Committee Hearing, October 29, 1997

COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC MEETING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, October 29, 1997 11:50 a.m. - - - RESOLUTION 970687 - Resolution approving a Venture Agreement between the Philadelphia Facilities Management Corporation and QST Energy, Inc. - - - PRESENT: COUNCILMAN JOHN F. STREET, Chair COUNCILWOMAN ANNA C. VERNA, Vice-Chair COUNCILWOMAN HAPPY FERNANDEZ COUNCILMAN JAMES F. KENNEY COUNCILMAN W. THATCHER LONGSTRETH 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 2 I N D E X RESOLUTION 970687 Stephanie L. Franklin-Suber, Solicitor, City of Philadelphia------------------------------ Bud Z. Karachiwala, Vice-President, Energy Management Division, PGW--------------------- 7 Raymond N. Sharbutt, Sr. Vice-President, Chief Financial Officer, PGW---------------------- 36 8 James Hawes, President, CEO, PGW---------------- 54 Thomas J. Collins, Member, Management Committee, 9 PGW------------------------------------------ 76 Deborah Estrin, Sr. Vice-President, Human 10 Resources, PGW------------------------------- 101 11 - - - 12 13 14 3 RESOLUTION 970687 P R O C E E D I N G S

Good afternoon, ladies and gentlemen. If I could have your attention, please. Good afternoon, ladies and gentlemen. This is a public hearing by the Council Committee of the Whole on Resolution No. 970687. This resolution approves a Venture Agreement between Philadelphia Facilities -- if I could have your attention. Councilman Cohen, can I have your attention, please. Approves a Venture Agreement between the Philadelphia Facilities Management Corporation and QST Energy, Inc. The resolution was introduced at our last Council session. And I believe every Council member had delivered to his or her office a booklet from the Law Department entitled "The PECO Energy Pilot Program, Philadelphia Gas Works, QST Energy, Inc., Venture Agreement." Is there any member who did not get this package of information? I didn't say is there any member who does not have it. Is there any 4 RESOLUTION 970687 member who did not get it? I believe that this material was all delivered, and it is in at least your constructive possession. This is what we would like to do, if I could have everybody's attention. What we would like to do is take testimony from the City Solicitor of Philadelphia. And unless someone has a problem, I would like to have her kind of walk us through the agreement. After which, I would like to have Council members raise any and all questions that you might have about the agreement. Questions that can be answered should be answered. Questions that cannot be answered, in the sense that any witness doesn't have all the information to answer the question, a record should be made of those questions, a commitment will be gotten that that information be made available to us between now and tomorrow. It is unlikely that we will act on the resolution today. I think it is fair that after we have the explanation from the City Solicitor, complete whatever discussion we have, Council 5 RESOLUTION 970687 members should have an opportunity to think about all of this, to go back, reread whatever you wish to reread, and then we can complete our action on it tomorrow. Is there anybody that has any question about any of that? If not, the Chair recognizes the City Solicitor, Stephanie Franklin-Suber.

Good morning, Council President Street, members of City Council. For the record, I am Stephanie Franklin-Suber, City Solicitor for the City of Philadelphia. I am pleased to appear before you today to testify on Resolution No. 970687, which would approve a Venture Agreement between the Philadelphia Facilities Management Corporation, acting on behalf of the Philadelphia Gas Works, and QST Energy, Incorporated. As I testified last week, Bill No. 23 970647, as amended, would authorize amendments to the 1972 Management Agreement between the city and PFMC, to permit PFMC to operate the Philadelphia Gas 6 RESOLUTION 970687 Works for the acquisition, marketing, brokering, aggregation, and supply of electric power within the city. The amendments to the bill approved by the City Council Committee of the Whole limit that authorization to December 31, 1998, coinciding with the end of the PECO Energy Company Electric Pilot Program. In addition, the amendments provide that PFMC shall exercise that authorization only through a Venture Agreement with QST containing several specific provisions to protect the city and PGW ratepayers. The amendments to the bill also require that the Venture Agreement with QST be approved by resolution of City Council prior to Council's enactment of the bill. Prior to this hearing, as the Council President indicated, I distributed to each member of City Council and the Gas Commission a notebook dated October 29. This notebook has a blue cover and contains the bill, the amendments to the bill, the resolution, a summary of the proposed Venture 7 RESOLUTION 970687 Agreement, a proposed form of Venture Agreement, an opinion of the City Solicitor, and a Law Department research memorandum. Exhibit E to the notebook contains the proposed form of Venture Agreement. Exhibit D in the notebook includes a summary of the Venture Agreement. I believe that this summary demonstrates that the proposed Venture Agreement complies with each and every condition Council requires under Bill No. 970647, as amended. At this point I would like to briefly review the significant terms of the Venture Agreement. Purpose: The purpose of the venture is narrow. It is to solicit, acquire, market, broker, aggregate, and supply electric power to customers within the City of Philadelphia only in connection with this pilot program. The term of the Venture Agreement begins on November 1, subject to City Council approval, and automatically expires on December 31, 1998. In terms of QST's activities and obligations, QST's obligations include the supply of 8 RESOLUTION 970687 all electric power and all costs related to the supply of electric power. QST will enter into individual service contracts with customers. Those contracts have to be, in form and substance, satisfactory to the city. The customers will receive a 9 percent discount and credit for the 15th month, if 10 they have been participants for the previous 14 months, and a $15 enrollment check. QST is responsible for maintaining and providing all permits, approvals, licenses, or authorizations necessary for it to act as an electric-generation supplier in the pilot program. QST will also provide training to PGW personnel in the electric-generation business. PGW's activities include providing brand awareness and marketing. PGW will also provide inbound and outbound telephone services, call center services, and telemarketing services. The joint activities include marketing oversight; electric product development, design, and production; sales training and sales coordination; constructing and implementing 9 RESOLUTION 970687 business, marketing, sales, and advertising plans and campaigns to direct the actions of the parties throughout the program. There is a Management Committee, which will manage the venture with equal representation on the part of both PGW and QST. The day-to-day operations will be jointly supervised by one designated representative from each of QST and PGW.

The specific performance goals set forth in Bill No. 970647 are expressly incorporated and made the performance goals of the venture in the Venture Agreement. The Venture Agreement also includes various provisions on the flow of funds and segregated accounts to minimize the likelihood that the revenues would be taxable, and to reduce the likelihood of any adverse impact on the tax-exempt status of PFMC. In terms of liability, as required by Bill No. 970647 as amended, QST expressly assumes sole responsibility and liability for all activities undertaken by both QST and PGW in connection with the pilot program, both prior to, but no earlier 10 RESOLUTION 970687 than, September 30, 1997, and after the commencement of the Venture Agreement for the term of the Venture Agreement. And this obligation survives the termination or expiration of the Venture Agreement. In absolutely no event, and under absolutely no circumstance, will any General Fund revenue of the city be exposed or made available in support of or in connection with the pilot program or the Venture Agreement. As required by Bill No. 970647, PGW will provide regular written reports to the Mayor, City Council, and the Gas Commission regarding its performance goals. As required by Bill No. 970647, QST and PGW will use the venture as their exclusive distribution channel for the sale of electricity in the city. As required by Bill No. 970647, QST will not compete directly or indirectly with the city, PGW, or PFMC in the solicitation, acquisition, marketing, brokering, aggregation, operation, supply, and/or distribution of electric power as long as PGW is in the electric business, or of natural gas to persons, businesses, or other 11 RESOLUTION 970687 entities in the City of Philadelphia for a period of one year after the earlier of the termination or expiration of the Venture Agreement, or December 31, 1998, without the prior authorization of City Council by ordinance. In terms of indemnification, as required by Bill No. 970647, QST provides the broadest possible indemnity to the city, PGW, and PFMC for any and all losses, costs, or expenses arising out of or relating to the solicitation, acquisition, marketing, brokering, aggregation, operation, supply, and/or distribution of energy in connection with this agreement. As required by Bill No. 970647, QST provides all insurance ordinarily required by the city, including but not limited to general liability insurance, workers' compensation, employers' liability, and professional liability insurance, all as reviewed and approved by the city's Risk Manager. The Venture Agreement will terminate at the latest on December 31, 1998, unless extended by City Council authorization by ordinance. PGW may also terminate for convenience on 30 days written 12 RESOLUTION 970687 notice to QST. On termination or expiration of the Venture Agreement, customers under contract with QST, in accordance with PUC regulations, will be assigned to PGW and/or to an appropriately approved venture containing PGW as a participant. To protect the tax-exempt status of any outstanding bonds, the Venture Agreement includes a detailed covenant as to the use of tax-exempt financed assets. And the binder includes an opinion of bond counsel. The Venture Agreement also includes a covenant that the city will not be construed and does not intend to lend its credit to QST in violation of the Pennsylvania Constitution. This completes my summary of the significant terms of the Venture Agreement. In conclusion, in my view, the proposed form of Venture Agreement complies with each and every condition Council requires under Bill 22 No. 970647 as amended. At this point I would be pleased to answer any questions you may have.

Miss Suber, I 13 RESOLUTION 970687 understand you to have read that PGW may terminate the agreement upon 30 days written notice, yet our written report shows 90 days. Is it 30 or 90?

It is 90 days. That's as a result of late-night discussions with QST.

Thank you.

So 90 days?

It is 90 days.

Councilwoman Verna, are you finished?

I am finished. Thank you.

The Chair recognizes Councilman Nutter.

Thank you, Mr. President. Madam Solicitor, in Exhibit E, which I believe is now the Venture Agreement, on , Item No. 9, under the heading of Flow of Funds and Accounts, do I read Item A to now mean that PGW will not be the billing entity in this proposal, and that PECO will be the billing entity? 14 RESOLUTION 970687

That is correct. In response to certain concerns and comments made by, as I recall, Councilman Cohen in particular with regard to the confusion that customers may have by receiving more than one bill, PGW and QST will request that PECO handle the billing and collection. So the customers will receive one bill.

So without any document in front of us, or those great charts that we had here last week, theoretically, a person would receive their regular PECO bill. And somewhere in the billing scheme, same page, back of the page, somewhere in that it would, I assume, tell you as a pilot participant that here is your listing of charges, similar to what we saw in those charts, for the PGW/QST pilot program? Is that how that bill would look, or work?

My name, for the record, is Bud Karachiwala, with Philadelphia Gas Works. What you are saying, Councilman 15 RESOLUTION 970687 Nutter, is correct. PECO has agreed to do the billing for November. I would say that we -- it is up to PECO to exactly determine how it is going to show up in the bill. And I do not have that firm document in front of me.

What provisions, I guess, have been made, if you are one of those individuals -- and this may fall in the category of a question that you don't have all the answers to -- but there was some discussion last week about where funds get applied. And this was even in the two- or three-bill scenario, and now we have narrowed it down to maybe one bill. But you send your check in to PECO. PECO has a charge already on their bill, and they were always going to have a charge. You just send the money in. The money is inadequate to cover the entire bill. How does PECO now decide the split of the funds? And, secondly, in that same item or another item under the same heading, do I now 16 RESOLUTION 970687 understand that the customer pays the money to PECO; PECO then transfers the funds, the appropriate funds, to QST; the QST dollars sit in a segregated account somewhere until the management group, the six-member management group, figures out that it is either right or it is appropriate or it is what it is? Taking all that into consideration, how does PECO decide, on a $150 bill, and I sent you $95, what goes where? And, how do we know that PECO's systems will work in concert with QST's systems, when PECO sends QST the money, that the customer's account is credited properly, and that is, not intentionally, being inappropriately done by either QST or PGW for lack of payment, when they have in fact sent some money to PECO?

Councilman, to respond to your question, it is one of those categories where I have not been able to get a definitive answer to that question from PECO. I am in the process of getting that answer right now.

Because that's going to be a billing dispute area. And, "I paid." 17 RESOLUTION 970687 "No, you didn't. You sent it over here. No, we have to split it up. Six-member Management Committee, we haven't looked at it." And in the meantime, you know, you are fighting with one of these companies.

The PUC rules do provide very significant guidance on that. All I need is to know exactly how PECO is going to do it.

All right. Let's go to , Letter D. The new word, I guess, by agreement from last week, now appears to be "margin"; is that the operative word today?

Yes.

It is a nice word. Do I read this to understand that QST in this venture is now assuming all risk, and is being asked to share 50 percent of the margin, the margin being what's left over after all expenses are taken out? Is that the way that reads?

That's correct.

And QST has agreed to that? 18 RESOLUTION 970687

That's one of the issues that's still under discussion with QST. The proposed agreement before Council, in terms of the discussions between PGW and QST, is substantially negotiated, except for certain aspects of this particular provision. With that in mind, and also any additional concerns or questions that Council may raise today, we would envision resolving those issues, getting any additional information, and responding to questions by tomorrow.

Okay. I mean, as a public policy matter, as a member of the body reviewing the document, I mean, that's a pretty interesting arrangement from our side. If I take that hat off, though, as with any small amount of business sense, I do wonder how the private entity reacts to the notion of all risk, and share half the profit -- I'm sorry; margin. And it will be interesting, I guess, to see how that finally shakes out. But good try. On , can you in plainer English explain what the meaning of Letter D is? 19 RESOLUTION 970687

Letter D is one of the requirements in the proposed amendments to the bill adopted by the Committee of the Whole. And, essentially, it means that, in terms of this venture relationship, neither the city, nor PGW, nor the company will expend any additional funds on a going-forward basis to participate in this venture and to participate in the pilot program short of the use of existing PGW staff materials, supplies, and equipment that they have already been using in connection with the pilot program as of October 23. That was the date of the hearing.

Right. Okay. , Item No. 16, the Covenant Not To Compete. This is a much-discussed item which has grown significantly since this started. I just wanted to pose one scenario to you, Madam Solicitor. I understand that there is the one year No Compete. Or if we, the city, through PGW, end up not in the electric business after December 31, 1998, then it is kind of a mute issue, because QST would not have anyone to compete against, because we 20 RESOLUTION 970687 would literally be out of the business.

In the electric business, that's correct.

If the agreement terminates prior to 12/31/98 -- there seem to be three or four ways that the agreement could terminate before 12/31/98 -- but PGW, although they have a current application, has no license at that point, prior to 12/31/98, would QST at that moment be able to still provide electric service?

Yes. The non-compete for QST in the electric business does not apply, or is void, if PGW is not in the electric business. The notion is competition. But the non-compete as to gas would be in effect.

Right. Let's say the agreement between PGW and QST terminates, for whatever reason, on March 31, 1998, and QST decides to continue in the electric business. And on March 31, 1998, PGW, still, for whatever reason, does not have an electric license, and in June of 1998, PGW does get its own 21 RESOLUTION 970687 electric license; what happens, if anything?

Nothing.

PGW would go on and sell electricity?

They would compete at this point.

QST, according to the agreement, would have been able to start on April 1.

That's correct.

And they would, in effect, under that scenario, technically be competitors.

That's correct.

There would be no 17 violation of the Venture Agreement.

In the electric business.

In the electric business.

The record will reflect that there are three women who are all huddling trying to figure this out. They are still huddling. I think we 22 RESOLUTION 970687 are going to get something real soon here. Please proceed.

Mr. President, I have a number of other questions, but --

Councilman Nutter --

When you were away from the Chair, I took advantage.

-- no lights are on.

Okay. Let me go to . On , No. 6, this seems to read that -- and I believe this is under the Termination section, No. 24 -- it says that all of the then present customers in a pilot program under contract with QST within the City of Philadelphia will become customers of PGW and/or a venture containing PGW as a participant. Again, if at this termination point PGW does not have its own electric license, either in the previous public hearing or in the briefing, wouldn't those people actually, technically, go back to PECO? 23 RESOLUTION 970687

There is a proviso to the provision. If PGW has a license or if PGW is in a venture relationship with another third party that is not QST, then, working with PUC approval, we would assign the customers to PGW or to the new venture.

Right.

If PGW does not have a license or is otherwise not in the electricity business, QST has the contract with the customers. The customers would stay with QST.

The customer stays with QST.

Which is also why the non-compete would not be in effect.

That also automatically assumes, though, that if this venture falls apart, PGW still has to come back to City Council for a new participating partner.

That's correct.

And you assume that between your notice, PGW gives QST notice. And I believe one of the provisions is a 90-day notice. 24 RESOLUTION 970687

Correct.

Your assumption is between them giving the 90-day notice and the expiration of the agreement, or the termination point, that Council will have approved a new participating partner, or PGW will have its own license, or the person ultimately stays with QST?

That is correct.

Okay.

Because PGW would also have to come back to City Council. Not simply in the context of a new proposed venture, but for authorization to proceed even with its own license.

Right. Item No. 7 talks about --

Councilwoman Clark wishes for Councilman Nutter to yield to her for a followup question on that point.

Absolutely.

What if PGW is not in the electricity business? The customers then will be QST customers? 25 RESOLUTION 970687

That is correct.

At no point will the customers revert to being PECO customers?

Not unless they switch. The customers could switch back to PECO.

But absent a switching, they become --

QST customers.

-- the customers of QST.

That's correct.

Which is the surviving part of the QST/PGW arrangement.

That is correct.

And under this scenario, PGW is not and no longer contemplates being in the electricity business?

Certainly would not be in the electricity business at that point.

There is no 24 license, there is no license pending. If you had a license, you reject it. You are simply gas, and not RESOLUTION 970687 electricity?

That's correct.

Then any customer would be a QST customer?

Customers signed up during the pilot program, that's correct.

Thank you for the clarification.

No problem. On Item No. 7, which seems like it was partially answered by the previous Q and A, even in the event of termination of the agreement between PGW and QST, the customer now reverts, or solely becomes, a QST customer. And the agreement here is saying that they still have to provide the 15th month free, even if the relationship has been terminated between PGW and QST. Is that what Item No. 7 means?

A customer, when it reverts, he or she reverts back, to QST has to remain a customer of QST for the 14-month period in order to be eligible for that 15th month free generation electricity. So if they were to switch, then QST 27 RESOLUTION 970687 would not be obligated.

Okay. Right. Okay. I'm sorry to take this one out of order. But back on , this item had never been discussed in any of the previous hearings, and it brings up potentially a delicate issue. No. 23, on , this non-hiring agreement, is essentially an agreement saying that neither party can take the other party's people who have participated in the putting together of this pilot program for at least a year; is that --

That's the essence of it, that's correct.

I believe in the briefing, Bud, you may have shared with us some information about your previous employment. Do I recall somewhere that you may have had a previous relationship with QST?

No, I do not have any previous relationship with QST directly. In my previous employment I was with Mid-American Energy Company, which started the first natural gas unbundling pilot program in the 28 RESOLUTION 970687 country. And it was during the course of that pilot project that representatives of QST were discussing with me, because they were intending to have an electric pilot program in their service territory.

I appreciate that clarification. And I meant no accusation towards you. I knew that you had mentioned some level of relationship with QST. But it was not as an employee; it was as, I guess, a vendor company to a company that you worked for.

I appreciate the opportunity for clarifying that.

This is not numbered, but it was the next page after the end of exhibit -- I'm sorry; it is the first page after Exhibit A, Customer Terms and Conditions. Councilwoman Clark raised an issue last week with regard to, I believe, this brochure. This is not a great copy, but I believe in Item No. 2, Length of Agreement, there 29 RESOLUTION 970687 was discussion about what appears to be an automatic annual renewal. And that seemed to be a problem, or seemed to be in conflict with some provisions either of the bill or proposed amendments from last week. Has that been rectified?

Yes. Through operation of the different terms of the Venture Agreement, the way that we have structured the termination provision, the pilot program is the 12 months. 13 After that, if PGW, through either 14 its own license or a new venture arrangement, continues in the electricity business, the customers then are going to be, with the approval of the PUC, assigned to PGW and/or that venture. So that, therefore -- and QST has agreed to that. So, therefore, the contract between QST and the customer, which provides for the automatic renewal, that will not occur by virtue of the assignment.

Are we in any position to change or amend literature that may go 30 RESOLUTION 970687 out in the future to reflect that change? And I assume you are saying the controlling document, notwithstanding the propaganda that's out by the little materials, the agreement that the customer signs with QST will reflect what you just put on the record, versus what's in the brochure?

The exhibit covers the customers that have been signed up up to October 25.

Right.

The Venture Agreement will be effective, subject to Council approval, November 1. The Venture Agreement provides that QST cannot, without the prior written approval of the city, enter into a contract with customers. So that in discussions that I personally had with QST, we made it clear that this form was not acceptable on a going-forward basis, and that there will be a new form of contract with the customers that we will review and approve.

Do we have a copy of either the previous and now discredited contract, 31 RESOLUTION 970687 or the new contract?

You have the old contract as part of this exhibit, and we would supplement it with the new contract. We do not have that at this point.

Well, is what you are calling a contract what I am referring to as a brochure? Is that Exhibit A?

Yes.

Okay.

I have a followup.

Yes.

Councilwoman Clark.

Point of clarification. How many of these brochures have been signed and returned and may operate as a registrant in the pilot?

The deadline for sending the list of customers to PECO was 5:00 p.m. on Monday, October 27. The venture has sent 2,254 customers to PECO. 32 RESOLUTION 970687 Since then we continue to receive sign-up cards, but those are not in the initial batch that went to PECO.

2,254 signed onto this brochure, which is our Exhibit A; is that correct?

That is correct.

How will we incorporate the nonautomatic renewal after the 2,254?

Let me try to answer what I think your concern is. The customers will be customers of the venture, so that we get the benefit of the revenue that they will pay. QST bears any liability associated with the contract, since we did not approve the contract. We deal with the automatic renewal provision at the end of the pilot program. The pilot program is 14 months. The way the contract -- the way the Venture Agreement is drafted, as long as we are continuing in the business, the electric 33 RESOLUTION 970687 business, the customers will be assigned to PGW with PUC approval. We are working through that process. But the intent is that we would do everything we could to make sure that we retain the customers, which was the intent of Council. So instead of addressing it by changing the form of contract, because customers have already signed it, we have tried to cover it in a variety of different ways to at least address the intent of Council. But there will be a new form of contract for customers once the Venture Agreement is in effect.

All right. I thank you for that clarification. I now do understand it better. Thank you for the yield, Michael.

Mr. President, at this point I am now prepared to ask my questions for the day.

Those were the day questions? The other questions were --

Those were the morning questions. I am now prepared for my 34 RESOLUTION 970687 afternoon questions.

Okay.

My last question, Madam Solicitor, there is an unmarked exhibit, but it is two pages, entitled Philadelphia Gas Works PECO Electric Pilot Program with QST. And it seems to be an outlining of a budget, and also seems to get into this issue of the no more than 5 percent use of tax-exempt facilities and activities of the company. Can you give us a slightly more expanded explanation of what this proposed budget is about?

Question, Mr. President. Can the Councilman give me a page?

There is no 19 page. It is the second page after Exhibit B, PGW Asset List. It is the page with, it says, "Exhibit," but it has no exhibit number.

Is the next line, "Philadelphia Gas Works," and is the next line, "PECO Electric Pilot Program With QST"? Is that the line we are reading? 35 RESOLUTION 970687

Yes. And it reads "Postcards and Brochures and Postage Expenses incurred, $66,000," that page.

This page right here.

Madam Solicitor, can you provide an expanded explanation of exactly what this document is and what it means?

Yes. the Venture Agreement refers to this as Exhibit B. It is in Section 6, relating to PGW activities. It is a list of all assets, including personnel, which are being provided by PGW in support of the pilot program. This exhibit is also important for Section 19, which is on . And that's the covenant relating to the tax-exempt bonds.

And so you are saying here that total PGW resources of capital and other costs incurred that are estimated to be incurred in the pilot is $318,214, and that that figure is somewhat below, whatever, 5 percent of the total PGW either tax-exempt assets or facilities; is that what that number is? 36 RESOLUTION 970687

I am Raymond Sharbutt, Mr. Nutter. The 318,000 is the total cost. The only costs included in --

Total cost of what?

The 318 is the total of these columns, including payroll costs, capital costs, and all other expenses. The only costs included in that that are applicable, as far as the tax-exempt debt are concerned, are the two marked with the asterisks on Line 2 and 3, $4,734 and $2,000. None of the other costs have anything to do with the tax-exempt purchase to assets. It is very de minimis.

So that number, the $4,734 at the end of this two-page document, is then divided by your $32 million in tax-exempt bond issues to acquire various assets?

The assets that are identified just above the calculation that are being used in this pilot program, yes, sir.

Councilman Nutter, 37 RESOLUTION 970687 this is Bud Karachiwala. If I can offer a clarification with regard to the costs that Mr. Sharbutt has indicated about. The postcards, brochures, and postage expenses incurred, $66,000, that is a total cost that has been incurred by both parties. So I do not want to give the impression -- the same goes for the telemarketing expenses and the information/technology expenses. Those are going to be a total cost for the project, not just PGW's costs.

Well, that then leads to a question on Exhibit D which reads, "PGW expenses incurred prior to October 23, 1997." Maybe it is just my book, but there is no page behind Exhibit D to indicate what those expenses incurred are prior to October 23, 1997. But, Bud, you are telling me that you have already expended, on a shared basis, at least the $66,000 for the postcards, brochures, and postage, and there may be other expenses incurred prior to. Why is it that Exhibit D is either blank or there is no page associated with it? And, 38 RESOLUTION 970687 secondly, what is the answer to the question?

Exhibit D is currently being prepared. But, you are correct, the charges that have been accrued, out-of-pocket expenses, have been charged to a designated account. And some of those charges may still be on the way. But that is being prepared and will be completed.

You say some of those charges may still be -- what was the word that followed the "be"?

There is a separate account, Council President.

I understand that. I don't want to make this complicated. So there is a separate account for these charges.

Yes, sir.

"Some of these charges may still be," and then I missed what words followed.

On the way.

What does that 39 RESOLUTION 970687 mean?

Charges may still be on the way?

The invoices for those charges. And what we will reflect in Exhibit D is the charges that we know that may not have an invoice yet, but we know have been incurred. That's what I meant.

All right.

Mr. President, I apologize. I was distracted. It looks like this page is all costs. And so it would have been more revealing if this heading was, PECO Electric Pilot Program With QST Costs; right? It is an accounting page. And absent such a revealing word as "costs," it looks like we are going to do something other than talk about what this has cost so far. So I would respectfully suggest that the heading be brought in line with what's on the page. And what does "invoices on their way" 40 RESOLUTION 970687 here mean? Are we still going to limit PGW's liability to something close to, it looks like, $6,734? Is that the maximum of our financial exposure as to these costs?

Councilwoman Clark, the title will be changed to include costs. It is shown in the next line down as Estimated Costs of PGW Expenses.

But that's hardly a heading.

Yes. I will change the heading to reflect that, so it is more clearly outlined. The invoices on the way, we -- it has only been a week or so since the 23rd. And if we placed orders or made commitments for certain things, such as cards or other --

As, of course, you have.

Yes, we have. And we have not yet received the invoices. But we know.

How, then, will you allocate those costs consistent with the testimony that we are hearing today? 41 RESOLUTION 970687

The cost of the postcards and the brochures and others will be split with QST once we know what -- once we actually get the invoices. We will split that bill.

So there is a 50/50 split in the costs to be borne by QST and PGW?

Up to October 23, yes, ma'am.

Okay. So the costs that we are considering now, all those costs are not in yet because only one week has passed?

Some of the costs shown on this exhibit are to be incurred in the future, and they are noted on the end of the line. For example, the employee costs, they are to be incurred; not all of those have been incurred at this point. That's what we estimate we will incur by the end of the program, the pilot program, over the next year.

But if I understand the City Solicitor's summary, it was that public funds would not be used, and, therefore, QST was being asked to accept all of the costs and split 42 RESOLUTION 970687 half of the margin; is that correct?

That's all of the costs except our in-house employees, who are already on the payroll. Most of these costs are for employees and costs that we are already incurring.

As I understand it --

Well, certainly we weren't trying to save the nickels and dimes in authorizing this. This is going to be labor-intensive. So that the savings will be in whose payroll the high-priced employees are charged to; correct?

Ma'am, if I may, if you will indulge me just a moment here. All of the expenses incurred for the pilot through October 23, 1997, it is our understanding we have tracked all of those expenses, even though some of it may be in the process of coming to us through the designated account. It is my understanding that we will be sharing those expenses between ourselves and QST. Henceforth, from October 23, all 43 RESOLUTION 970687 out-of-pocket expenses incurred relative to this pilot project will be picked up by QST. So I wanted to clarify that.

I do appreciate the clarification. Now let me ask whether employee costs can be designated as out-of-pocket expenses.

No. 10

So that employee costs will continue to be shared on a pro rata basis?

QST is responsible for their employees in kind. We are responsible for our employees in kind.

And those salaries are not construed as a use of public dollars?

What we are under, in terms of the restrictions in what we can use funds for --

Can you just say yes or no, and then direct her question? That's how we get in trouble here. She asked a very direct question. 44 RESOLUTION 970687 You are going to give her information that she didn't ask, and you are going to breed ten other questions. And I don't mean to be disrespectful. Sometimes I think Council members should get together and teach a course in how to answer a question; right? Because that can be a yes or no, with an explanation, and then she will be happy.

I will try and answer your question. Yes, they are public funds, but they are not borrowed, they are not debt. And the amendments to the bill 16 contemplated that staff at PGW and on the payroll existing as of October 23, PGW would continue to provide those in-kind services, contributions to the venture. It is if there is an expansion beyond that, that's what was prohibited by Council.

Does that also limit the number of people that PGW can assign to this task, or are they free to augment or restrict their personnel, depending on what's before them? 45 RESOLUTION 970687 Is that clear? Is that a clear question?

There are no plans to augment the staffing with regard to this pilot program.

But are we permitted under the terms of the Venture Agreement?

The answer is no, under the terms of the Venture Agreement and under the terms of the bill as amended. It is staff on the payroll as of October 23.

Okay. Thank you very much. I yield back.

Madam Solicitor.

Question on the same point.

Sure.

I am very confused by --

Councilman Cohen, we need you to speak right into that microphone.

I am very confused by the answers given to the question. What is the purpose of all of this? 46 RESOLUTION 970687 Is it to meet certain requirements of a previously issued bond? Why are we concerned with which money is public money and which isn't? Because it is all public money. What does the bond issue prevent us from doing at PGW?

The short answer to your question, Councilman Cohen, we actually are starting to mix a couple of issues in our responses. Let me address the legal issue in terms of the covenant on the tax-exempt bonds. Basically, in a nutshell, the Exhibit B shows costs, but also identifies certain assets, facilities, equipment, that PGW will be using in connection with the pilot program. To the extent any of those assets, facilities, equipment have been funded by the proceeds of any tax-exempt bonds, arguably, because they are used in connection with a private activity with this relationship with QST, we could run afoul of the tax laws and could have an adverse impact on the tax-exempt status of the outstanding bonds. 47 RESOLUTION 970687 There is some latitude in terms of the tax laws if the use is de minimis, less than 4 percent. 5 And what you have on the exhibit is a tracking of the assets, the facilities, the equipment, how they were financed, how they were funded. And in the footnotes, it gives you an indication of whether or not it satisfies the de minimis test. It does. And the Law Department memorandum in Exhibit G has as an attachment an opinion of bond counsel to PGW. The law firm of Wolf, Block, they have reviewed this, they have discussed this with the Law Department and conferred with the Chief Financial Officer at PGW, and legally reached the conclusion that there is no adverse effect on the tax-exempt status of the outstanding bonds. That's the legal issue.

That particular bond? The bond counsel on the particular bond?

That is correct. 48 RESOLUTION 970687

Thank you very much.

Either Madam Solicitor or the PGW personnel, I want to go back to of the Venture Agreement, Item Letter D. The difference now between revenues and expenses is referred to as the margin.

That is correct.

And I would like to, since we appear to be so close in this, to get anyone's best estimate of what we think the margin will be, and, at least as it is written today, what we believe the split of the margin will be. And I want to basically have a discussion about the money. How much, who gets what, how does it happen?

With respect to your question about how much the margin is likely to be, we do not know for sure. My best guess at this point would be, it will be very close to zero. So it will be de minimis margins. 49 RESOLUTION 970687

Let me go back to the first part of your answer. I mean, Bud, you have been in the business for some time. You guys have spent a lot of time and effort working on this. And, so, an answer that goes from the range of, I don't know, to zero, is an unusual answer, I guess, for me. I mean, I think in response to Councilwoman Clark, you said that you have now -- was the figure 2,254 people signed up?

Yes.

You must have some ballpark figures on what those people, or what the average person, if there is an average person left in this city, what an average person spends for electric service.

Yes, sir.

You showed us a chart last week on figures you received from PECO on what the costs were of four different cost categories. You had a distribution charge, you had a generation charge, you had a 50 RESOLUTION 970687 wake-up-and-see-the-sunshine charge. I mean, you have charges all over the place. I mean, there was a number that a person was going to pay. I believe it was 70-some dollars, minus a discount, and maybe ends up at 60-some dollars.

That's correct.

You know how many people are going to be working. You know after October all your personnel are in kind because 12 they are on the payroll anyway. 13 We don't care what QST has, because 14 their people are on their payroll, and we are not 15 responsible for them. 16 At the end of the day, you have to 17 know that you are collecting X amount of dollars, 18 and you have Y amount of costs, which leaves you Z 19 margin. 20 I mean, I haven't known you that 21 long. But in a couple of weeks I respect you too 22 much to believe that you and the gentleman next to 23 you and Jim behind you and all these other people here, that no one knows how much. Whether it is positive, zero, or negative, somebody has to know. 51 RESOLUTION 970687

QVC knows.

QST.

They know, too.

QST.

I mean, we are all big boys and girls in this room here. This is very serious business. Someone has to know, within a 5 or 10 percent margin of error, what we're talking about here. I mean, we are not flying blind.

Councilman Nutter --

We must be arguing about something in these negotiations. People don't argue over zero. They could get zero somewhere else.

Councilman Nutter, you are correct. If I might at least try to respond generally with some information that we have obtained recently. This, again, is one of the reasons why the negotiations are not quite complete as to 52 RESOLUTION 970687 the flow of funds.

Because you are arguing about the money.

But I can share with you certain general information estimates that I have discussed with the President of QST, Craig Shephard. QST is working with certain estimates with regard to the market based on their experience. As PGW management has testified --

The hour is still young. Give us the dollar.

QST estimates that on an annual basis --

A number.

-- it can generate revenue of approximately to million dollars. Based on the expenses, 90 percent to 92 would go to the cost of supplying the electricity.

And the rest would be margin?

No. 53 RESOLUTION 970687 Approximately percent would be other charges; discounts, award payments, incentive payments, if you look at . So that the margin could be anywhere from zero to 2 percent. So, for example, a good year could be $60,000, which would be shared equally by PGW and QST. Those are the kinds of estimates that QST is working with.

Thank you, Madam Solicitor. Councilwoman Clark has a question.

When, in your long-range planning, do you see those numbers rising to the level that could cause us as much skittering around as we have done in the last two weeks? I mean, surely we are not skittering around for the last two weeks over our pro rata share of $60,000. Come on. Now, when does it start to be real money, sufficient to make it worthwhile?

Councilwoman Clark --

Your name is?

I am Jim Hawes, President and CEO of Philadelphia Gas Works. 54 RESOLUTION 970687 I think that when we started this discussion, even before we knew QST's numbers, we started with the proposition that this was not a money-making venture because the revenues, the money that you got from the revenues, would be generally about what would cover the cost of the gas. The expenses, which were start-up expenses, would be the expense of the project. That was what we started. And I believe that, generally, that is still where we are. Except at that time we didn't know how many customers, the costs of the gas were not certain. And, so, therefore, I think, that's why Councilman Nutter, when Bud used the number zero, I think that's why he said it. Because, again, the revenue in this case always, from the time we started the briefings, we thought the revenue was just about what it would cost to purchase the gas. And the expenses would be truly what it would cost us to do -- in other words, we started with a losing proposition. And the losing proposition was the amount of the expenses that we 55 RESOLUTION 970687 had estimated to run the program. Because the revenue would just offset the cost of the gas. So it was never planned to be a money-maker. And that was our position from the beginning, in the pilot part of it. The numbers were just too small.

I'm following up on Councilwoman Clark, if that's okay, Mr. President. I just wonder why we are here in the first place. Many of us have many, many concerns about outsourcing things we do. We are really worried about the gas company, we are worried about entering into this complicated agreement in the first place. And we wonder, then, especially in protecting the gas company, and we wonder why we are here, if it is not even cost effective in the first place. We were told initially that it makes the gas company competitive, and that we need to enter into this market. But all that we're hearing doesn't indicate that it is even worth it.

Well, I think what you 56 RESOLUTION 970687 have articulated is exactly the reason we are in it, is posturing to put ourselves in the position to participate when the whole market is open. If you approve, I think in the contract in May, that we go further, based on the experience between now and May, then we will go further, if you approve it. If you do not, based on our experience, then we don't go forward. I think the price we are talking about for not making a bigger mistake longer is a very cheap price. Somebody raised the other day, you will recall, some concerns around us making mistakes like we made with some of the generation plants which were 6- and 7-billion-dollar mistakes. This is a very cheap price to make sure that we don't make a mistake. We are learning how to do the business. We are arm-in-arm with QST. And, in May, we look at the results. And if you decide that we don't need to go further, we don't go further. But we now have postured ourselves to grow the revenues which will hopefully offset some 57 RESOLUTION 970687 of the gas revenue loss, and will make less of a financial burden on our gas customers and we go forward.

So your estimate of zero to 2 percent speaks only to the margin in the pilot program.

Yes, ma'am.

I want to be very clear that we are not going through all this so in the Year 2090 we will still be barely breaking even. At one point you see the cost being substantially less than the revenues, to produce the margin sufficient to offset the cost of gas?

And the whole thing, this whole scenario, gets more attractive as the scale gets bigger. We are only talking about, now, we started out talking about a thousand customers, and now maybe two. But we could be talking about, in less than two years, there will be roughly a million and a half customers that will be open all over the state. 58 RESOLUTION 970687

And then it would be profitable?

I would say so.

Not profitable; marginal.

No, I think profitable.

We can't use profit. That's not language for not-for-profit corporations. It would be marginal. Thank you for the clarification. I yield back my time.

The Chair recognizes Councilman Cohen.

First with respect to that figure of 2,254, something like that, that have signed cards, is that number, are all of those 2,254, or whatever the number was, are they all part of the pilot program?

Yes, they are.

They have been accepted as part of the pilot?

That's correct.

And what's the difference between the thousand you expect to get 59 RESOLUTION 970687 and the 2,254? Why don't you say, "We expect to have 2,254 customers"?

The short answer to that question was, the goals were established very early in the process, like in mid September. And at that time we expected to get 1,000. Now we know that we have 2,254. That's the reason.

So the number now is no longer a thousand? We have more than doubled the original goal?

That's correct.

All right. That's a good sign. Now, I am not sure of what, but it is a good sign. Going to the Venture Agreement, of 28 of the Venture Agreement, the top paragraph, G, the entire agreement, what happens if along the way there is not unanimity of agreement between the Council President, the President of the Gas Commission, and the City Solicitor as to whether or not something is material? I looked in that paragraph for an explanation of what then happens, and I can't find 60 RESOLUTION 970687 it. And maybe I am missing it. Or is it that since, apparently, there is a burden that has to be established to indicate that a proposed change in the agreement is material, is a material change, and that it requires three yes votes by the three offices I have indicated that something is material before it comes back to us in City Council?

Councilman Cohen, I would expect that there would be consensus. But your reading of this provision is correct, all three would have to concur.

Well, what would be wrong with getting a copy sent to all Council members, and we could all inform the President of City Council if we thought there was any problem or not, so that everybody could feel that there could be no material change, whatever that might mean, without us in City Council, as Council members, having a chance to look at it? I mean, why this elaborate arrangement on the determination of what is material?

This provision 61 RESOLUTION 970687 doesn't preclude notifying members of the Council of the types of arrangements.

It doesn't require it. It may not preclude it, but it doesn't require it.

That's correct, it doesn't expressly require it. The intent is that in putting together this agreement, there are certain things that we may find would require adjustment that are more technical in nature, and also there are going to be changes in the program as a result of the PUC that we may need to make technical amendments that don't alter the material obligations of the parties. I certainly think that we could make provision to give Council information with regard to any of those kinds of changes. And I don't think the intent was to preclude informing Council.

But how do we make sure we are included in?

We could expressly provide --

You are the City 62 RESOLUTION 970687 Solicitor. You may go on to some higher position, and no longer with the City Solicitor. The next City Solicitor will say, "I never said that I would do that."

Councilman Cohen, part of this process is to identify any additional issues or concerns and see if we can expressly address them in the agreement. We can expressly address that in the agreement.

That, and I think it ought to be clear that using this language, that, as I would see it, if all of us in Council saw it and made no comment to the Council President or indicated that we didn't think it was material, that his determination that something is material, his one vote ought to be enough to bring it back to Council. It ought not to be that he has to get the votes of the Chair of the Gas Commission and the City Solicitor. You know, you never know politically at a given moment what the relationship between parties are going to be. There are a lot of factors 63 RESOLUTION 970687 that may determine that. And I just think we in Council ought to have a chance to look at it. We may think something is material, you know, and my colleague may not think so. I may think it is. The same applies to the President. But once it is concluded by the Council, in whatever form the Council, you know, makes its decision, then I think that ought to alone be enough to require it to come back to Council for consideration. Comment?

Councilman Cohen, can we agree that we have heard you and will make the appropriate changes in the language to try to address your concerns?

Yes. Yes. I don't have to get the third member of the triangle to agree to that, do I? Councilwoman Tasco, you also agree that they are going to make an effort to deal with the questions that I raised? The City Solicitor has agreed and the President of Council. You are the third member 64 RESOLUTION 970687 mentioned in this paragraph. Thank you.

The Chair recognizes Councilman Rizzo.

Thank you, Mr. President. My question is directed to the PGW management. The Public Utility Commission has extended the deadline until, I believe, November 12 for people selected to be in the pilot to respond, 13 because the prerequisite to be in the pilot is to 14 physically choose your energy supplier. And if you don't do that, you are rejected, you are thrown out of the pilot. What has this extension to November 14 done or mean to this arrangement, the additional costs, et cetera? I know that QST has assumed all costs after the 23rd of October. What does the extension to the pilot mean?

Okay. The extension to the pilot means that those customers who indicated their electric-generation suppliers by 65 RESOLUTION 970687 October will indeed get the benefits of the contract with that supplier on November 1, 1997. However, those customers that do not choose by October 25, but do choose by November 14, will then get their benefits under the contract with their designated supplier thereafter, which right now appears to be December 1. Also, I would just clarify, if no 10 customer who has already been picked by PECO to participate in this particular pilot program chooses between then, it is my understanding that they can still choose later on.

If you do not 15 choose a supplier, and you have been chosen for the 16 pilot, if you do nothing, you will be put out of the 17 pilot and be substituted by another person. 18

I do not know the 19 answer to that question. 20

That isn't a 21 question; that's a statement. 22

Then I will accept 23 your statement. 24

So what are you 25 doing, since now you have until November 14 to bring 66 RESOLUTION 970687 additional people that have been selected, the residents of the City of Philadelphia that have been selected, to bring them into your pilot? And what does that do to the cost of administering the pilot, because it hasn't stopped on the 25th, it now is running to the 14th of November?

Okay. All of the costs associated with the venture after October 23, 1997, the out-of-pocket expenses, will be picked up by QST. So whatever we spend with regard to the solicitation of customers and all that, those costs will be picked up by QST.

Thank you. Thank you, Mr. President.

Thank you very much. The Chair recognizes Councilwoman Tasco.

Just a small clarification. On of Exhibit E, Paragraph B. I guess Section B, Paragraph 1. It says, "Would you define in 67 RESOLUTION 970687 Paragraph 1 who City would be"? It says, "QST shall enter into an individual service contract with customers for the provision of electricity solely after the City's prior written approval of such contracts."

The intent is that the same mechanism for amending the agreement in the entire agreement provision we just discussed, it would require the approval of the City Solicitor, the Council President, and the Chairperson of the Gas Commission. It does not expressly say that, however.

Thank you.

That is something that we could certainly clarify.

The Chair recognizes Councilman DiCicco. COUNCILMAN DiCICCO: I have a question of an entirely different nature, but it is a followup to, I think, a request of the Chair at the last meeting concerning residency. Have we gotten any information on that? 68 RESOLUTION 970687

I have a couple of questions on that. COUNCILMAN DiCICCO: Thank you. I will yield to you.

Councilwoman Clark has questions on this issue. We will recognize her first.

Mr. President, by way of clarification for me, if I were to ask the team to write the preamble for a report on all that we have done in the last few days and weeks, the gas company, a municipally owned utility, seeks to provide electricity for blank reason, can you tell me the answer to that? Why are we, when many people are saying we ought to go out of the provision of utilities, not only not just gorging gas, but enlarging our participation, so that should we approve this venture, the City of Philadelphia would be providing gas, electricity, and water? Help me understand that.

Councilwoman Clark, I would answer that as shortly and succinctly as possible, and you can follow up with another 69 RESOLUTION 970687 question if I don't do a good job. There are two reasons. I believe one is offensive and one is defensive. Number one, for selfish reasons, I don't want our customers, our gas customers, to have to go anywhere for their energy supply in the future other than Philadelphia Gas Works. They will have new people coming to their houses they have never seen before, new companies, new names. And, quite frankly, some of those new names, if not all of them, also have gas components. So my defensive reason is that I want to protect our market share of our customers so that they don't have to go to these new entrants to get that electricity. And that's the defensive reason.

Does it at any point benefit the customer base to have PGW provide both gas and electricity? And, if so, how does it benefit us?

I believe that, number one, in, I would guess, 18 months or less, we will have -- our gas customers will have choice. The whole marketplace will be in an uproar. Customers 70 RESOLUTION 970687 will be able to get both of those supplies, both of their energy sources, from one supplier. We think that we have a very good relationship with the vast majority of our customers.

You might need more. Is it going to be cheaper, more dependable, higher quality? Tell me.

Well, I think we have, on the dependability and the reliability side, our record is probably second to none in this country in terms of reliability of supply and things like emergency services. So a lot of our customers are a lot more comfortable with us than what a lot of people think. On the business and industrial side, our customers have been asking us now all of my tenure, why is it, now that we like this relationship, you can't offer us electricity? So I think there are -- and the marketplace, because we will be in a competitive marketplace, the marketplace will certainly drive the prices down. 71 RESOLUTION 970687 So I think we will have to be competitive, as will everybody else, if they are going to be in the marketplace. But I think one of the greatest values is that we build a financially strong company so that all of the pressure won't have to be on the gas customers for all of the changes that are going on in the industry.

Is providing electricity going to make your ability to provide continued high-quality gas better?

I think one of the advantages of this trial is that we can talk for days about competition, and try to simulate war games to get people ready for competition. You will never understand war until you have been to war. And one of the things that we'll learn --

And war is hell. Oh.

One of the things that we expect to learn and to transfer back into the gas side are the experiences that we are having -- that we will be having, assuming that this is approved, 72 RESOLUTION 970687 in this war, which is a real one, of competition in the electric business. We hope to transfer those learnings over to the gas side. And a lot of the people, as you pointed out earlier, who will be working on some of the electricity components will be people also in the gas side. So we actually are getting some inexpensive, on-the-job training for how we will have to behave when we are in a competitive situation.

Thank you.

The Chair recognizes Councilman Cohen.

Thank you, Mr. President. I wanted to mention that the reason I'm leaning in support of this proposal is that I think residents of Philadelphia need help. I think they have been treated very badly over many years by the present supplier of electric energy. I don't know of any for-profit company that would not also do things that I think 73 RESOLUTION 970687 hurt Philadelphia residents and Philadelphia businesses. The cost of electric energy, in the recent article I saw in the Inquirer Business pages, was cited as the number one reason a lot of businesses folded, because of the enormity of the cost of electric energy. I don't blame PECO for it. I don't have any love for any of the private energy companies. Because in their effort to make profits, I think that consumers have often gotten the wrong end. If PGW can get into this field, and if I can take Mr. Hawes' statements some months from now as being factual statements of how people feel, then I think the people of Philadelphia, the business groups as well as the residents, have another arsenal in their weaponry to get fair treatment in whoever, you know, is furnishing the electric energy. That's the reason I view this as a very positive step, provided, Mr. Hawes, that you give the kind of leadership that I believe you are capable of giving at the level of the kind of 74 RESOLUTION 970687 service rendered. We ought to be able to make Philadelphians proud of the company that they own, you know, that the taxpayers own, that services them with energy. And at the same time we would have a weapon, if any of them still choose PECO or Enron or Southern Company, or any of the companies, in the event any of those companies don't treat the consumers right. So that's the reason I think that this is good. I do agree with your analysis that this is kind of an inexpensive way to get the experience you would have to have if you were to compete successfully when the market gets wide open, or to defend the gas works when gas itself becomes deregulated. So I would certainly wish you well in this. Incidentally, I am very much impressed by the testimony today, Mr. President. I think we have come a long way from when the hearings began last Wednesday, both in our understanding and in the development of the kind of agreement that I 75 RESOLUTION 970687 think truly begins to protect the citizens of Philadelphia, as well as enable you to engage in this very important experiment. Thank you, Mr. President.

Thank you very much. There don't seem to be any other lights on. Mr. Hawes, is Mr. Collins here?

Yes, sir.

Can we have him come to the witness table, please. Mr. Hawes, can you join him at the witness table.

President Street, could I also have Mrs. Estrin, our Vice-President of Human Resources, come up, too?

Certainly. Mr. Collins, would you state your name and address for this record.

My name is Thomas J. Collins, and my address in the City of Philadelphia is 5450 Wissahickon Avenue.

Why did you say 76 RESOLUTION 970687 your address in the City of Philadelphia?

Because I maintain a residency in the City of Philadelphia.

And what other residences do you have?

I have a domicile in North Whales, 1609 Claudia Way.

Mr. Collins, are you married?

Yes, I am.

Do you have children?

Yes, I do.

Where do they live?

They live at 1609 Claudia Way.

Where is that?

In North Whales.

And how long have you been with this company?

Two years.

And who recruited you? 77 RESOLUTION 970687

Phoenix Resources.

Are you one of the people who came here at the time Mr. Hawes came here?

I was hired a month before Mr. Hawes got here.

Okay. Did anybody talk to you at all about the PGW residency requirement?

Yes, they did.

What were you told?

At the time that I was hired, I asked the question, in fact I was told, that there was a residency policy, and that I should discuss it with PGW officials, which I did. I spoke with the Vice-President of Human Resources at that time, and he clearly --

Who is that?

Bob Pierson.

What did he say to you.

He clearly defined the definition between domicile and residency, explained 78 RESOLUTION 970687 that the policy required residency, and that residency would be acceptable if met through the establishment of a permanent address in the City of Philadelphia.

And where did you live prior to living in North Whales?

Tulsa, Oklahoma.

So you relocated from Tulsa, Oklahoma, to take the job at PGW?

No, I did not. I relocated from Tulsa to Philadelphia to continue an assignment that I had with Sun Company.

And where did you live prior to living in North Whales?

In Tulsa, Oklahoma.

And you came from Tulsa, Oklahoma, to Philadelphia?

That's correct.

To to go to work --

To North Whales, that's correct.

To go to work for PGW? 79 RESOLUTION 970687

No, Mr. President. I had an assignment with Sun Company, and I was transferred from Tulsa, Oklahoma, to Philadelphia.

So when you took your job with PGW, you lived in North Whales?

That's correct.

And all you did was get an apartment in the City of Philadelphia?

That is correct.

And how long have you had that apartment?

I signed the lease in December of '96 and took physical possession in January.

And, now, you regard this as your residence in Philadelphia?

That is correct.

In an average week, how much time do you spend, how many nights do you spend, at your Philadelphia residence?

I do not spend a time there at night at all.

So you have a residence, and you don't go there at night; you go 80 RESOLUTION 970687 to North Whales at night?

That is correct. That's where my family is.

Well, when do you go to your residence in the city?

I go to the residence on a regular basis to pick up mail, to pay the bills, to check the apartment, but I don't use it at night.

Do you use it at all?

For other than the reasons I just described, no. 15

So you just have it because you think it is necessary in order to have it to have this job?

I acquired the residence in compliance with the policy to establish a residence.

There is a simple answer to that question, Mr. Collins. It is yes.

Yes.

How many children do you have? 81 RESOLUTION 970687

Two.

And how old are they?

I have a daughter that is and another daughter that's 13. 7

And what schools 8 do they attend? 9

They attend Wissahickon 10 Public School. 11

Is this a public 12 school in North Whales? 13

Public school in 14 Ambler. 15

In Ambler. 16 Did anybody ever suggest to you that, 17 under the residency requirement, you might be 18 expected to live in the City of Philadelphia every now and then, maybe spend a night or two here?

Yes, there have been discussions about that. And, quite frankly, my problem has been the amount of time that I do have available to spend outside of the office, I have chosen to try to spend it with my family. 82 RESOLUTION 970687

Mr. Collins, isn't it true that you are just not going to live in the City of Philadelphia? I mean, you are going to live with your wife and your family. And that if you have to have an address, you will have an address, but you have no 8 intentions of living here?

Under the current residency policy, I didn't think that was required. So in response to the policy that I thought I was trying to comply with, yes. The answer is yes.

Well, what was your idea about what the purpose of a residency requirement was that led you to believe that you could just get an address and go pick up mail and then go on out to North Whales? I am just real interested in why you thought this was all right.

In discussions that I had with the officials at PGW, talked about what was required to be compliant with the policy, and that was identified as being acceptable. It created a tax address for me, so 83 RESOLUTION 970687 that my taxes would be paid from the Philadelphia address, and provided a permanent address and also a place from which I was obligated to pay utility bills and apartment rent. So there was a real substantive transaction taking place, in addition to --

Do you own automobiles?

Yes, I do.

They are registered in the City of Philadelphia?

They are registered at my North Whales address.

Do you have a driver's license?

Yes, I do.

Which address is that? North Whales?

North Whales.

Do you have any connection with the City of Philadelphia, other than the lease?

A lease that requires the payment of both the rent and the utility bills, 84 RESOLUTION 970687 and the payment of taxes as a Philadelphia resident.

Well, this is a lease. You are suggesting that you pay taxes as a result of the fact that there is some provision in the lease that there is a pass-through on the taxes? Is that what you mean?

As a Philadelphia resident, I think my tax rates are different than if I was not a Philadelphia resident.

You are talking wage tax?

Wage taxes, I'm sorry.

All right. The Chair recognizes Councilwoman Clark.

Mr. Collins, when you took the apartment, was it in bare compliance or an attempt to defraud us?

Under no circumstances, Madam Councilwoman, was I attempting to defraud anybody. I have been very open about my actions and my intentions. I really believe in good 85 RESOLUTION 970687 faith that I have done what was required to comply with the policy.

Did you understand that our insistence on people living in Philadelphia would not be met by barely and merely paying rent? It is the willingness to pay rent and utilities and not live here that troubles me most. Each month when you pay your utilities, what did you see it as, a license to live somewhere else? How do you characterize those expenses?

The expenses that I was paying to the apartment, Councilwoman?

Yes, sir. The rent and the utilities that you pay to give us the appearance of living in Philadelphia. I mean, do you think we are in the business of collecting rent from people who don't live here? Why would we ask you to live in Philadelphia, and then be so easily confused by the fact that you merely pay rent here? 86 RESOLUTION 970687 Something about that just doesn't feel right, does it?

Councilwoman, I understand your question. And, again, at the point of time that I was hired, there was a very significant distinction drawn between domicile and residency. And domicile clearly was defined as --

Please don't play legal games with me, because I am a lawyer and I don't want to do that. I just now want to talk about what it feels like.

The decision that I made to rent the apartment and pay all of the fees and the utilities and whatnot was done to comply with the policy. The dilemma that I faced, once I had the apartment, was where would I have the best use of my time, in the apartment by myself at night, or with my family, where I have opportunities to do things with the children.

Well, we shouldn't be having that discussion, Mr. Collins, you and me. We should not be having that discussion. 87 RESOLUTION 970687 Surely I do not want to be a person who tells you, sit in an empty apartment and deprive yourself of the children and the children of you. But there is an alternative to that. And the alternative is for you to move the children where you are, which is how you maintain a family. And I can't believe that that didn't occur to you. When it occurred to you, you made a decision that, "I would rather pay for the sham than comply with the legislative intent behind residence, domicile, pass through, stop by, visit." Whatever term you used, you decided that you wouldn't live here in Philadelphia. Now, you don't have to live in Philadelphia. There are choices. But you have the choice not to live here, and we have the choice to condition that in order to have this job, you must live here. So, it seems to me now that you are on the horns of a dilemma. You are going to have to either do the responsible thing, or you are going to have to somehow make us think that what we see is not actually what we see.

It is not my intention 88 RESOLUTION 970687 to try to deceive anybody, Councilwoman. Let me state, I believe that at the time that I was hired, I was acting in good faith against the description of the policy that was in force at that time. It is clear to me at this point that the expectations for compliance are different. And as you have correctly stated, I now have to make a decision. And I am prepared to do that. I am prepared to -- it is obviously going to be a difficult decision. And I am prepared to sit down with my family and review the pros and cons. I am very, very interested in continuing employment with PGW. I think I can contribute a lot to the move into deregulation, and I think I have up to this point. But the fact of the matter is that I have a family and I have responsibilities and requirements. I have a daughter who is finishing her senior year. I have another daughter who is in eighth grade. And I would be remiss if I didn't incorporate them into the decision. So I think you have correctly laid 89 RESOLUTION 970687 out that I have a dilemma and a decision to make. If the expectations of compliance with this policy has changed -- and obviously, at least in this proceeding, it appears it has -- then I can no 6 longer continue --

Mr. Collins, you have stepped across the line. Because the expectation in this legislative body has always been the same. You are in error if you believe or are suggesting that your private conversation with a personnel officer at PGW entitles you to infer what the expectation of this legislative body is or has been. I will tell you that there has never been a time when this legislative body has endorsed or in any way supported any sham residence. And that's exactly what it is you have said somebody has encouraged or at least condoned your doing. Please do not put that on this legislative body. We have not changed our position about this one iota, I will tell you that. I don't think you are in a position to know what our position is, and don't expect you to know. And wish that you would not comment on 90 RESOLUTION 970687 it. And I don't want to be unreasonably harsh in dealing with your situation. Your situation is just an example of what we see in numerous other situations. Before we get to the other Council members, however, I would like to ask Mr. Hawes a couple of questions. Mr. Hawes, what is your understanding of what the residency requirement requires of people who are a part of your staff who are subject to it?

It is our policy, and I think I can almost say -- and I might want Deborah to make sure I don't say the wrong thing. Miss Estrin is our Senior Vice-President of Human Resource. For the hiring that we have done since I have come here, we have viewed residency as a condition of employment.

And that is what it is.

City residency.

That's what it is. 91 RESOLUTION 970687

Do you condone today the kind of arrangement that Mr. Collins has maintained over these years?

And the arrangement being having an apartment and not living in it at all? That's the arrangement you are talking about?

That's the arrangement he has indicated to us that he has and believed was acceptable.

That is not the kind of arrangement that we would expect our employees to have.

Well, what kind of arrangement do you think is acceptable, short of living in the City of Philadelphia, and the City of Philadelphia only?

The arrangement that I believe is acceptable is the one that we have required of the people who we have brought here. We expect them to -- and in the case, I think eight cases, of people who are officers of PGW, they all are homeowners and they live in those homes seven days a week.

In the City of 92 RESOLUTION 970687 Philadelphia?

In the City of Philadelphia.

You have to keep saying that.

In the City of Philadelphia. We have two officers who are in transition, because they had to have houses remodeled. But in the case -- in every case that I am aware of over the last months, we have 14 required our officers to live in the city and we 15 have attempted to make -- and I say attempt, because 16 I can't guarantee every case -- but it has been my 17 view, and our philosophy, that we tell people up 18 front that it is a condition of employment. 19 And I will go one step further. The 20 residency issue is a real problem in the high-demand jobs like systems and data processing. Our commitment to residency is probably not evidenced anywhere better than the fact that we have lost in the neighborhood of 20, 25 people, 60 percent of our offers, because we told 93 RESOLUTION 970687 them up front that, if you don't want to live in the City, then we don't need to take this discussion any further. So I don't know if that answers your question.

Well, that's helpful. But I am now going to ask you to supply us with some information, before recognizing Councilman DiCicco. Please supply us with a written copy of PGW's residency policy and any written explanatory information you have regarding it. Explain in writing what you say to new employees about its meaning and implementation. Please supply us by the end of the day the names of all PGW employees who are subject to the residency requirement, and the address of each employee which brings the employee into compliance with the policy. Also, please advise us of any employees who have more than one residence.

One clarification, Mr. President.

The Chair 94 RESOLUTION 970687 recognizes Councilwoman Clark.

Your last question was exactly where I wanted to be. Mr. Hawes --

Do you understand that request?

I understand the request. I just need to confirm the timing, whether or not we can get all the addresses by the end of the day.

It is on the computer.

This is the computer age, Mr. Hawes.

I understand. But the second part of that is, you wanted to know whether there are dual residences. And I don't know if we would have a way of knowing that. We have a requirement to ask for validation every two years.

If you don't have that, then I wish for you to tell us in this correspondence how long and when it will take you to 95 RESOLUTION 970687 find that out.

Yes.

I owe Councilman DiCicco. Councilwoman, did you have a point on this?

I just needed a clarification as to exemptions from the policy. Because let's assume that Mr. Collins has a discussion with his family, and the discussion is, yes, we will move into the city. It would be unreasonable for us to expect him to do it in a day or a week or a month. He has a house to sell. So we would need some reasonable amount of time to permit him or any other employee who seeks to comply with turning over that house and engaging and occupying an in-Philadelphia residence. How many exemptions to the policy of residency have you granted? And is it open-ended or is it for a term of weeks, months, or years? Please talk to me about that.

Councilwoman, you 96 RESOLUTION 970687 are going a little bit afar here. I would like to recognize Councilman DiCicco. It seems like you are now trying to not just ask a followup.

It is a clarification of the exemption, but I will wait my turn.

The residency requirement hopefully will be in writing, and we will be able to see what, if any, exemptions or anything that's in it. But I would like to get to Councilman DiCicco, then we can get to Councilwoman Clark. COUNCILMAN DiCICCO: Two questions. In the list that you just requested, I believe one of your questions was the requirements for residency. And I would like that to be extremely specific as to what proof is required on the residency. Is it a copy of a deed to home ownership, a copy of a lease agreement? And is there any followup to that? Is there any internal followup? 97 RESOLUTION 970687

That's the reason why I say, explain in writing what you say to new employees about its meaning and implementation. Because they ought to be told, this is what it means and this is how we go about implementing the residency requirement; i.e., we do random checks, we don't do any checks, we do whatever it is. This is what we need to know. COUNCILMAN DiCICCO: Traditionally there are people that use their mother-in-law, their cousin's or aunt's properties as a place of residence, and there is no followup investigation. It does require a lot of work, and I think it is something that is really important. And the other question -- I don't know if this was already asked; I was doing a sidebar with Councilwoman Clark -- does Mr. Collins have use of a PGW car?

Yes, I do. COUNCILMAN DiCICCO: And is that the car you take home to North Whales at night?

Yes, it is. COUNCILMAN DiCICCO: And I assume it is the gas, if it is natural gas or regular gas, 98 RESOLUTION 970687 that is gas that's supplied by way of PGW, and the insurance to the car, also?

The gas is paid for by myself through the commuting mileage. COUNCILMAN DiCICCO: Through the what mileage?

Commuting mileage. COUNCILMAN DiCICCO: Is that an expense account that is provided to you by PGW?

No. My commuting mileage is identified separately, and then it is paid on --