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.
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.
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 --
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 --
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?
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
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?
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.
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
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.
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 --
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
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 --
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.
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.
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.
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?
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.
As long as it is amended to give approval to PGW to enter the market.
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 that permit the pilot, including those about which you and I spoke.
Thank you very much. Anyone else? The Chair recognizes Councilman Nutter.
And I will decide which amendments I will vote on when I see them.
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?
Does everyone understand what we are contemplating doing? Any Council member have any question about it? Fine.
I knew if I hesitated long enough, we could get at least one more question.
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.
-- 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.
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.
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.
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's in the amendments that were given out yesterday.
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.
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.
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.
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. 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.
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?
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.
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?