnification. Although the definitive Venture Agreement has not yet been drafted and finalized, QST, it is my understanding, would be willing to supply a letter if that will give Council some 153 BILL 970647 comfort on the indemnification issue. I would also direct your attention to of Mr. Karachiwala's written testimony, which specifically says that QST has agreed to indemnify the City and PFMC against any claims by individuals, entities, or such regarding damages, whether tort or property, for claims generated by their electricity supply. As I said the other day, QST is the license supplier --

Please. That's for their electricity supply.

That's correct.

We are talking about much broader indemnification. So it is unfair for you to say that they have already offered to indemnify us. They have offered us a very limited indemnity. I don't even know how much it is worth. They are saying that, "If there is a problem with the electric supply, then we will be responsible." It sounds to me like we're going to have to share responsibility, at least on a 50/50 154 BILL 970647 basis, for all other kinds of problems.

Council President --

As in attorney's fees.

Council President Street, in the context of negotiating the Venture Agreement, we would seek the broadest possible Indemnification Clause to answer your question.

That's really what I need to hear you talk about.

Absolutely. And I have the language that we use in our standard City contracts. That's an issue I believe we could work with QST on to give Council some comfort or assurance. And certainly that could be a condition, a specific condition, of the Venture Agreement.

I would like to give you some hints on the kinds of things that I think will start making Council members comfortable. 155 BILL 970647 Because we are only going to be able to do so much here this morning, and then we will recess and do Council, and then we will come back. And then we will just do whatever we have to do. I mean, I regard this hearing as being much like budget hearings, in the sense that we may have to be here at 9:00 or o'clock 9 tonight. 10 We may end up going to the Democratic City Committee party, and staying until 9:00, and then coming back here, staying until midnight, take two hours, and then come back in the morning. We will do whatever we have to do. But there is a concern about insulating the General Fund from liability here in any way, shape, or form. I can tell you that there is going to be very little sympathy for this program if there are circumstances under which we might look around and find out that the General Fund is under assault by somebody, you know, because we decided now to engage in a pilot electric program. Because I will tell you something, just the litigation costs in all of this can end up 156 BILL 970647 running us a lot of money. So I don't think there is anybody here that's interested in exposing the General Fund. So I think you ought to be thinking about what kinds of limitations you are prepared to offer that would insulate the General Fund as much as you think is reasonably possible and doable under your discussions with QST on the General Fund. I think you have it, some of this, covered. But I think anything that we do here in the next ten days would absolutely, unequivocally have to be limited to the pilot. And this thing has got to come back here. I think it has to come back. I don't think that people are going to be interested in passing this bill, and then that's, you know, PGW, the agreement is now authorized, PGW can do what it wants going into the electric business. I think you need to be thinking about more specific ways that this Council can use to determine the success or the failure of the pilot. I am unclear about how you measure 157 BILL 970647 that. I am unclear about how you measure whether the pilot was successful or not successful. We are going to want to be able to know now how it is we make a judgment then. Because, unfortunately, all too often, you know, we do this thing. And at the end, it is declared successful, and then we don't have any standard against which to determine why we are now concluding that it is successful. What I would like, also, I would like also to have someone craft for us something that amounts to a policy statement so we know where we are headed in all of this. You know, I would hate for us to do anything at the end of which we look back and didn't understand why. And ordinarily in legislation, there are a bunch of whereas's that kind of lay out all of why you are doing what you are doing. I think we need to have a record that reflects where we are trying to go with all of this, and why we are trying to go there, and what our overall objectives are. I know I am missing at least one 158 BILL 970647 point. There is a major concern here about what happens at the end of the pilot. QST, it is our understanding, reserves the right at the end of this pilot, or maybe even before the end of this pilot, to compete even with PGW for PGW customers, customers that are currently gas customers, PGW gas customers, and/or customers that will be a part of the PGW/QST pilot. This is a major concern for us. Part of what we fear is that, assuming that PGW should be in the electric business, and that QST forms this very limited partnership with us, introduces itself through us to all of the PGW customers, gets, really, a little bit of a leg up on everybody else, in some respects is now able to compete even with us, because it will say that we, in effect, delivered this service, and then we end up competing.

Because we intend to be licensed, according to my understanding, because we filed whatever documents necessary, in order to be able to one day do it on our own. This is, at least in part, a kind of a little training program for us. 159 BILL 970647 Why do we want to put QST in that kind of preferred position? " So I think you ought to be thinking about that. I am not optimistic about all of this, but I want us to continue to talk about it and continue the public hearing process with a view towards trying to figure out a way to achieve the objectives of the company, while at the same time giving Council the comfort that it needs to authorize this. Now, those are some thoughts that I have. And I would like to hear from Council members who have any other thoughts about things the company and QST ought to be thinking about. I also think you ought to be thinking about having here to City Council, prior to a final vote, the agreement. I don't think anybody here is going to want to accept this whole business on faith. 160 BILL 970647 I mean, procedurally it would be possible for us to report all of this out, you know, with the appropriate amendments -- if we thought amendments could solve some of our problem -- then get an opportunity to see the actual agreement, so that we know what's in it, and then take a final vote on this. Those are some of my thoughts on it. And if Council members have any other feelings that you would like to make or views that you would like to make known at this time. Because what is going to happen is, as soon as Council members are finished, you know, making any comments that they have, and we will hear more testimony, then we will recess the Committee and have the session, and come back. And that gives the company an opportunity to talk about any of this that they wish to talk about when we come back. Does any Council member have anything to offer at this time? The Chair recognizes Councilman Cohen and Councilwoman Fernandez.

Well, I think, 161 BILL 970647 Mr. President, you have outlined very succinctly the areas of concern. I and Council would want to see every agreement. If there are changes in the agreement, we would want to see them. We would want to have an opportunity to see whether any Council member has any question about any phase. And no one of us can think for everybody. So we think there ought to be public hearings. I think whenever Council action is called for, it ought to be done by an ordinance, which guarantees public hearings and the public process. I think you made very clear that we want to know. What's the point of engaging in a pilot unless you know what's going to happen after the pilot? If what PGW proposes finally is something we don't want to go along with, then there is no point in getting involved in the expense of a pilot program. A pilot is useful only if it gets us to where we want to go. So first we have to find out where we are going to go. 162 BILL 970647

That's the purpose of asking for some kind of statement --

Yes.

-- that serves to set the framework for doing a pilot. Because we want to know, what are we trying to achieve with the pilot. And that's why we need some standards, to know whether or not we were successful with that.

And we would not like to have the standards developed at the end, because that's always very easy. I think that's what the President was referring to. Sometimes standards are developed after everything is in. And the standards that are developed conform to, you know, the results you are producing. We'd like to know what is it that we're going to be using as a testing ground, so that we can come back at you later and say, "This is what you said was the purpose. How do the test results make clear whether or not they're in line with the original purpose?" So I think we want everything out in 163 BILL 970647 the open. It is a big step forward. I have concerns. I expressed them at the hearing, expressed them after the hearing yesterday to those PGW officials that were good enough to stay late in an effort, I guess, to convince me. And I was willing to stay late in an effort to convince them of my concerns. But I just think it is important that we realize it is a city government that's involved here, and we're setting city policy. It is not PGW. It is not some private for-profit venture. And none of us are businesspeople, at least in our work in City Council. So I think if you follow, basically, the outline set forth by the Council President, and realize that the Council is composed of 17 individual bodies, and each one of them has to feel that he or she has had a full opportunity to understand every aspect of this and to come to an agreement. Councilwoman Verna may have a question. As she looks at the agreement, she may come up with a question that I would not see, 164 BILL 970647 because she would have her own experience by which to gauge the contents of a Memorandum, say, of Understanding. I would have my own, and the same would apply for every Council member. So please realize you are dealing with a diverse 17-member body, and no one ever speaks for all of us unless all of us have agreed to that fact. So we all would want the full opportunity to know just where you are going and what you are headed for. Thank you.

Councilwoman Fernandez.

Thank you, Mr. President. I must admit that I felt very uncomfortable with the original proposal until the amendments that were offered yesterday made it clear that this Council would be approving only the pilot, and not an open-door and a long-term involvement with electricity on the part of PGW. I think in light of the amendments, I 165 BILL 970647 do now feel more comfortable with giving a go-ahead for PGW to pursue the pilot, and the pilot only, at this point. One of the problems we face is, we would love to have certainty about all of this, but there really is not. And my understanding, we're in a very fluid time in terms of utilities. The deregulation of electricity, from my point of view, has come all too fast. But that's slightly out of our control, since it was a state legislative decision. I think the materials in the paper this morning about electric deregulation, you know, customers trying to make informed judgments, with all these different competing proposals, it is as bad or worse than the telephone stuff, which as a consumer I do not find helpful to have all these alleged choices. But that is the reality. And the further uncertainty that we face is the fact that the state legislature is considering deregulation of gas, also. And we really don't know what that will -- first we don't know what bill will actually 166 BILL 970647 emerge from the state legislature, and when. Some have said this fall. Some have said this spring. Some say it might be the bill that they're currently considering. But we know the state legislature has a capacity to make very surprising and unusual amendments at the last minute. So we don't even know if there will be gas deregulation, and, if so, when. And we also do not know, and there has been no substantive discussion, about the future of PGW as a municipal gas utility, much less a municipally owned electric and gas utility. So whether we like it or not, there are all these uncertainties out there. And we have to weigh the risks in the light of all these uncertainties. I, for one, am willing to move forward with this proposed pilot, with the clear amendments that have been added, that were added yesterday.

Thank you very much. The Chair recognizes Councilwoman 167 BILL 970647 Tasco.

Thank you, Mr. President. I guess I agree pretty much to what my colleague and Co-Commissioner of the Gas Commission has stated. We do know that the issue of deregulation is coming for the unbundling of gas. And I have stated to the PGW leadership time and time again that they, along with the Administration and City Council, must decide what PGW is going to be and what the future will be, and take a strong position on the legislation that is in Harrisburg, as it might impact on our future. And I think that discussion has to take place, take place very soon, so that we can have some influence. And if we are to have influence on the legislation, we have to know what we want in terms of any amendments. The other thing is, we do know that we want the company, if it can be, in light of deregulation, to be competitive, if it can be. I supported the concept of this whole 168 BILL 970647 issue of electricity, but too am concerned about the particulars. And I certainly hope that in looking at the agreement, that we place some protections in the agreement for the information that we have. Because we don't know what the relationship will be between QST and PGW. And, in the end, if we decide to stay in this business, they could end up being a competitor, and what have we given up to them enhances their position. So there are a lot of questions to be answered. And the other issue is what role -- we haven't even talked about that -- does the Gas Commission play in terms of regulation. And, that is, there are other issues and questions that we had early on about that. So while I support the concept and believe we ought to participate in the pilot, I think we ought to be clear on the road we are traveling.

Thank you. The Chair recognizes Councilman 169 BILL 970647 Nutter.

Thank, Mr. President. Just two brief comments. One, I notice that already we have received some of the information that was requested yesterday, apparently an opinion and what looks to be some documents out of Purdins 42. So first I want to thank the City Solicitor for getting that information over. And I know we got some additional information from PGW. Reflecting on yesterday's discussion, I want to say to the Solicitor that if any of my comments with regard to the need to have information and the request for information, if any of those comments seemed particularly personally sharp, I want to apologize to you. I have not ever had a problem getting information from you. There are other parts of the government that don't operate as openly as your office does, and so you are the recipient of, probably, some other people's fire. The substance of the comments, though, remain the same, and they are very clear. Secondly, the issue of QST, we have 170 BILL 970647 heard a fair amount about them, but, as best I can tell, either in any briefing on Monday or hearing yesterday, or even this morning, have we seen any of the QST people? Who are they, where are they? And I'm not, for the moment, asking that any of them come to the table. But with the exception of Bud, who we just met on Monday, I know everyone else at the table, and I have not heard or seen this other party. And there are a number of questions that were raised about them and about their relationship to PGW, or to PFMC, which, normally, if we're entering into something with someone, or even a contract directly with the City, those parties are usually not only present, but are asked questions themselves, so that we can get to the heart of the matter with the other entities. So I have wondered for some time where, other than on paper, was this entity QST.

Councilman Nutter, as to your first point, thank you. No 25 apology is necessary. 171 BILL 970647 And I do have additional materials available for members of Council, including the research memoranda that I referred to briefly that support the legal conclusions I summarized in my testimony. We have quite a lot of information and material responsive to some of the points and questions and concerns that were raised, and we will make that available. Secondly, we neglected as a housekeeping matter yesterday -- and we do apologize -- to introduce the representatives of QST that are here in the audience. And I will rely on Mr. Hawser, Bud, to do that.

With the permission of the President, I would like to introduce two members of the QST organization. First member is Steve Corwell, who is a vice-president. Steve is back there. And I think Steve is very willing to come and answer any questions that you or other members of the Council may have. We also -- 172 BILL 970647

Was Steve here yesterday?

Yes, he was.

I just want Steve to know --

He was sitting in the same seat.

We also have Vickie Ashelman, who is the Manager of Regulatory Affairs. She is on the phone. She is on the phone over there in the corner. We also have distributed materials with regard to QST to all members of the City Council and the President. And so that would be information that you can read with regard to QST. But if it is your pleasure, we would certainly request Mr. Corwell and Miss Ashelman to come and take the floor and address any questions or concerns that the City Council may have.

You may want to address that suggestion or request to the Chair.

Councilwoman Fernandez.

Yes. Thank 173 BILL 970647 you, Mr. President. I wanted to add one other comment for the record, which I have certainly raised in the Gas Commission and also, you know, off the record with PGW leadership. But it seems to me, as PGW, if they do proceed or give them permission to proceed with this pilot program, that it would be very important for PGW to continue to primarily focus on improving customer service, because that is really the core and a very important asset, whether they are trying to deliver gas or electricity. And looking both now to their role in the city as the municipally owned gas utility, but also looking toward the future and the kind of asset that we have, certainly excellent customer service needs to continue to be the core and main focus of efforts. And I think, for the record, I think it is to be noted that PGW went for about six years with no CEO, no clear top leadership. That has finally been changed, and we do have a strong leadership team there. And they have been able to make some significant changes in 174 BILL 970647 improving customer service. But considering how long there had been problems and neglect, I think there is still much to be done. So I as a Commissioner, and also a member of this Council, would urge PGW to continue to have that be your number one priority, and not allow this pilot in any way to detract from continuing to improve customer service. Because whatever happens in the future, having a satisfied customer base will serve us all well.

Thank you very much. At this time I believe Mr. Hawes has some comments that he would like to make, it is my understanding. If that's not true --

I assumed I would give testimony. Thank you very much, President Street. I will just make a few brief comments, and Bud Karachiwala will testify on behalf of the Philadelphia Gas Works. Let me just say that I wanted to 175 BILL 970647 clarify, so that there is no confusion whatsoever, about the strategic direction of your Philadelphia Gas Works. Yesterday Councilman O'Neill raised the issue of the vision of PGW. And let me just clarify for the record that a vision is intended not to limit the power of thought, and to continue to have us go toward a position about how we want our people to think and the direction we want them to think about taking the company. It is not intended to be a limitation at all. Now, as you go down the page, on the things that support the vision, they get a little more finite. Our vision is supported by two legs. One leg of that is to revitalize the core business. Everybody in this room understands -- I know you understand it -- that in a business, or in government, you have to think about the future long before it comes. You have to, what amounts to, place bets well ahead of -- sew seeds well ahead of when you expect the crop. So we don't have the luxury of just managing the core business. 85 to 90 percent of our 176 BILL 970647 time today and always will be devoted to managing the core business. But as we look to the future and what will make this utility viable long-term, you then look to the second leg. The second leg is, you have to be looking concurrently, not serially, to opportunities for expansion and growth. I think that's where sometimes the message gets a little confusing. If you look at those, they both are important, but the weight is nowhere near the same. The 1,962 employees we have, 90 percent of that effort, and in some cases 100 percent, most of the expansion and looking to the future is done by the top, the people who are actually out doing the business. 100 percent of that time is devoted to the core business. I am going to go one step lower. There are 5 strategies, and we had 100. 5 strategies, very simple business strategies. Improve service is number one, and has always been number one; reduce costs and be more efficient is number two; grow the core business is number three; and expansion is number four. 177 BILL 970647 The first three of those you do anyway. But even if you expand, you still have to do the first three. So that's where the leveraging comes in, and that's where you start having to look to the future. So the purpose in all of that was just to say, I don't want to leave the impression that we have taken our eye off of the ball, because we have not. We are talking about today one piece of what might be in the future, and that really is all we are talking about today. Now, having said all that, I want to quickly move into the guts of the testimony. I think it is very important, and I think a lot of the confusion comes from how this program has been rolled out and how confusing it is to people. What we have tried to do in this testimony is get very basic about who does what. I think there is a lot of confusion about who do you call, who is going to provide the distribution, who is going to provide the generation, how does the bill look, all of the 178 BILL 970647 fundamentals that perhaps we would normally start with. So I am going to, in the interest of time, turn the microphone over to Bud Karachiwala, who will give his testimony on behalf of the Philadelphia Gas Works. Thank you very much.

Good morning.

The Chair recognizes Mr. Bud Karachiwala.

Good morning, Mr. President and members of the City Council. In the interest of time and to respect your time pressures here, what I have done is condensed the presentation, a copy of which was given to all of the City Council members yesterday. And the only condensation that I have done is, essentially, those items that have been discussed may be not in the order that I had laid out in the presentation. So I will focus my presentation on this revised handout that I have laid on each and every Council member's desk. It is the one dated October 23, 1997. 179 BILL 970647 The slides are identical to the ones that you had, except for some typographical corrections. With your permission, Mr. President, I would like to give my presentation today.

Please proceed.

Thank you. Also, I understand that my written testimony has been adopted and included in the record, so I will just proceed with this. What I'm going to do this morning is really focus on four main topics. The first one is a summary of the PECO pilot program. Next I will talk about the business reasons for PGW's participation, the goals for the pilot. And I agree 100 percent with the comments made by you, Mr. President, as well as Council members, that we need to know up front what it is that we are seeking out of this pilot project. So that when we come to the conclusion, we will be able to assess in a fair 180 BILL 970647 fashion as to whether or not this company and us individually have met those goals. And, lastly, I will talk about the preliminary budget. With regard to the PECO pilot program, this pilot program was required by the Pennsylvania Public Utilities Commission because of the state law that was passed in 1996. I believe it was on December 12, 1996, that the Governor signed the law. The PUC issued pilot program regulations in August of 1997. PECO developed this pilot program in September of 1997. The deadline for PECO customers to indicate an interest in participating in the pilot program was September 29, 1997. On October 8, PECO provided a list to all the electricity generation suppliers of approximately 75,000 customers that were chosen to participate in the pilot program. The deadline for customers to pick their generation suppliers is October 25. Since then, there has been an extension of that deadline to November 14. 181 BILL 970647 So there are two key deadlines: October and November 14. 4 Those customers that choose a 5 supplier by October 25 will begin purchasing their 6 electricity from the suppliers on November 1, 1997. 7 The City Solicitor just wanted me to 8 remind you that she has distributed a copy of the 9 Commission's Order with regard to the PECO pilot to 10 all members of the City Council, including yourself, 11 Mr. President. 12 The pilot ends on December 31, 1998. 13 On January of 1999, another 28 percent, roughly, 14 of PECO's customers will get choice. 15 And a year later, on January 1, 2000, 16 another 33 percent. And then, finally, on January 17 1, 2001, the last 33 percent get choice. 18 I wanted to point out just some 19 important rules of the pilot. And there are many, 20 as you can imagine. This is a new area in the 21 electricity business. 22 But the first important point I 23 wanted to bring to your attention is that no 24 customer of any supplier will be without electricity 25 during the pilot, even if the supplier's electric 182 1 BILL 970647 supply fails to be delivered into PECO's grid. And that is because under these pilot programs, especially PECO's, PECO is the supplier of last resort. All complaints with regard to the pilot go to PECO, and from there to the Pennsylvania PUC. Even if a customer has already selected an electric supplier, the rules provide that the customer can still choose a new supplier by October 25. This is generally what is referred to as the initial open season. Afterwards, a customer can switch suppliers every 30 days after the start of the pilot on November 1. A supplier cannot drop a customer during the pilot except for nonpayment. I would like to now turn to the business reasons for PGW's participation, and there are essentially two. One is to test, and second is to position. With regard to the test, there are four things that we intend to test in this pilot. Number one, how good is PGW's name in 183 BILL 970647 selling other products and services within the City of Philadelphia. Second, how important is it for customers to buy their gas and electricity from the same energy company. Third, how can PGW use its current resources to expand into new businesses. And, lastly, what does it take for PGW to market in a highly competitive business.

With regard to the second leg of the business reasons, the positioning, the reason number one for positioning is in case deregulation occurs on PGW's system. Number two, future expansion of PECO's choice program, which will occur in January of '99 and later. And, of course, a share of the annual electric supply business in Philadelphia. I want to talk about the goals of PGW's pilot program. These goals were established during the first week that Mr. Hawes and I discussed our participation. And the first goal was to obtain 1,000 customers representing all customer classes. 184 BILL 970647 We also want to use our current technology, our current processes, and our current procedures, and apply them to, admittedly, a more competitive business environment. We also want to limit our out-of-pocket costs to PGW to about $500,000, exclusive of energy charges. We will also establish a goal of retaining 90 percent of the customers who have signed up with PGW in the open season. We also have a goal of causing at least 100 of competitors' customers to switch to PGW after the start of the pilot program. And, as was discussed earlier, achieve a customer satisfaction rating of at least 7 on a scale from 1 to 10. I want to highlight some important things with regard to a venture with QST. We have executed a Memorandum of Understanding. We are working on the definitive agreement to be done by November 1. Both are subject to necessary approvals. This relationship will continue at least until December 31, and this is an exclusive 185 BILL 970647 agreement within the City of Philadelphia. The roles of PGW and QST in the pilot will be as follows: We will jointly develop the business plan; PGW will market the venture's offer in the city; PGW will provide customer knowledge and contacts, incoming calls service, tele-marketing, billing and collections, local sales force, promotions and communications campaign using our current infrastructure. So, basically, what the City is going to see, the citizens inside the city are going to see, PGW in this joint venture. QST will provide competitively priced wholesale power and will be solely responsible for all costs associated with the supply. The price paid by the venture for power is not to exceed a set amount. QST will provide its experience in other electric pilots, sales support, and supply knowledge. With regard to the preliminary budget, there are two scenarios that were outlined in this presentation. The base case refers to those goals 186 BILL 970647 that I have described just now. In other words, 1,000 customers in the initial open season and 100 customers who switch to us later on. The stretch case is a case where we have 5,000 customers in the initial season, and 2,000 customers that switch to us later on. I am going to kind of -- all of those items have been laid out there. I would like to jump to the bottom line, so to speak. The subtotal for the project in the base case is 498,000, and for the stretch case is 951,000. From that, we have deducted the QST contribution, where they have agreed to share 50/50 the cost. And the sort of net bottom line PGW budget is 276,000 to 503,000. That concludes my formal presentation, Mr. President. And, with your permission, I would like to approach the blow-ups of the bills that I have established there, and kind of step the Council members through how our provisions of the offer will function.

Please 187 BILL 970647 proceed.

We had these mock-ups prepared in response to Councilman Nutter's questions about how exactly -- and I know it is difficult for members to see.

We need a microphone. Can we get a microphone.

Thank you. I also have placed it on your table, too, that may help you follow through. I don't know what the best way to stand is, but I will stand this way. This is how a residential customer's bill will look if you participate in PECO's pilot program and if you accept a customer of PGW. This is an example only, and this is not how your bill may actually look. This information, the top half that I reproduced here, comes directly from PECO. And what it shows, for example, this is a bill for a customer who is in the R rate schedule, residential customer, for the month of September, using 500 kwh for that month. The customer is going to see a fixed 188 BILL 970647 distribution service charge of $5.10. There will be a variable distribution service charge based on the consumption, which is 500, times 4.71 cents per kwh, giving you a total of $23.55. There is a transmission service charge of 500 kwh times .6 cents per kwh, giving you $3. A competitive transition charge of 500 kwh, at 4.74 cents per kwh, giving you a total of $23.70. For a total, unbundled subtotal, of $55.35. PECO will give the customer a participation of percent of that amount. So the 13 net PECO unbundled bill that a customer will receive under this pilot program will be $48.15. Then, if you switch to PGW's bill, where PGW is the generation supplier, the customer charge -- excuse me. I misspoke. QST is the generation supplier, but this is the PGW/QST offer. The customer charge is zero. The electric generation charge, based on 500 kwh -- because that is the information that PECO will give us with regard to how much the customer has consumed -- times 4.45 cents per kwh, gives you $22.25, less the 10 percent guaranteed savings that PGW/QST has offered, which is 7.04. 189 BILL 970647 And in a minute I will show you how that $7.04 is derived. The customer's bill from PGW will be $15.21. Over here I'm showing how the derivation of the percent savings occurs. 8 This is for a customer who is not 9 participating in PECO's pilot program. It is still 10 a customer who is in the R rate schedule. It is still for the month of September, and for the customer using the same 500 kwh that I mentioned. This is what I would call the PECO bundled bill, where for customers that are not participating in the pilot. The customer charge for basic service of $5.10. The energy charge, 500 kwh, at the rate of 13.05 cents per kwh, $65.25. Those two added together, $70.35. We take a straight 10 percent off the total bill, which gives you the $7.04. And that's the $7.04 that is deducted from the PGW bill.

Can we go --

The Chair recognizes Councilman Nutter. 190 BILL 970647

Thank you, Mr. President. Can we go back through some of the components of the two charges that you just showed us?

Certainly.

Okay. Let's go back to the first one. You are saying that someone who participates in the pilot, even though this is not exactly how their bill will look, although this may be, potentially, the clearest explanation of any utility bill in America, you are saying that all of these charges will be on there?

As I understand it, these elements or items will be on the bill that you get from PECO, yes, sir.

So you are a PGW customer participating in the pilot, and you are getting your electric through the PGW/QST relationship in this first scenario?

That is correct.

Okay. The fixed distribution charge, that is a PECO charge? 191 BILL 970647

Yes, sir.

The variable distribution service charge, that's also a PECO charge?

Yes, sir.

And so all of these, down to Total PECO Unbundled Bill, are all PECO charges?

Yes.

And then you are coming back. And I guess the QST portion is another electric generation charge at the 500 -- what is this? Kwh is kilowatt per hour?

Kilowatt hours, yes.

At $4.45 per kilowatt hour?

4.45 cents.

I'm sorry. I misread that. So there are now actually two generation charges?

No. There is no 25 generation charge in here at all. 192 BILL 970647

I'm sorry. There is a transmission and distribution charge.

Right. That's transmission, distribution, and what is called the competitive transition charge, which would be for all of the other costs, like stranded costs, and so on. But there is no generation charge here. The generation charge just comes from a separate bill that you get from your generation supplier.

Could you humor me in words or less and explain to me the 15 difference between a variable distribution charge 16 and a transmission service charge and a competitive 17 transmission charge? 18

I can certainly 19 try. 20

Did you 21 say in 25 hours or less? 22

Actually, 23 kilowatt hours. 24

That's 25 even better. 193 BILL 970647 Councilwoman Land, you are going to have plenty of work to do --

I can see that.

-- when these bills start going out.

To try and explain that, I don't know if you meant this facetiously, but I will try to explain.

Somewhat. I'm sure it is going to take more than words. But 12 Councilman Cohen, I think, is trying to ask a 13 question. 14 It is the first page, Councilman. 15

What is the bill 16 the customer is supposed to pay? 17

The customer is 18 supposed to pay PECO $48.15. The customer is 19 supposed to pay the generation supplier $15.21. 20

If they accept the 21 PGW offer, one electric bill will have two -- 22

They will have two 23 components, separate electric bills, yes. 24

Will they get two 25 separate bills, or will it all be one bill? 194 BILL 970647

They will get two separate bills. They will get one bill from PECO, and they will get another bill from PGW. Or if it is Enron, they will get another bill from Enron. Or Energy One, Horizon, they will get another bill from them.

But I thought in some of the materials there was the potential for dual billing? I thought I heard that in the briefing on Monday, and I thought it was in the briefing materials on Monday, that a person might have an option to have all of their charges on one bill, or as a part of a package of bills.

Yes, you are correct. The way the program rules were set up by the PUC, the customer could have one bill or two bills. I think it is one of the electric generation suppliers actually asking the customer which one they would prefer. What it is is, if you got one bill, then your generation charges will be applied by PECO 195 BILL 970647 in their bill, and there will be another line item which then includes the generation supplier's charge.

I mean, are you concerned about any confusion out there? If you have two bills floating around, and they are both, in the most bottom-line fashion, they are both for my electric service, if I write the one check, misplace the other bill, forget about the other bill, ignore the other bill, I mean, and I guess depending on the time of month or which bill goes out first, I mean, won't PGW potentially be in a position of not getting paid because a person thinks that they already paid their electric bill? You come back and say, "No, you have to pay us," and we get into that whole discussion that we had on Monday, about what happens when people don't pay. And then you are looking for your money, you cut them off, they end up back as a PECO customer, and I guess maybe they paid PECO. Why would you do that?

Councilman Nutter, 196 BILL 970647 all I can relate to you is my experience, actual experience, in being involved in pilots in other parts of the country. And I think this experience is also shared by QST in their participation, also. The two bills does not appear to be as confusing to customers. I think that from a convenience standpoint there is a certain segment of the population that would prefer to have one bill, but it is not confusing for them to have two bills.

I thought PECO was offering a 10 percent reduction. Would that come from the $70.35? Is that factoring the bills in --

If you look at the PECO portion of the bill, there is a customer participation credit of 13 percent, which equates to $7.20. That is directly going to appear on the PECO bill. If you add the two components, Councilman Cohen, the $48.15 that you get from PECO, and the $15.21 that you get from PGW, if you add those two components and compare it to what a customer who is not participating in the project would pay, which is $70.35, that's how you will come 197 BILL 970647 up with the percent, and that is what PECO is saying.

The Chair 5 recognizes Councilwoman Tasco. 6

I want to go 7 back to what Councilman Nutter asked about. At some 8 point in time, possibly, I thought, too, we were 9 talking about, a one bill from PGW and Philadelphia 10 Electric. And I'm not sure if I heard the answer, if this was his question. If I get one bill from PGW, and it has a partial payment, a person makes a partial payment, how do you know that they are paying electric or gas, and how do they denote that they are paying one? And where does the partial payment go? Does it go to PGW or does it go to -- does it go for gas or does it go for the electric?

This is how it is going to happen. A customer who is already a PGW gas customer, that chooses PGW as its electric supplier, will continue to get the PGW gas bill as they 198 BILL 970647 already have. There is no change in that at all. They will get another bill from PGW for their electric charges that will have a coupon, just like the gas bill does, which says, in this case, you owe $15.21. When the customer makes the payment, they tear the coupon and send it with the payment. That's one scenario. The other scenario is where the customer does not separate it out and sends one bill. In that case, the gas bill will always be paid first. And then whatever the balance is will be allocated to the PGW electric bill. So those are the two scenarios. One is where they send a separate coupon, separate payment, it gets taken care of. The second is where, let's say, the gas bill was $100, and they got $15.21, and they paid $115, the first $100 will go to the gas bill.

Who decided that?

So in one sense PECO is going to maintain all of its customers. All 199 BILL 970647 of the current PECO customers will continue to get a monthly bill from PECO.

Absolutely.

Even if the customer believes that he or she has chosen another company.

That is correct. At the same time, in many of the pilots, other marketing companies have proposed that the customer only get one bill, and that bill be from the marketers. And the marketer's bill will have the utility company's distribution, transition, and competitive transition charges. So that is another scenario that has also been discussed in other various pilot programs.

In the phone --

Who will make the decision on the billing ultimately?

The PUC.

I mean, my only other experience, I guess, with two or three different entities all billing together is in the phone industry. 200 BILL 970647 I mean, I get a bill from Bell Atlantic. Farther back, depending on how much I talked, I got a separate portion telling me about my long-distance calls, whether it is AT&T or Sprint or MCI, but it is all in one package. And at the end of it, there is a bottom line where they break out what my basic service is, they break out what the toll or regional stuff is, long-distance. And then down at the bottom this is it, and I write one check. And I send it to them, and they get it, and they do whatever it is that they do. You are telling us about your experience with pilots. And I have no way of even disputing that because I have none. All I am saying is, PECO is still going to send the bill, even though, as Councilman Cohen said, people in the pilot believe that they are actually now dealing with another company. And then PGW is still going to send their bill to those folks for gas and electric. I am intrigued, though, as to who decided or how did you decide that. In Councilwoman 201 BILL 970647 Tasco's, example, whatever they send in, the gas is automatically taken care of, and whatever is left over, if they are making a partial payment, goes to electric. Who made that decision?

We made that decision ourselves.

"We" who?

PGW made that decision. And the decision was reflected on what is common practice in a lot of other utility companies that also sell other products and services on the same bill. It is very common to make sure that the primary regulated service that you are providing always gets the full payment, and that is the practice that we choose to do here.

Well, we are not at that portion. But based on your business reasons for being in this, you have, one of your items is, how important is it for customers to buy their gas and electricity from the same energy company. You can answer this later, but you raised the issue. 202 BILL 970647 I would be interested to know, of top ten cities in the country, what is going on in those cities with regard to gas and electric provision? Are people getting those services from one company, are there multiple companies, and what any of those experiences are. But I don't need you to answer that question now, because we are in the billing section 10 of the discussion.

Right. Yes, sir.

Can I get Councilman Rizzo, who has been desperately trying. Councilman Rizzo.

Thank you, sir. Could you address the credit issue? If a person has poor credit history with a current supplier, are you going to assume that credit risk in the pilot?

When a customer chooses a generation supplier, the rules of the pilot say that the generation supplier must accept that customer and must supply generation supply to that customer. However, each generation supplier has 203 BILL 970647 terms and conditions for nonpayment after that customer has selected a supplier.

If they are under a current agreement with their current supplier, will you honor that agreement, if there is a payment arrangement or a payment agreement already established?

When you say "current supplier," you are talking like PECO? Once they choose PGW starting November 1, there is a brand-new relationship between that customer and PGW/QST for the generation portion of the bill. So when they get the first bill from us, $15.21, if they pay it, no problem. If they don't pay it, then there are certain provisions that are laid out in the terms and service as to what happens afterwards.

So what you're saying is, if a customer has a special agreement to maintain service, if they make the switch into the pilot, that that agreement does not come with them.

That's correct. That agreement stays in place with PECO. 204 BILL 970647

So they have to be very careful, if there is a special agreement with PECO, that they don't switch or see if you will accept that arrangement. Because many people are on arrangements, less than $15 a month.

That arrangement would continue with PECO, you are correct.

Thank you, Mr. President.

Thank you very much. Councilman Nutter, would you like to get an answer to that question that you had now? It might be an appropriate time.

I would, right after this question. The kilowatt hour charges on the first page add up to 10.2 cents for the PECO portion of the bill, and then PGW's is 4.45 cents, which seems to add to a total of 14.65 cents.

I will accept your math.

I mean, in the 205 BILL 970647 elementary math I was pretty good. That's the first page. On the PECO bundled bill, the only charge on this bill is the 13.05 cents per kilowatt hour.

Right.

A cursory reading of this seems to indicate that the kilowatt hour charges on the first page are more than the kilowatt hour charges on the second page. Can you explain that?

I cannot explain that. That is the way the program has been established by the PUC. All the numbers that you see here are coming directly from the PUC's documents, directly from PECO's documents. I cannot explain that.

And so ultimately, I mean, the only difference between these two pages seems to end up being the 10 percent savings out of the PGW portion, the PGW/QST portion, of this program.

Well, as you recall, our program, our offer, has two other 206 BILL 970647 elements besides the percent. 3

$15. 4

Right. 5

All right. You 6 can answer the other question. 7

Okay. I will try 8 to answer the other question. 9 I do not know the exact percentage of 10 utility companies in the larger cities that are what I call combination gas and electric companies. But I would estimate that a majority of the companies tend to be combination gas and electric companies. And then when deregulation occurs, it is a common positioning of all of these companies to be in a position to supply deregulated gas, as well as deregulated electricity, and, therefore, hang onto that customer as their customer.

Do you know about their billing practices?

Their billing practices generally are, they provide one bill for the regulated gas and electric. And when the deregulation occurs, 207 BILL 970647 they generally create an unregulated subsidiary that sends a separate bill, including the deregulated gas and the deregulated electricity, with a regulated bill still coming from their sister company.

Okay. All right.

The Chair recognizes Councilman Cohen.

You will forgive me if I am just being repetitive. But my head seems to be especially thick on this issue. Has there been any decision by PUC on these bills as of now?

The PUC is going to have post-pilot hearings in January of 1998. And at that time they are going to evaluate all of the experiences from the variety of pilot projects, and then make whatever changes the PUC believes is appropriate and necessary.

As I understand it, if a customer stays with PECO, and doesn't choose anybody else, that customer will get a single bill for electric energy.

Single bill for 208 BILL 970647 $70.35.

Whatever the bill 4 is, they will get one bill --

Yes, sir.

-- for electric energy. If they choose any other company, PGW, QST, or whomever, Enron, whatever, then they are going to get at least two bills.

That's correct, sir.

I think -- I just think -- did PECO write that regulation to do that?

The PUC provided those options.

Well, I understand that. But I think they have a tremendous advantage. Because I don't know what the experience -- with due respect to Councilman Nutter's question about what's the experience anywhere else, I think you are going to create a terribly confusing scene here in Philadelphia. We are going to get a call in the Council offices, we are going to be told, "We have 209 BILL 970647 already paid the electric bill. We are getting a second bill." And it is not only that Councilwoman Land, working for PGW, is going to have problems. I think we are all going to be run out of town. Because instead of making things simpler and easier, we are complicating things.

All I can do is share my personal experience and share with you, Councilman Cohen, the experiences of QST, that have participated in a variety of different pilots. It is not a matter of --

Well, that may be their judgment. But looking at the same facts that they look at, somebody else may come at a different position.

I understand.

I am not prepared to accept QST's judgment that this is a good way to work. We have been through that many, many times with a number of different situations. I am just saying there is going to be created a terribly confusing picture here. And I 210 BILL 970647 would like to urge on all companies that they try to move PUC to permit a unified bill as you get in the telephone companies. The telephone company, you get one bill, which includes the local company carries the billing for the long-distance company. That's true in Philadelphia. And Bell Atlantic bills you if you have MCI or AT&T, or whoever you have. But I think it is going to be a totally chaotic situation if there are two bills.

I think, Councilman Cohen, I think you are correct. And I think as we move into a more stable posture, as we get toward the end of the pilot, clearly you will have one company where that will be very easy. I don't think I would argue that there will be some confusion. But I believe -- and of course you understand it is out of our control -- but I think the price that the people who have chosen to be in the pilot will pay is some confusion. Because that's what this is, it is a pilot to test things, even on the part of -- it is a transition phase that the PUC is putting the 211 BILL 970647 customers through to make sure that when it rolls out, we know where the warts are and we know how to roll out the rules. I don't think there is anything we can do about it. That's just the way it is set up. We were just explaining to you, trying to make it clear, the facts as they are.

All right. I just think PECO must have done a pretty good job in getting PUC to accept this as an arrangement for the trial program.

I can't answer that. But if I had to speculate, I would agree.

The Chair recognizes Councilwoman Tasco.

I don't have a question about the bill. I do have a question about the -- probably Jim or Stephanie will answer this question -- would the cost of PECO-funded social programs be shared between PECO and the electric generation suppliers? If not, who will pay these costs?

I don't know if Bud can answer that. 212 BILL 970647 I doubt there will be any sharing of it. I think PECO will have to handle those as they always have.

I agree with that.

If you look at that bill, everything that they do today, that they will be doing in the trial, they are still billing for. And, you know, the most obvious thing is that surcharge to recover the stranded costs. So if you look at that bill, you see a fairly big number on there for that. I think everything that they do today that they are doing in the trial, those components, will still be billed by PECO.

I guess all of this goes back to many questions that I raised in my testimony on 1068, the gas unbundling. What is the advantage of -- and you may not be able to answer this question. It is just a question about, why are we deregulating, if it is just to give somebody the ability to use PECO's lines to sell electricity? And what responsibilities do they pick up for entering into the market? 213 BILL 970647

I do understand the question. I have heard it many times. And I don't have an answer any different than past answers. I don't want to be put in a position to answer that question because it is not --

Well, most people have an answer, and their answer is the --

Excuse me. Mr. Hawes, there may be some of us here who have not heard that answer. In addition to which, this is a hearing of record for the City Council of Philadelphia on this bill. And I would appreciate your giving us at least a brief response, since it has been raised.

I will be glad to. I think the question was, what is the intent of deregulation, if all it does is cause confusion. And I guess the only thing I can say to that is that deregulation, in my view -- although I don't want to be put in a position of defending it -- because I think it can be good, and I think competition can be good, but I don't think that it 214 BILL 970647 necessarily is good. I think the competition is supposed to reduce costs. I think it is supposed to provide more products and services. But I don't think that's necessarily the case. I think it is how it is structured, the quality of the competitors, and so forth. I don't know how to answer that any other way. I think federal legislation on all fronts is a fast-moving train. And I think it has been the intent of the federal government to move deregulation, from airlines, to trucking, to telecommunications, and so forth. So I think that's it.

But it seems to me that they are providing the environment for competitors to come in to sell the electricity without bearing the burden of the cost of producing that. Because they come in, and say, "Well, we'll give you the electricity for," whatever rate they want to charge. But the base company, PECO, and/or 215 BILL 970647 PGW if we get into unbundling, will still have to bear the costs associated with providing the pipe lines, as well as supporting programs for low-income customers. And, again, when we talk about this legislation 1068, I don't think we can stay out of it, if it is going to impact on us. Because I don't think they should have that right to do that without bearing some responsibility for the actual cost of providing that service. And what we have here is, these people trying to say, "I'm going to make it all great for you," but PECO is bearing the cost, the burden for producing and providing the lines, the transmission lines, and for the cost of the low-income customers.

Mr. Hawes, can you tell me what percent of PECO's customers are currently involved in the pilot?

I believe the number is 27.7 percent are, I think, roughly -- no. No. 24 Let me start. 27.7 percent were those who applied. The trial was limited to 75,000, 216 BILL 970647 which is percent. 3

5 4 percent? 5

Yes, sir.

So that if 5 percent is 75,000 customers, then 28 percent that will be in deregulation by 1999 is how many customers?

28 percent of 1.5 million, whatever that is.

Mr. McPherson, do you have your trusty calculator?

It would be a little over 300,000 customers; 330,000 customers.

Then by the year 2000, the 28 escalates to 33 percent?

Another 33 percent.

Another 33 percent. So that's 58 percent. And then 66 percent.

A third, a third, a third.

And those are total PECO customers, not just within the city. 217 BILL 970647

I understand that. They are total customers. Haven't we always been talking about total customers? Didn't I ask a question that was total customers?

But our program is limited --

I didn't ask about our program. I don't want you to give me information that I don't ask for, because then you confuse me.

Sorry about that.

I just want to know, what I want to do is, explore the magnitude of this program. So that the 7,500 is roughly 5 percent, and this is going to go to 28 percent and 33 percent. And I guess my question is, if this program, if this pilot, is going to end in 1998, and in almost the next instant, 1999, there are going to be that many more PECO customers that are now choosing in all of this, and that's a year from now, why wouldn't we just want to wait, get our act together, have our own license, negotiate around 218 BILL 970647 with whoever else might be interested in all of this, and be prepared to go into this thing full steam? Is there any reason to believe that we wouldn't be able to, PGW, on its own license, wouldn't be able to get into the electric business, if we all thought it was the reasonable thing to do, given the dramatic increase in customers that are going to be available?

I guess I would agree with every word you said. And I would add to that, if I were going from Councilman Street's presentation to mine, I would say exactly what you said. And I would say on the front end, that's why we want to experiment with -- we have 550,000 customers. To experiment with 15, and test all the things that we are talking about, puts us in a better position to do that if it is proved and if we choose to do it.

But, you know, my point is, we come here with two weeks to explore all of this. People don't even understand what 219 BILL 970647 this bill is going to be like. We could be here for -- I'm sure Councilman Cohen, in the interest of time, stopped, he just stopped talking about it. It just seems to me that this is the very, very tip of the iceberg for which we are probably least certain about what we are doing. I guess what concerns me a little bit is that, we had a briefing, and the company said to us, "We want to file these papers. We really want to file these papers so that we can stay in it. Not a commitment, but we want to be alive, to consider a possibility of getting in the pilot." And now we come here to the public hearing about whether or not we want to go into the pilot. There is a Memorandum of Understanding that will take significant work, which we think we need to see prior to authorizing this. There are all kinds of outstanding legal questions that have been raised, and we need to see some opinions on all of this. There are indemnity questions, cost questions. And I guess I am asking, what is it, quantify, if you will, for me the disadvantage of 220 BILL 970647 waiting. And I know this will be tough for you. All right? But in cases like this, there is always a down side. There is always a down side. There is always an up side and there is a down side. You have given us all the up side. Tell us a little bit about the down side. What is the down side of doing this now? There has got to be a down side.

I guess at this point I want to think about it. I guess that there could be some down side to having a few more calls, where there may be customer concerns. I think that's limited by the small number of participants. I don't know that there are many down sides. I think the greatest up side, that we haven't talked a little bit about, is, it might keep us from making a bad decision. The things that we said we want to test in the objectives are things that haven't been tested before. And we are in the very -- 221 BILL 970647

You want to talk about the up side.

The answer to the down side question is, at this point, I don't know of any down side because of the small size of the trial. If you asked me would it dilute our ability to answer telephones? I don't think so. So that it doesn't interfere with our entire business. We have trained, I guess, to 11 people, who still do what they do, but who will be 12 trained in how to answer the electric questions. So 13 I don't see a down side of it interfering with the other 150 people that we have on the phones. It doesn't involve our distribution people, who are out fixing our mains. It doesn't involve our field services people. After we get past this point, we don't have not one employee, I don't believe, dedicated to this. Bud is managing the project, and he is doing it while he is still doing his other job. Assuming that we clarify the insurance and indemnity issue, President Street, I'm sorry, I just don't see any down side. 222 BILL 970647

So you don't think there is any down side to this.

At this point, I don't.

Well, let me ask you, if you were to be told right now, "There's no reasonable chance in the foreseeable future that we were going to be able to sell gas and/or electricity in a deregulated environment in the city or in the suburbs," would you recommend that we continue with this?

No. 13

You would not recommend that we continue with it?

If there was no need to use what you're testing, then there would be no need to have the test.

Now, I am trying to connect --

President Street, my responses are geared strictly to inside the city. Because at this point that is the magnitude of our plans.

What I am trying to do is connect the business reasons for 223 BILL 970647 doing this to what it is we are doing. And you say, "Business reasons for PGW's participation." And you want to determine how good PGW's name is in selling products and services in Philadelphia. And obviously you can't test how well it would be outside of Philadelphia, because you aren't even proposing to get there at this moment. And then you say, "How important it is for customers to buy their gas and electricity from the same energy source." How can being in this pilot answer either of those questions? Because I don't understand that.

Okay. Let me try the first one. Brand awareness is very important to companies. They spend a lot of money, promotional money, not on a product, but on increasing the value of the brand to the consumers. At this point we have come into a pilot having done very little brand awareness. We have come into this pilot spending very little money on advertising. 224 BILL 970647 So we will know right away, to a certain extent, the power of the brand. Because if we could sign up, as an example, four or five thousand people with no advertising, that will suggest there is loyalty associated with the brand. We also have researchers --

How do we know that?

How do we know there is loyalty?

How do we know because a thousand people decided, "Maybe I will get my electric from PGW," how do we know why they are doing that?

Well, we don't know exactly why. But there are 40-plus suppliers who have registered. And that's just one of the options. The other option in the business reasons is, we have got a goal to get --

I only want to talk about these two for the moment.

But it is related to the same. You asked me about the brand question. 225 BILL 970647 I think the other issue in the brand question is, if you can get 100 people to switch to you, once you start applying some sort of stimulus, which may be advertising, you get to test the brand. I think the issue of the brand --

I'm still trying to figure out what that makes us know.

Well --

Look, this is a municipal utility. It is very different than all these other people. People don't know N Ron. People don't know these other people. I am just concerned about what it is we are inferring from the fact that somebody signs up. Somebody signs up with PGW, maybe, to get $15 or to get a lower discount. I don't know.

But I think there's one possibility they do it for that reason. But the other part of it is, we have surveys planned to see why people switched, to see why they chose one over the other. I mean, once you get in the fray, there are all sorts of things that you can learn 226 BILL 970647 about the power of the brand, that you can apply to other parts of the business. I think the second question you raised, which was the issue of gas and electricity, again, it is a test. We are the only potential supplier in the trial who can test customers' wants to get their gas supply from one customer. I think that's a significant advantage that we have. Nobody else has that, because nobody else sells gas. So we will get to see if, in fact, it is important to our customers to have a supplier, one supplier, for gas and electricity. That will be an important bit of understanding to make a determination as to whether we go forward.

Can you tell me what the statistical significance is of the customer base of PGW's that you are trying to get to buy their electric from the same company that supplies their gas?

I don't think -- I think the issue is, is a way to get information, market 227 BILL 970647 research, that you have never had a chance to get before.

I know that.

Let me tell you where I think the statistics become involved. I think the statistics become involved when you get in a much bigger population. As I can tell you know from your comments, the smaller the population, obviously, the less significant things can be. But I think we can learn from the smaller samples how you can apply to much bigger numbers, and you can then determine whether or not you want to take those kinds of risks later on. But I think the biggest value is, we get to do market research that's just not available out there a lot. And we already, by the way, are getting calls from companies wanting to know what kind of experience we will have in trying to get relationships with us, to get the advantage of that market information.

A part of 228 BILL 970647 the measure that you indicate is this 100 customers, "Cause 100 of competitors' customers to switch to PGW after the start of the pilot program." How are you going to get these 100 customers to switch?

President Street, we have not finalized a strategy yet as far as the switching. But in previous experience in previous trials, there are several strategies that I use. One is to offer some additional incentives, like additional sign-on bonuses, or whatever, to cause customers to switch. The other one is to try and, with tele-marketing, point out why your offer is significantly superior to whatever the customer may have chosen. Those are the two main strategies that have been adopted in previous trials. Like I said, we have not finalized what that strategy will be yet.

So you want to buy them with like a check for like $15, or 229 BILL 970647 something?

Some people have tried that. But the other approach would be to try and educate the customer as to the value of your existing offer.

Let's assume that you do all of this. Now what happens? I mean, you have done all of this stuff. Now what are we going to do with this information? Where are we going to take it from there? I am trying to connect this to some objective. Where do we go from there? You get 100 customers to switch, you had a thousand, you had a thousand of them, they all rate the service at least a 7. What then?

The way you use it is to make sure that you are not vulnerable to the same reasons why the competitors' customers have switched over to you. For example, if the customer is --

Vulnerable 230 BILL 970647 to what?

If the customers say, "I am switching over from Enron because I have got poor service from them, I don't get this, I don't get that, it is not clear," that is information we need to use to make sure --

For gas customers or electric customers?

Electric customers in the trial.

We will hope to give better service.

But my understanding is, we are doing all of this looking towards the future. You mean you are telling me that you are proposing to engage in this pilot to protect gas customers?

No. No. 21

That's what was just said. We can't do this to protect gas customers.

What I was saying was that you talked about the 28 percent additional 231 BILL 970647 that's going to open up in 1/1/99. The results and the experience of the trial, and learning what causes customers to switch, is what is going to be useful to structure our offer for the additional 28 percent that will open up in the next phase, which is January 1.

And I think the other thing that I will add to that, President Street, to your question, is that I think you can learn something. And we have got one of the items in there that we mentioned. I think you can learn in a competitive environment. And this electricity will be competitive. You will have some lessons that your people can own who are on the monopoly side now. So that when deregulation comes full bore, they have the experiences that they learned from that small competitive trial. Right now, other than those of us who have come here in the last two years, the majority of our people have been born and reared in a monopoly and have no conception, in a lot of cases, as to what it means to be competitive. 232 BILL 970647 So I think there is intelligence that you get from even the small trial that you could start to assimilate into the greater organization. Those people who have been 6 assigned to answer the telephones for electricity 7 can be used as trainers for the others when we get 8 into an unregulated environment. 9 And even if we don't get into an 10 unregulated environment in gas, we still need to 11 make the same customer service improvements. 12

The Chair 13 recognizes Councilman Cohen. 14

My staff informs 15 me that, at the present time, if PGW desired, and we approved your entry into this pilot program, that you could arrange to have a single bill sent to a customer; that it is PGW that is choosing to separate bills, and that you are not compelled to have separate bills. Is that true?

That is true, yes.

Because I did not get that impression at all. I thought that this was what the PUC 233 BILL 970647 had decided. And that under about my third or fourth question while you were standing at the podium, you indicated, well, it maybe could be reviewed by the PUC in January 1999. Why don't you have one bill sent, instead of two?

The PUC provided the two options, one bill versus the two bills. The generation suppliers have chosen the two-bill option. And I mentioned Enron, I mentioned Horizon, I mentioned PECO company, and PGW/QST, also.

I did not get that.

The PUC, in their rules, allowed for two options: One bill by PECO, which would include the generation suppliers' charges, or two bills, one from PECO and one from the generation supplier. The generation suppliers, like Enron, like Horizon, like PECO Energy, PGW/QST, have chosen that two-bill option.

But that doesn't mean PGW has to choose the two-bill option, does 234 BILL 970647 it?

That is what we have chosen. But it doesn't mean that, you are correct.

Well, that's a serious problem. Because I was going to say, short of that problem, it seemed to me that the history of PECO's treatment of the people of Philadelphia makes deregulation particularly attractive in Philadelphia. Because I think we are in a position where their rates were among the highest in the nation, and there was no movement whatever to lower those rates until the threat of competition came in. If things are done right, Mr. President, it seems to me that it is possible -- I don't see it as certain, but it is possible -- that PGW's entry into this field could give the Philadelphia citizen an option in the event that PECO's strength in the field continues at a very high level. Because our experience has been that 235 BILL 970647 the consumer in Philadelphia doesn't get treated fairly by PECO unless there is this threat. I think we need competition. But I just think we need it under circumstances in which it is made easy and not hard. It would seem to me if you went to a single bill, that would give you a second -- maybe not a second. It would give you an additional advantage. Because I think you do have advantages. I think the point that Mr. Hawes made recently, that you start with the base of gas customers, and you are the only company that can offer kind of a single billing for gas and electricity, I don't know how many it will influence, but I think it may influence many people, because that's a real advantage. But that moves in the direction of reducing the number of bills, not increasing the number of bills. And I would certainly urge upon PGW to reconsider its position on the billing, no matter what other companies do. Thank you, Mr. President.

Thank you 236 BILL 970647 very much. At this time there are three witnesses who are not company witnesses who have asked to testify on this matter. What I would like to do is hear those witnesses before we recess for the Council session. It is unfair to bring them back yet again. They are Joseph Horan, Walt Pizinski. Is Mr. Pizinski here? And Steve Hershey. So I would like to start with Mr. Horan. And if the other witnesses, if the company witnesses, would sort of stand by, I would appreciate it. But I would like to have these witnesses have an opportunity to testify before we recess to later on today. Mr. Horan, please identify yourself for the record.

Yes, sir. Good morning. My name is Joseph Horan. I am a private citizen testifying as a ratepayer and a PGW retiree. I have provided a copy -- 237 BILL 970647

Mr. Horan, this is a very long statement here.

I am going to practically skip this statement because much of what I have put in there PGW has pretty much agreed to. The pilot program is a loser in terms of cost, or savings. However, several things in my statement I wish to reiterate. One is that, it is improper to have the PGW gas ratepayers finance a 10 percent discount for electric customers. That's basically simple. I certainly don't want to finance it. And if the city believes that it is a very inexpensive program, as Mr. Hayllar said, then the city ought to fund it through a net credit to the $18 million city payment. And I can tell you one of the down sides -- you asked Mr. Hawes what one of the down sides is; I could tell you what the down side is -- a 300,000 or 500,000 cost borne by the gas ratepayers. The prospects of deregulation being successful beyond the pilot program are somewhere between slim and none at all because of the PUC 238 BILL 970647 settlement, which provides a very small margin for the energy suppliers to provide the energy and make a profit. Therefore, I don't see any point in running a pilot, for a cost of 300 to 500 thousand dollars -- incidentally, there is a very interesting statement there. That's exclusive of energy charges. So if the energy revenues don't cover the energy costs, there is an additional cost to the PGW ratepayers as it is currently structured. I believe that the city, if it believes that PGW should, despite all of the negatives in this venture, should participate in the pilot, that the city ought to fund the pilot and not the gas ratepayers. Several statements have been made today I would take issue with, Mr. Nutter. Councilman Nutter asked Mr. Karachiwala about the 10 largest cities, and whether or not they are combination companies or separate companies. And, you know, he answered it, he thought most of them were combination companies. I disagree with that. I can think of three right 239 BILL 970647 offhand -- New York, Philadelphia, and Atlanta -- where the major gas supplier is a gas company and the major electric supplier is an electric company, they are not combination companies. That's three. And Los Angeles is served by SoCal Gas and a different electric company. So that that's another consideration that I believe you have been misinformed on. Another thing -- and I have listened very interestingly to these legal arguments and legal comments, and I'm not a lawyer -- but one of the things that struck me was that it seems to me that the lynch pin of the legal pin is the 1919 law which deals with utility service. And I guess I would ask the question that since the provision of electric generation is now a deregulated entity, is that a utility service, or is it a private enterprise? So that that's a very interesting question that I haven't heard any answers to at the moment. Again, I reiterate that I don't believe the gas ratepayers should underfund or fund this particular venture. And I find it appalling 240 BILL 970647 that the two Gas Commissioners on the City Council would indicate they would support the program without a proviso that the funding come from somewhere else, other than the gas ratepayers. I appreciate you moving us up on the schedule, since, unlike my previous times before Council, I am not getting paid for this one. And I thank you for your attention and for listening to my comments. Thank you.

Thank you very much. Are there any questions of Mr. Horan? Thank you very much. Mr. Pizinski. He doesn't seem to be here. Steve Hershey.

Thank you, Mr. President. I won't read through this prepared testimony, but I do want to emphasize a few points and make a few additional comments based on what we have heard during the last two days. 241 BILL 970647 I am an attorney with Community Legal Services, and we serve as the public advocate before the Gas Commission on all matters related to PGW. We represent PGW's --

Mr. Hershey, I am going to have to ask you to speak louder and much more directly into the microphone.

Yes, sir. We serve as the public advocate representing all of PGW's residential customers. One of the concerns that you have articulated, Mr. President, is a concern that we have had very much at the Gas Commission, and that is the supply of timely and accurate information. That is essential to the way PGW operates both at the Gas Commission and here. No 18 one can do their business without that. Having said that, I do believe that, given PGW's current situation, it is essential that they have the freedom to act on opportunities to increase revenues when they can do so in a reasonable way, and particularly when they have the oversight of the Gas Commission to protect the customers from any abuses that might occur from any 242 BILL 970647 errors of judgment. All of the information --

I don't understand that at all. What errors of judgment? On whose behalf?

Any time management of any company makes decisions which affect the ratepayers' obligations, those decisions have to be reviewed. With every company, mistakes can be made. There can be differences of opinion as to appropriate policy.

Can you bring those comments home to what we are talking about? As in, if PGW makes a mistake, there has to be a Gas Commission. I mean, I don't want you to talk in a theoretical world here. And you know I appreciate your testimony. But I would like for you to talk about concretely what's in front of us. When you say, for example, the company should have the freedom, Mr. Hershey, I don't know what that means. 243 BILL 970647 Either the company has the authority or it doesn't have the authority. We don't give it freedom. And I need you to be just real specific. I respect your view. I have been involved with you in these issues, and I really want to hear your opinion. But I want you to give us something that means something to us. Don't tell us that it should be free, because it is either going to have the authority to do something or not. And that's just not a word that means anything to us in this context.

Freedom was a bad choice of word. Authority to act on opportunities such as electric deregulation. And I believe that, in the pilot proposal that's on the table, the risk to customers is minimal, that the possible gain is significant. And given the current financial distress of PGW, they have to have the authority to act in a reasonable manner on every opportunity to increase company revenues.

Who should pay for this? You can start right there. Who 244 BILL 970647 should pay? There are some people who are concerned that taxpayers might end up having to pay. There are some people who don't think ratepayers should have to pay. Who should pay? And there is going to be a cost, a financial cost. In your judgment, who should pay for this? And my recollection is that you are a person who has stood in front of us on numerous occasions and questioned the $18 million. So if ratepayers shouldn't pay the $18 million, should ratepayers pay a cost of this venture, whether or not it is $10 or a million dollars? Who should pay?

I think that, certainly for the pilot program, it is appropriate for ratepayers to take on those burdens. You are correct that I challenged the $18 million. We lost that in the Supreme Court. I still believe that the city, the General Fund, should be responsible for any costs incurred as a result of imprudent management. And 245 BILL 970647 it is for the Gas Commission to determine what is prudent and not prudent. That the city does have an obligation to properly manage and make sure that management is acting reasonably in the interests of the ratepayers, as well as the owner, the city. But for this initial pilot program -- and my testimony is focused only on the pilot -- it is reasonable for customers to pay those costs. Going back to some of the questions yesterday concerning potential liability, I'm not going to address the legal questions there; that's not my expertise. But I can say that with regard to the likelihood of liability in this situation, it is PECO that will be maintaining the transmission and distribution lines. In reality, PGW is doing little more in the pilot than acting as the middleman, making arrangements between customers and the supplier of electrons which will pass through PECO's transmission and distribution system. If there is an accident, the likelihood is that it will be a transmission and 246 BILL 970647 distribution problem. For that reason, and the size of this, I think the risk to the ratepayers, and, in turn, to the city, is pretty limited.

Well, is it your position that whether or not the ratepayers should pay or someone else should pay, because there is one thing that -- why should PGW decide to speculate about going into the electric business with a for-profit company that looks to make money out of all of this in the end? It looks to make money. It is not limited in what it can make. Why should we sit here today and authorize ratepayers, who are already struggling, to pay for the costs of that speculation? And it is speculation. Why should they have to pay one dime, one little itsy-bitsy penny? If we all want to preserve the asset, or increase its value, and enter into a marginally, at least arguably, illegal joint venture with a for-profit company who is concerned about its bottom line, why should we tell ratepayers, why should Councilman Cohen, why should we say to Councilwoman 247 BILL 970647 Fernandez and Councilwoman Tasco, "You should pass those costs off to the ratepayers. Let them pay"? And if, for example, you know, there is litigation involved in this -- not you all, of course; you would never sue us -- if there was litigation involved in all of this, because Enron or somebody else decided that this is not a good idea, and now we are already in it, and there are two, three hundred thousand dollars worth of legal fees, the ratepayers should have to pay that? I am having some trouble understanding that argument. The ratepayers should pay for the costs of the service that they receive. Why shouldn't the electric ratepayers pay it? You understand? I am a person who gets a gas bill. I don't know anything about deregulation. I don't know anything about electricity. I'm buying my electricity from PECO. I hate paying the bill 22 because it always seems too high. Now all of the sudden the company decides it is going to go into electricity. And I have to pay because a thousand of other PGW 248 BILL 970647 customers decided to get involved in this speculative venture? What does that have to do with me and the service that I receive? I am receiving a service from a municipal utility, that I own and operate and elect people to run. And they have delegated that responsibility to a board which is appointed by the Mayor. Why am I in it? Why am I in it? You want to do that? Spin off some other agency. Let that agency, that other, you know, kind of PGW-type subsidy do whatever it wants to do. Maybe it could have a contract with somebody. Let those people pay those costs. Why am I in it? And I know you are good at this. And I regard you as being a professional witness. And I want to have a little bit of dialogue with you because you think about these things a lot. Why are we dragging them in it?

PGW has been involved in a number of other pilot programs, as have other utilities. 249 BILL 970647 One specific pilot program was with the low-income program, another was with the automatic-meter-reading program. Both of those pilots, like this pilot, were designed to test an idea and its implementation to determine whether or not it would benefit all of the customers. Both of those pilots proved to be effective, and they were expanded to all of the customers who were either eligible, in one case, or all customers within the system. This is designed to test a concept which could provide benefit to all of the ratepayers. And I should say that in this particular situation --

No one has said that to this point. Not a sole has said, "PGW ratepayers, in the long haul, could benefit from this." There have been talks about, "Well, you know, this preserves the value of the company," and this that and the other. But nobody has said, "As a result of doing all this, we might be able to 250 BILL 970647 provide some great relief to PGW customers." PGW customers want to pay for what they get. They are not interested in having us speculate around about what it is they might get some time in the indefinite future, if, under law and government, PGW is able to do a bunch of other things, either within the county or outside of the county, based on what somebody else might do about deregulation. What is the nexus there?

Well, the next step would be, as in the other pilots, to assess what happened and make a judgment whether it is appropriate, whether it is in the interests of all the customers, to expand the program --

See, Mr. Hershey, this is my problem with all of this, is that the ratepayers don't own the company. If the ratepayers owned the company, then you got a strong argument. The taxpayers own the company. The ratepayers only buy service from the company.

But the ratepayers have, in fact, been the only investors in this 251 BILL 970647 company. The city has never invested a penny.

Recently.

No. Ever. Ever.

But you have to concede that the taxpayers own the company. The people who potentially will benefit if this experiment is an absolute success is taxpayers, not ratepayers. And to the extent ratepayers are taxpayers, they may get a benefit. But not ratepayers. Ratepayers every month get service and pay a bill, and that's it. I can cease to be a ratepayer any time I want, but I can't cease to be a taxpayer any time I want. Ratepayers can decide they're not going to do PGW today, "I'm going to go and get rid of my gas, and I'm going to switch to oil. I'm going to switch to electricity for heat," or whatever. And I draw a very clear distinction between ratepayers and taxpayers. And it is unfair, it is unfair in 252 BILL 970647 some respects, to ask ratepayers to pay the costs of a pilot which, if it is successful, is going to benefit taxpayers.

I wouldn't be here if I didn't think that ratepayers would benefit from this pilot. And I say that for a couple of reasons. First, if PECO is able, if the pilot is successful and they expand the program and are able to sell electricity on a larger scale, I believe that that will provide very real value for ratepayers. In fact, much greater value for ratepayers than taxpayers. And I say that for a couple of reasons. One is that I think PGW is in very bad financial condition right now, and they need desperately --

To spend more money.

No. Well, unfortunately, sometimes you do have to spend money in order to get money. And they desperately need to increase their revenues. And you do that by attracting 253 BILL 970647 additional gas customers and by providing other services that can bring in revenue. This is one of those. I do not sit here today testifying --

Mr. Hershey, you don't mean to lead us to believe that you think that, as a result of this pilot, revenue, additional revenue, is going to come into this company. We have been told flat out that all the revenue that gets generated by this pilot will go to QST for the costs of electric provided. Now, am I wrong about that?

In the only document that I have been shown about the nature of the agreement with QST, it says specifically that net profit will be shared 50/50 between QST and PGW.

We don't even think that PFMC could share in profit. We think that that creates all kinds of problems with its 501 C 3 nonprofit, all that. There is this big legal question about whether or not it can have profit. But those questions aside -- 254 BILL 970647

I am talking about PGW and QST sharing the profit.

I understand that.

And, obviously, PFMC is a nonprofit. But, you know, in terms of potential benefit to taxpayers versus ratepayers, one of the issues that's been discussed here, both in opposition and in support, is that PGW is going to be sold. And, as you know, Mr. President, very well --

I never heard that here.

-- we did --

Is this a definitive statement or is this a speculative statement?

Nobody ever said PGW was going to be sold. Did anybody hear that?

That that's -- the possibility of sale of PGW is something that's being 255 BILL 970647 considered, and I oppose that. I think that sale of PGW would be not in the ratepayers' interests.

So is that your real interest here? You think that if we don't do this, that might increase the likelihood of sale? And you are against sale, so you have to be for this?

No. Because I have heard the sale of PGW connected with this pilot from both sides. Either you shouldn't do it because PGW is going to be sold, and, therefore, don't spend the money. And I have also heard from the other side that this increases PGW's value for sale. I say, put that whole issue of sale aside. I oppose the sale. Let's look at this on its own merits and don't think of it in the context of a possible sale of PGW. So having said that --

We have to think of this in the light of the future of PGW. And the future of PGW has to, of necessity, consider, include the possible sale of 256 BILL 970647 PGW. Although nobody has today, or I haven't heard anybody say, PGW is going to be sold. Nobody has said that. I don't think this record should be confused with the idea that this is all being done to support the sale of PGW. And that's because I don't think anybody has said that. I certainly don't believe Mr. Hawes has implied that. As a matter of fact, to the contrary, I think his whole point here is that this is a mechanism or a device or a way that would probably tend against the sale of PGW. But that, if it ended up that way, it would increase its value. So I don't want to get these hearings, you know, bogged down in whether or not PGW is going to be sold or not. We really are going to have to recess until 2 o'clock. Is there any other thing that you have to offer to us at this point?

I think I have made my major points. 257 BILL 970647 I have written testimony which can --

We will make sure it is included in the record.

Thank you, Mr. President.

If I can have Council members' attention. What I would like to do is recess this hearing until 2 o'clock this afternoon. I would like to now go to the Council Caucus Room to do our caucus, come back, convene the Council session, take care of the business that we have to do in Council, reconvene this public hearing at 2 o'clock, see where we are, and then we can make a judgment at that time how we wish to proceed from there. The Chair recognizes Councilman Nutter.

Point of order, Mr. President. And I may have missed the person. I got the impression, I think I was on the other side of the room, that you indicated that there may have been three. 258 BILL 970647

I called all three names. Only two people responded.

All right. Thank you.

So this Committee will stand in recess until 2 o'clock. We would appreciate it if the Council members would go to the Council Caucus Room. We will have a brief caucus, come back, have Council, recess, reconvene this session, and then we will probably end up reconvening Council. (Hearing temporarily adjourned at 10:55 a.m.) - - - 259 BILL 970647 (Hearing reconvened at 2:35 p.m.)

This is a reconvened hearing of the Council Committee of the Whole. The City Council of Philadelphia's regular session for today has been recessed until 3 o'clock. At this time the Chair recognizes Councilwoman Verna.

Thank, you Mr. Chairman. I would ask to be excused. And I would like the record to reflect that I vote that Bill No. 970647 be reported out of Committee with a favorable recommendation, with the amendments submitted by you.

Thank you very much. That is not a vote; a vote is not required.

I intend to offer some amendments, and would like to have the Council members hear them before a final decision has been made. 260 BILL 970647

Councilman Cohen, I think you may have misunderstood. The only thing Councilwoman Verna is doing is leaving, and she wants her vote for the bill and the amendments that I offer. Other amendments will be considered. We aren't doing that now; she is just going to go.

But I don't want her vote to be counted a vote against other amendments.

It isn't a bote against other amendments; it is a vote for some amendments. It is not a vote against your amendments.

Well, that's not the way it happens, you know.

Councilman Cohen, do you object to Councilwoman Verna leaving her vote for amendments that I offer?

No. I just want to make sure that that's not an interpretation that her vote is to be counted as a vote of no on my amendments.

I already 261 BILL 970647 thought I cleared that up. Her vote is only a vote in favor of the amendments that I offer, I offer. It cannot be in any way a reflection on any amendments that you offer. We don't know what those will be. Is that all right with you?

All right. That's satisfactory. I will miss her.

Thank you very much, Councilwoman Verna. If I could have your attention. It is clear to me that there are a number of people who wish to offer amendments. What I would like to do is complete the testimony today, now. These are not simple amendments. I know that the Solicitor and others are working hard to try to come up with language. I propose to recess this Committee after the testimony until tomorrow morning, recess the Council session until tomorrow morning, so that by then, hopefully, Councilman Cohen will have an opportunity to have his amendments prepared. Whatever amendments anybody has, they can all be 262 BILL 970647 prepared. Come in here tomorrow morning. If anybody has any last questions, public hearing questions, you can offer those questions, get those answers. Go into a public meeting, and any and all amendments can be considered by the Committee of the Whole. If there is enough support for anything to report it out, it gets reported out, we have a live Council session to consider it. Councilman Ortiz.

Mr. President, I will not be here. I will be in Washington. I am leaving for Washington this evening, so I will not be here. So I want to be recorded as voting yes on reporting this bill out of Council.

All right. However it is amended?

However it is amended.

I thank you. 263 BILL 970647

As long as it is amended to give approval to PGW to enter the market.

To do the pilot.

To do the pilot, yes.

I thank you. It is so noted.

If it is amended to prevent PGW, then my vote would be a nay vote on that.

Well, that would be a superfluous nay. But, nevertheless, it will be noted. I thank you. The Chair recognizes Councilwoman Clark.

Mr. President, tomorrow I have a commitment that takes me out of the building and out of the city until at least noon. So if I am not here, I would like to be recorded as voting aye on the bill as amended if those amendments permit the pilot. 264 BILL 970647

All amendments?

All amendments that permit the pilot, including those about which you and I spoke.

Thank you very much. Anyone else? The Chair recognizes Councilman Nutter.

Well, Mr. President, I plan to be here.

So do I.

And I will decide which amendments I will vote on when I see them.

That's a good idea.

But I do have one informational question.

Councilman, before we get to the substance, does anybody have any procedural -- is this information of me on the procedural?

Yes. 265 BILL 970647 Between all the material that we received in the past couple of days, am I correct that the last thing we have from the Solicitor with amendments is a document dated 10/22/97 that has Exhibit A and Exhibit B attached to it?

That's a yes or a no answer.

Yes.

Thank you.

Does everyone understand what we are contemplating doing? Any Council member have any question about it? Fine.

So that there is no --

I knew if I hesitated long enough, we could get at least one more question.

This is a comment, not a question.

That's fair. 266 BILL 970647

The basis of my amendments is that, before PGW can go any further, assuming it is given a grant of authorization to engage in the pilot program, that everything must be sent back to the entire Council. And if there are changes in the agreement, they have to be done by ordinance. That's the only way I know to guarantee the full hearing and for involvement of the public.

Councilman Cohen --

That's the nature of the amendment.

-- I think you misunderstood. I tried to make it clear earlier. There is not any interest on the part of the Chairperson of this Committee to support approving the entry of PGW in this business by pilot without seeing a full agreement, not the Memorandum of Understanding. They're not going to have a very good weekend here. We want the full agreement -- now, that's the position -- before the final vote, which 267 BILL 970647 literally moots your amendment. Because what you are talking about being able to see later, we want to see before the final vote.

The final vote on what?

On this bill.

Engaging in the pilot program?

On this bill. I will say that we have to have it by Wednesday, so you could see it Wednesday, in preparation for a possible vote on Thursday. These folks have work to do. So where you're talking about maybe bringing it back later, we are way away from that. We're talking about having it before we actually have a final vote on the bill. So that there could be no need to bring anything back, because you already had an opportunity to see it.

All right. And then amendments could actually be 268 BILL 970647 offered at that -- we could have approval by -- no. 3 I understand. We have to wait another week.

Can't do that.

Okay. I agree.

The amendments that would be made to the bill will set forth the framework and any limitations that we want to impose on the agreement that will be, in major part, like the Memorandum of Understanding, but which we don't think is sufficient advice to us on how it will be structured. So we want to see the agreement. So they're going to have to do an agreement in record time, get it over here, let us see it. And at the time we adopt the bill, we will also adopt the resolution approving the underlying agreement. Then you have it all.

All right.

Then there is no need to bring anything back, there is no need for anybody to be looking at it, making judgments, because we saw it all.

But there would 269 BILL 970647 have to be language in this bill to indicate that before any further action, beyond the pilot, can be taken.

That language has already been contemplated.

That's in the amendments that were given out yesterday.

That's in the already inadequate amendments.

Okay.

Any questions about any of this? We are now at the point in time where we wish to continue the public hearing on this matter. The Chair recognizes Councilman Nutter.

Thank you, Mr. President. In the hearing earlier today, and the question was asked yesterday, I believe I asked about the agreement only covering the relationship between PGW and QST in the city. And the response was that there was 270 BILL 970647 an exclusive agreement with them in the city, and that QST very well today or tomorrow, or at some time in the future, would be engaged in the business that they are in in areas outside the city. I subsequently asked about a No 7 Compete clause. And the response, I believe, yesterday was, there was discussion about that, but it has not been resolved. I have two questions. One, I was told this morning that there are QST people at this hearing, and I would like to hear from them on that issue. And, secondly, there were a number of statements made about, why is PGW getting into this and the nature of the relationship between PGW and QST. I would like to hear from QST's perspective why they would want to engage in this relationship with PGW, given some of the comments that have been made about the operation of the Gas Works and how some people may feel about PGW.

Mr. President, with your permission, I would like to introduce a representative of QST. This is Mr. Steve Corwell, C-O-R-W-E-L-L, Vice-President for QST. 271 BILL 970647

Thank you, Mr. President. Is there any value for me to introduce QST Energy, Mr. President, an overall framework, in order to get a better understanding prior to answering some specific questions?

What I would like to do is have you answer Councilman Nutter's specific question.

Okay.

And I think there may be a small possibility that it will lead you to the opportunity to talk a little bit more about QST in a general kind of way.

Very well. Thank you. Councilman, I believe you asked about some Non-Compete issues, language, et cetera.

Right.

And, I apologize, I'm not sure what the specific question was.

That's okay. On one of the pages of the multi-colored presentation dated October 22, there is a statement headline that says, and one of the bullet points says, that you 272 BILL 970647 have an exclusive agreement within the city. That led to a question asking, naturally, you must plan to do business outside the city. The response was yes. And we have no 6 involvement in that business. The specific question about No 8 Compete comes in where PGW is presently planning to use your license to engage in this business. You have a license in Pennsylvania to provide electric service. PGW is allowed to, through this Memorandum of Understanding and Venture Agreement, to go forward in the pilot piggy-backed on you. PGW has also applied for their own license, and at some point in time could get a license. And if the agreement, or the Memorandum of Understanding, were to dissolve, or you both decided to part ways, the question is whether PGW will go on its own to provide electric service under its own license, while you had a partnership or a relationship with them, and you have your own license, as well, and whether you, in theory or in reality, the two companies, as partners 273 BILL 970647 today, months from now, could be competitors. What I want to know is, one, could that happen? Two, will you agree not to compete against PGW in this marketplace, since you are developing a relationship with the company in an area where you have no name recognition whatsoever? And I assume that part of the reason you are engaged in this partnership is because PGW does have name recognition, whether by Councilman Cohen's estimation it is bad name recognition, or other people think it is good. Why should we engage in a relationship with you, if we could potentially end up as competitors after you have enjoyed the benefit, at some level, of a relationship with a company that has 100-some-odd-year history, and you have virtually none?

Councilman, the intent of the relationship that QST Energy is entering into with PGW is for it to be a long-term, amicable relationship. As Mr. Hawes stated yesterday, this certainly is a courtship period.

We know a lot of 274 BILL 970647 things happen in the courtship.

During that period, we would intend not to compete directly with PGW as QST Energy within the City of Philadelphia, and we essentially agreed to that. Presumably, if the worst case happens, where the agreement between QST Energy and PGW is terminated, for whatever reason, the agreement stands, as now, that we would both be permitted individually to compete. Obviously, if we were both competing, it would be against each other.

Let's get right to the question, then. Would you agree not to compete against PGW if your relationship dissolves?

I certainly cannot sit here today and agree to that on behalf of QST Energy.

Let me ask the simple question. Why? I'm sure this is not the first time this has come up, this issue.

This issue has came up 275 BILL 970647 during the discussions with PGW. And as indicated in the MOU, if a decision was made, and the decision was made to terminate the relationship, each party could go its own separate ways. There was no agreement, per se. Just as there was no agreement on QST's part, or I should say on PGW's part, not to compete with QST somewhere else in the country.

That was mighty big of us, to agree not to compete with you in other areas of the country. I hope we didn't give up much for that.

I am prepared to sign an agreement with some New York City Council members not to compete with them.

Or sell any gas to customers in New York.

Well, I mean, I was told that you were here yesterday. You have heard, you know, this discussion. I'm sure you know by now that the No 23 Compete issue is a pretty serious issue, and one that some of us are focusing on. And I assume if you are at the 276 BILL 970647 Memorandum of Understanding stage now, and if we are anticipating seeing a Venture Agreement by next Wednesday, that there is a fair amount of discussion and movement that has to take place before we may be able to move on this issue. I feel very strongly about this Compete/No Compete issue going forward.

Councilman, your interest is noted. Certainly there are and will be additional discussions relating to the relationship that we are entering into. And certainly your interests will be recognized in some fashion in those discussions. I cannot commit, as I sit here, for the organization, and suggest to you that unilaterally we can just offer up a Non-Compete provision.

Okay. My colleague, Councilwoman Clark, I think, wants to talk to you about this issue. I have got another question still on the floor, but I think she wants to talk about competition. 277 BILL 970647

Am I recognized? CHAIRMAN MARKS: The Chair recognizes Councilwoman Clark.

Thank you for the yield, Mr. Nutter. For point of emphasis, in negotiations, there are some negotiable and nonnegotiable points. There are some sweeteners for a deal and there are some deal-breakers. This could be a deal breaker. How do you feel about that?

I don't feel good about something that could be a deal-breaker. We are very serious about our relationship with PGW. We believe that, contrary to what I have heard over the last couple of days, that QST brings significant value to the relationship, and that it isn't a one-way street. And certainly anything that could break the deal I would not be very excited about.

For that reason I rise to underscore the point of non-competition, so that you would realize that this is a very 278 BILL 970647 serious point with this Council. And I would urge you to negotiate very strenuously with whomever you must on your team. Because we don't want to nurture a competitor of PGW. I do not know a cleaner or clearer way of saying that.

Thank you, Councilwoman. Your point is well taken.

I yield back, and I thank you for the yield.

Thank you, Councilwoman. Mr. Corwell, tell us a little bit about QST's decision to enter or attempt to enter into this venture with PGW. You have heard many statements today about, I guess, possibly some Philadelphians' perception or image of the company. I assume QST must have a different perception or image of the company by your decision to try to go forward in this venture. What do you see, and what influenced your decision to partner with PGW in this pilot 279 BILL 970647 program?

First of all, Councilman, QST is and has always intended to compete in Pennsylvania. We are competing there elsewhere, outside of Philadelphia. As we were discussing and strategizing on our particular launch into an overall campaign throughout the Commonwealth, our senior management came into contact with Mr. Hawes, and certainly had some brief initial discussions. And we're very impressed with Mr. Hawes personally, as well as the management team, senior team, that he has assembled. We did our homework about PGW and the reputation of PGW because, frankly, that's one thing that we wanted to be assured of, was that we were getting together with the right partner. Our research suggested that through Mr. Hawes' leadership and the recruitment of the management team that he has put together, that we understood that there was a rapid turnaround in the level of service, the commitment to customers, the commitment to lower rates, et cetera, and we were very favorably impressed with how quickly that had 280 BILL 970647 been done. And, as we discussed further, we were also impressed with the vision Mr. Hawes and his team had for the future. We very much saw PGW to be a company not unlike CILCORP, CILCO, where our roots come from. We found that there were just some real synergies since, as I indicated, we had planned to market here anyway. And based on the response that we're getting throughout the Commonwealth from customers as just QST, we believe that while QST may not be recognized by everyone, certainly we are building a very strong name recognition.

Okay. Thank you.

The Chair recognizes Councilwoman Tasco.

I'm not ready yet.

Okay. Councilwoman Tasco is not ready.

I have some more, 281 BILL 970647 Mr. President.

The Chair recognizes Councilman Nutter.

Just briefly, Mr. Corwell, give us a sense of the size of QST, I guess, also, a little something about -- what is it, CILCORP, is that the parent? And it is our impression from some of the materials that QST is supposedly funding upwards of 50 percent of the cost of the entry into this pilot program; is that correct?

That's correct, Councilman.

Okay. And tell us a little something about the company, its size, your relationship with CILCORP.

Surely. QST Energy, QST Enterprises, is a subsidiary of CILCORP. CILCORP and its subsidiaries, essentially, have been around for 85 years. CILCORP is actively traded on the New York Stock Exchange. 2 billion in assets. We have offices in about 25 locations 282 BILL 970647 throughout the country, including several offices here in Pennsylvania. We have approximately 250,000 gas and electricity customers. There are two real primary subsidiaries to CILCORP. There are a number of subsidiaries, but two primary operating subsidiaries. One of which is Central Illinois Light Company, referred to as CILCO. Just a little bit of background on CILCO. I see that, we see CILCO, as very much a consumer-driven company. And while many utilities may say that, let me, if I may, give you something to back that up. CILCO has gone longer than any other utility, any other publicly traded utility, in the country without a rate increase. The last rate increase granted to CILCO was in 1982, 15 years ago. We have had two rate decreases since then. And those are -- I am talking about the electric rates. We now have the lowest electric rates in Illinois and some of the lowest gas rates, as well, in Illinois. 18 cents per kilowatt hour. 28 cents. And certainly I believe it has gone down in 1996. I don't have those numbers. So that the consumer tradition is, in cutting cost, it is regarded generally as very much a well-managed, low-cost utility. CILCO being another first in the country in being the first utility, electric utility, in the country to offer all consumer classes an opportunity to shop around for their electricity supply. And that was for residential customers, commercial, and industrial. That program is known as Power Quest. And CILCO, CILCORP, QST have also been very active in Illinois sponsoring legislation similar to legislation here in Pennsylvania, that would open up the electricity grid to competition. And the organization has also been fairly active at the national level, as well. 284 BILL 970647 Brand equity, I heard those questions asked either this morning or yesterday. I would like to think -- and it has been proven by our experience, as well as statistically -- that CILCO's brand equity is very good among its customers and has a good reputation. Just to give you an example, just a hands-on example of that reputation, when we were marketing in the Power Quest pilot program as QST against -- not against CILCO, but as an alternative to CILCO, one of the reasons customers didn't switch to QST was because they didn't want to do anything to hurt CILCO. And we explained to them that, no, CILCO is promoting this program, they are encouraging people to understand what choice is all about. The reason why CILCO was the first in the country to propose electricity choice for its customers is that it wanted to prove, once and for all, to its customers, to its peers, to its competitors that energy choice would bring about lower prices, better service, and quality services. In other words, various products and services. 285 BILL 970647 That's the CILCO story. About the time that Power Quest was filed, CILCORP formed QST Enterprises, with the idea that it was one thing to demonstrate to the country that energy choice would work; it is another thing to be able to compete in that arena. And just as you have heard from Mr. Hawes about PGW's interest in learning how to compete in that environment, which we believe is an inevitable environment, by the way, both for electricity and natural gas, in order to do that, you have to gain experience. And for CILCORP to compete in the future in this new environment, it had to have a subsidiary to do that. And that's where QST Enterprises was born. QST Enterprises includes QST Energy, which I am a part of. It includes QST Environmental, which is a full-scale environmental company that does remediation and various analysis for businesses.

And it also includes QST Communications, which is a competitive access provider, provides long-distance services to 286 BILL 970647 businesses in and around the Peoria area. QST Energy has been very active in pilot programs. As I mentioned, it was participating initially in Power Quest, which was CILCO's program, which, since it was the first program available, it was the first one QST chose to participate in. It did very well there. It moved on to a pilot of Illinois Power Company, which was only an industrial pilot. It did very well there. And then it looked elsewhere in other states to find out where consumers were being provided an opportunity to really benefit from energy choice. QST actively -- and Vicky Ashelman, who you were somewhat introduced to, I believe, this morning is really on top of this. She is responsible for tracking the 50 states in terms of the deregulation activities that are available. Some time ago we found that Pennsylvania was, indeed, one of the more proactive states in the nation in proposing and legislating consumer choice in electricity. We were attracted to Pennsylvania 287 BILL 970647 because of the way we saw it deregulating.

Let me ask you to hold one second. Because I know as soon as the president gets back, he is going to put the hook on me. We have asked Mr. Hawes, we have asked our City Solicitor about the issue of liability. And now that you are at the table, could you briefly explain to us what your understanding is of the liability questions regarding the nature of this venture and your relationship between QST and PGW.

My understanding in terms of liability is, there are certain commercially agreed-to provisions which suggest that if any harm is done, and that harm is due to QST's actions, for the responsibilities that it has under contract, under agreement, that QST would indemnify PGW for those actions.

Okay. Thank you.

The Chair recognizes Councilwoman Marian Blackwell. 288 BILL 970647 Councilwoman Blackwell, your light isn't even on. Is it? Councilwoman Tasco.

If you did not have this proposed relationship with PGW, and you planned to come into Pennsylvania, specifically Philadelphia, could you tell me what your costs would be to participate in this pilot program? And could you tell me what it will cost you to participate in the pilot program with PGW?

Councilwoman, I can speak, perhaps, generally to the cost. I can't get real specific because, frankly, I haven't done an analysis. The decision to participate with PGW was done, and then the costs were developed. I have not developed costs separately. I can tell you, though, having sent out in excess of 200,000 direct mail pieces, getting somewhere in the neighborhood of 4,000 calls a day into our call center, that certainly we could handle very easily additional business within the City of Philadelphia. But I haven't done an analysis of 289 BILL 970647 those costs. There are certain costs, like direct mail pieces, postage, et cetera, that are incremental. And out-of-pocket there are other costs. There are obviously -- there is economies of scale that benefit.

Well, suppose that we end up with a deal-breaker, and you still want to do business in Philadelphia; would you participate in the pilot without PGW?

Yes, Councilwoman. If there is a deal-breaker, we would fully intend to continue to participate in Philadelphia.

And you don't have any idea how much that would cost you?

I believe the costs would be relatively minimal.

To participate in the pilot?

Yes. And, excuse me. When I say "relatively minimal," I'm looking at incremental from here on, the costs of that. As you know, the pilot terminates, or 290 BILL 970647 at least the sign-up period terminates, fairly soon. And then it is a case of really servicing the existing customers, which is not --

Not expensive.

Not real expensive.

PGW, if the budget proposed by you is $276,000, is that a 50 percent --

I'm sorry, Councilwoman. I apologize. I didn't hear you.

The preliminary budget presented to us says that the total PGW budget -- I see. Your contribution is $222,000.

Yes, Councilwoman.

So the cost is $552,000, Mr. Hawes, for this pilot program, and QST is paying 222,000?

The total cost is 951.

I beg your pardon?

The total cost is a low point of 498 and a high point of 951.

And QST is paying 50 percent? 291 BILL 970647

Mr. Hawes, we didn't hear you.

Okay. The question was the amount of the budget. And I said that the range was 498 to 951. And QST is responsible for one half of that.

Has QST participated in other pilot programs across the country?

Yes. QST has participated in not only Illinois, but is currently participating in Michigan, in California, and then elsewhere in Pennsylvania.

Have you joint-ventured with other companies, or are you doing it as a single entity?

I'm sorry?