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.
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 --
-- 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.
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?
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.
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
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.
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?
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?
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.
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.
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
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 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.
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 --
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, 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?
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?
Are you one of the people who came here at the time Mr. Hawes came here?
Okay. Did anybody talk to you at all about the PGW residency requirement?
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 --
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?
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?
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?
And all you did was get an apartment in the City of Philadelphia?
I signed the lease in December of '96 and took physical possession in January.
And, now, you regard this as your residence in Philadelphia?
In an average week, how much time do you spend, how many nights do you spend, at your Philadelphia residence?
So you have a residence, and you don't go there at night; you go 80 RESOLUTION 970687 to North Whales at night?
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.
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.
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 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.
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.
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 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.
The Chair 94 RESOLUTION 970687 recognizes Councilwoman Clark.
Your last question was exactly where I wanted to be. Mr. Hawes --