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, 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?
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 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.
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?
QST, according to the agreement, would have been able to start on April 1.
And they would, in effect, under that scenario, technically be competitors.
There would be no 17 violation of the Venture Agreement.
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 --
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.
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.
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.
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
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?
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.
Councilwoman Clark wishes for Councilman Nutter to yield to her for a followup question on that point.
What if PGW is not in the electricity business? The customers then will be QST customers? 25 RESOLUTION 970687
At no point will the customers revert to being PECO customers?
Not unless they switch. The customers could switch back to PECO.
Which is the surviving part of the QST/PGW arrangement.
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?
Customers signed up during the pilot program, that's correct.
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 --
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.
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.
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?
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?
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.
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.
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 --
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"?
I understand that. I don't want to make this complicated. So there is a separate account for these charges.
"Some of these charges may still be," and then I missed what words followed.
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.
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.
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 --
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?
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.
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.
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.
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?
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.
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?
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.
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.
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
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.
We must be arguing about something in these negotiations. People don't argue over zero. They could get zero somewhere else.