COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, 9/27/00 3:15 p.m. - - - BILL 000583 - an ordinance authorizing the amendment of the Philadelphia Facilities Management Corporation Agreement to provide for a temporary change in the amount of temporary financing that the City may provide to the Philadelphia Gas Works ... BILL 000590 - an ordinance amending an ordinance 11 approved April 11, 2000, Bill No. 000005, adopting the Operating Budget for Fiscal Year 2001 ... PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN JANNIE BLACKWELL, Vice Chair COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 I N D E X JOYCE WILKERSON, Chief of Staff .......... JANICE DAVIS, City Finance Director ...... 12 THOMAS KNUDSEN, Philadelphia Gas Works ... 16 BARBARA BISGAIER, PFM .................... 33 LANCE HAVER, CEPA ........................ 109 KARMA SAUNDERS ........................... 113 REV. ROBERT SHINE, Black Clergy of Phila.. 115 ACTION ALLIANCE .......................... 124 STEVEN HERSHEY, ESQUIRE .................. 127 DAVID SWANSON ............................ 130 3 BILL NOS. 000583 AND 000590, 9/27/00 P R O C E E D I N G S
Good afternoon, everyone. We apologize for the delay. This is the Committee of the Whole regarding the hearing of Bill No. 000583 and Bill No. 000590. I would ask Mr. Erickson to please read the title of the bills.
Bill No. 000583, an ordinance authorizing the amendment of the Philadelphia Facilities Management Corporation Agreement to provide for a temporary change in the amount of temporary financing that the City may provide to the Philadelphia Gas Works under certain terms and conditions, and authorizing the temporary advance of up to $45 million to the Philadelphia Gas Works pursuant to that agreement under certain terms and conditions. Bill No. 000590, an ordinance 22 amending an ordinance approved April 11, 2000, Bill No. 000005, adopting the Operating Budget for Fiscal Year 2001, by making, in accordance with Section 2-301(a) of the Philadelphia Home 4 BILL NOS. 000583 AND 000590, 9/27/00 Rule Charter, certain additional appropriations needed to meet the unanticipated emergencies created by a cash flow crisis at the Philadelphia Gas Works.
Good afternoon. Sorry to have kept you waiting. Please identify yourself for the record and proceed with your testimony.
My name is Joyce Wilkerson. I'm Chief of Staff to Mayor John Street. I appreciate this opportunity to testify today. The Administration is here to testify in support of Bill No. 000583 which would amend Philadelphia Facility Management Corporation Agreement through which PFMC manages PGW by increasing from $20 million to $45 million the amount the City may temporarily advance to PGW. Under the terms of the PFMC Agreement, the advance would be interest-free and repayable within months. 22 Janice Davis, the City's Finance 23 Director and Secretary of Fiscal Oversight is 24 here to testify in support of companion legislation, Bill 000590, which would amend the 5 BILL NOS. 000583 AND 000590, 9/27/00 Operating Budget for FY 2001 to allow for an emergency appropriation that would be used to fund the loan anticipated in the PFMC Management Agreement. The bills before you today, which seek to provide PGW with relief from a crisis in its ability to meet payroll, purchase gas, and pay other operating expenses, are simply one component of a very complicated solution being assembled in an effort to stabilize PGW's very fragile financial condition. In addition to seeking temporary advance from the City, PGW is seeking the following rate increases from the PUC: The first is $97 million from the commodity cost of gas; the second is $52 million increase in the base rate in a rate proceeding before the PUC.
Excuse me, Madam Chair. Is there a written statement that we could follow?
I believe they were circulated. They were circulated to Councilmembers' offices yesterday, I believe. Any Councilmember that does not have 6 BILL NOS. 000583 AND 000590, 9/27/00 a copy of the testimony, I suggest you call your office and have one of your staff members bring it down. Please continue.
The second is the $52 million increase in the base rate that would fund operation and maintenance expenditures and enable the company to meet its bond and rate covenants. In addition, the gas company is embarking on aggressive cost-cutting measures that are reflected in the budget that is being reviewed now by the Gas Commission. Each piece of the solution is critical if we are to continue providing gas service to the residents who live in Philadelphia. Each piece is critical if we are to avoid exacerbating PGW's financial crisis and even undermining the City's own creditworthiness. The crisis we face today has been simmering for almost a decade. Over the past ten years, PGW has operated in a manner that allowed the City and PGW management to avoid any increases in the base rates. Some favorable factors over the decade such as substantial 7 BILL NOS. 000583 AND 000590, 9/27/00 reductions in major cost areas such as liquefied gas operations and pension expense worked to the company's and the customers' benefit and alleviated some of the pressure for rate increases. At other times, since the 1991 rate increase, management took extraordinary action to avoid a rate increase. The first was in 1995 when there was a forward purchase agreement on sinking fund earnings that allowed PGW to book a one-time extraordinary revenue of $23 million. The second was in 1998 when the indenture requirements were redefined effectively changing and reducing coverage requirements on certain bonds. 5 million through an interest rate swap. In hindsight, it's clear that the effect on PGW of using one-time revenue sources instead of small but regular rate increases has been devastating. In the last two years alone, FY '99 and FY 2000, earnings of cash flows have been reduced by approximately $42 million. The one-time revenue tools that were in place to help PGW address prospective cash flow requirements are simply no 25 longer adequate or available. 8 BILL NOS. 000583 AND 000590, 9/27/00 Historically, PGW has had at its disposal a credit line that has allowed short term borrowing of up to $100 million. The purpose of the credit line are essentially two: The first is to finance the gas commodity purchases over the winter months which PGW must make before it begins receiving revenue from its customers; the second is to finance an extraordinary increase in accounts receivable. Until very recently, management had never drawn more than $80 million of that line. At present, the line of credit which was increased to $100 million several years ago, is fully borrowed. Financing strategies that have worked for the company historically are now no longer available for several reasons: The first and the one that is confronting us most directly is the historic run-up in the commodity cost of gas, the likes of which the industry has not seen in the last 20 years. PGW is faced with the need to finance both the injections of gas into storage during the summer and additional gas dispatch over the winter. For the months of July and August alone, PGW has spent $17 million more on 9 BILL NOS. 000583 AND 000590, 9/27/00 the commodity than it had budgeted, but there was no alternative but to do that. The cost increases have continued unabated during September. Also, through the winter, PGW has historically had a buildup in its accounts receivable as it delivers gas but awaits payment through customers. Over 65 percent of the sales occur in just four months, between December and March. Second, PGW has had to draw on its short-term debt to fund normal operating costs. If PGW does not receive a temporary advance from the City, PGW will be unable to purchase gas, make payroll, the January debt service payment, and meet other operating costs and obligations. Any rate relief that we might get will not be received in time to eliminate this need.
In tandem with PGW's request for rate increase and short-term loans from the City, PGW will be waging an aggressive information campaign to better advise its customers about the various energy assistance programs that are available as well as the resources available through the UESF. PGW is considering efforts such as including energy assistance program information and 10 BILL NOS. 000583 AND 000590, 9/27/00 applications with its bills. Historically, energy programs like LIHEAP make payments directed to utility companies. Customer utilization of available energy funding would help reduce PGW bad debt and uncollected receivables. The Administration would like to acknowledge that we've received communications from Councilman Clarke asking us to consider making a cash payment to UESF in an effort to try to begin protecting some of the customers who will be most directly impacted by the unprecedented run-up in costs by the gas company. Some of the very poorest of PGW's customers are protected by the CRP program. There is, however, a category of people above that that don't qualify for the CRP program who will be most directly impacted by the run-up in cost of gas, and the Administration is committed to do trying to work with City Council to provide relief to some of those people. Further, PGW has initiated and will continue important reforms to increase the efficiency and reduce operating costs. Some of 11 BILL NOS. 000583 AND 000590, 9/27/00 them that Councilmembers may not know about is we've hired 30 new employees for its customer call center in order for us to be able to service customers more effectively and increase our collection on loans due to the company. To this end, we're training new employees to assure that they can appropriately handle those positions. For the first time in months, PGW is billing 10 all of its customers and has corrected many, but 11 not all, of the computer and software problems 12 that have been, in part, responsible for us 13 during accounts receivable. 14 Therefore, as we attempt to resolve 15 immediate cash flow and systemic problems many 16 years in the making, PGW and the Administration 17 requests that Council approve the 18 above-referenced bills. 19
Good afternoon. My name is Janice Davis. I'm the Director of Finance for 12 BILL NOS. 000583 AND 000590, 9/27/00 the City of Philadelphia. Thank you for the opportunity to testify in support of Bill 000590 which would amend Bill 000005, approved by City Council on March 30, 2000, adopting the Operating Budget for Fiscal Year 2001. That operating budget provides the General Fund appropriations of $2,830,455,918. If approved, this amendment would increase those appropriations by $45 million, for a total of $2,875,455,918 in General Fund appropriations. The Administration is seeking this emergency increase in appropriations in order to provide the Philadelphia Gas Works, PGW, with an immediate infusion of the cash necessary to purchase a sufficient volume of natural gas for its customers for the coming winter and to meet its payroll obligations in order to continue its provision of services. This extraordinary request is consistent with Section 2-3018(a) of the Philadelphia Home Rule Charter, which permits City Council to make additional operating appropriations needed to meet unanticipated emergencies, such as that presented by the current cash flow crisis at PGW. 13 BILL NOS. 000583 AND 000590, 9/27/00 As Members of Council are aware, significant efforts to address serious managerial and financial concerns at PGW have been undertaken during the past several months, including the resolution of automation problems that had prevented the timely and accurate billing of customers and appropriate financial reporting. Those efforts will continue. In order to remain a financially viable concern, however, PGW must obtain rate relief, the first increase in its base rate in almost 10 years. PGW's rate increase request is now before the Commonwealth's Public Utility Commission, but even if approved expeditiously by the commission, such relief will not solve the company's immediate cash needs. PGW has depleted its $100 million in short-term financing and so cannot borrow to meet its cash flow needs. This situation has been seriously complicated by the unprecedented and dramatic rise in the cost of natural gas. In response to having exhausted its short-term borrowing ability and the continually growing cost of gas, PGW has requested a loan of 14 BILL NOS. 000583 AND 000590, 9/27/00 $45 million from the City to be repaid over two years. The Administration concurs that this loan is necessary if we are to avoid turning a cash crisis into a public health and safety crisis this winter. We ask for Council's support of this amendment. Thank you, and I'm available to answer any questions.
Thank you very much. Mr. Knudsen, were you intending to testify?
Very well, then. I think we could go on to our question-and-answer session. Ms. Wilkerson, if City Council were to approve Bill 000583 in its current form, what would be the actions required for PGW to draw down a fund?
The way the bill is currently structured, we anticipate that the approval of the -- if enacted, the approval of the Finance Director would be required and also 15 BILL NOS. 000583 AND 000590, 9/27/00 the approval of the Gas Commission. It is our position when we structured the bill, and the way we read it, it would not have to come back to City Council. I understand that there is some confusion about the process that's anticipated and whether or not there would, in fact, need to be subsequent approval by City Council. The Administration is not opposed to having the matter return to City Council for approval by resolution after the Gas Commission and the Finance Director act on the request. My only concern would be the time constraints. The company has higher cash flow requirements and would need to have final action by all parties.
If in fact we did introduce a resolution and had to come back to City Council with the request of the $45 million, would it be all at one time or as needed?
We anticipate making a request of the entire $45 million. That's what we intend to submit to City Council. I think we have concerns that because of the way the cash flow requirements arise and because of the time 16 BILL NOS. 000583 AND 000590, 9/27/00 delay, we're going into a season in City Council where there are periods of recess and we're concerned that we not get caught up having to come back and forth, back and forth to make the kinds of purchases we might have to make or plan out our spending.
Thank you. PGW has requested from the PUC a base rate increase of $52 million and a cost of gas adjustment of $97 million; is this correct?
And can you tell us why does the PGW need these funds and why is the requested rate adjustment before the PUC?
I'm going to ask Mr. Knudsen who is the chief financial officer of the gas company to respond.
Thank you. Please identify yourself for the record.
Yes, my name is Tom Knudsen. I'm interim chief financial officer of PGW. The requirement that we have for $45 million is really based on several factors. One 17 BILL NOS. 000583 AND 000590, 9/27/00 is that the cost of gas is escalating quite quickly right now. We filed in June before the Gas Commission for 42 million in gas costs. By August we were asking for 97 million. And, in fact, we're facing a possibility of it going even higher. The difficulty we have is that without the ability to finance the purchases of this gas, we are in jeopardy of not continuing to provide safe and adequate service. So we need to count the funds now in order to finance our inventories and finance our purchases in advance of billing customers and collecting from them. So there's an immediate need in January, that's point 1. Point 2 is, again, because we don't have sufficient financial resources or flexibility in May under our line of credit requirement, we have to demonstrate that we can pay down the entire $97 million for a period of five days. We feel that a portion of the 45 million will be necessary at that time to help us demonstrate that capability. Now, understand that those funds would immediately be borrowed again and essentially replace what we had taken from the 45 million balance. We need it essentially for 18 BILL NOS. 000583 AND 000590, 9/27/00 those two reasons. The base rate increase -- well, yes, Miss Wilkerson reminds me of the timing of the other pieces of this. The base rate increase now will only be granted on an interim basis and the amount of that allowance from PUC is unknown to us. In addition to which, that decision on the part of the PUC will not be made until the 9th of November. Were we to get a substantial positive amount, an interim relief from the PUC, we would only then start to be able to build that increase. As a result, we will not see those funds until probably in the latter part of January. And understand that 52 million, where you could get in the whole amount, would not be sufficient to meet the cash flow requirements as well. So we have this complicating set of factors that is making it necessary for us to come to the Administration and to City Council for some flexibility in what we're attempting here.
Can you tell us what happens if the company does not 19 BILL NOS. 000583 AND 000590, 9/27/00 receive the requested rate increase in a timely manner or in the amount requested? And maybe, Miss Wilkerson, you can tell us what is the Administration's fall-back position if this happens?
I'd like to respond to part of that. You know, if we don't get the full $52 million dollars, we, of course, would be looking at cost-saving measures at the company. As I mentioned earlier, the budget that we have currently that we're projecting the $52 million based on anticipates over $20 million in cost-saving measures over the next two years. It is a very aggressive, I think, schedule for reducing cost. We would be trying to tighten the belt of the company even more. We will have some opportunity. We have labor contracts that expire in May, and one of the things that we think we can accomplish is some cost-saving measures when we have an opportunity to open that. So one part of the strategy will be to, you know, begin, you know, take a second round of cost cutting measures with the company. There does, though, reach a point where we may need to turn to the 20 BILL NOS. 000583 AND 000590, 9/27/00 City asking for support. We don't have -- there are only a few alternatives that the company has for addressing all of its needs. One is rate increase; The second is reducing its expenses; and the third would be seeking relief from the City. We are working very diligently to try to nail down an actual rate increase from the PUC. The staff has been involved in negotiations with the various parties at the PUC to try to nail down a rate increase so that we minimize the risk to the City so that we don't end up with, you know, the scenario nobody wants to see where we get a -- don't begin to get the rate increase that allows the company to go forward. We have a number of very serious issues outstanding. The company needs to go into the bond market in order to raise money to maintain its capital program. We have pipes we have to repair, we have the plant we need to repair so it really is essential that we get the revenues and so, you know, we've got a number of strategies we're pursuing right now.
Thank you. What is the source of funding for the 21 BILL NOS. 000583 AND 000590, 9/27/00 $45 million loan for PGW?
Can you tell us what impact, if any, will this have on PGW's payment of $18 million to the City's General Fund for this year and into the future?
The City has the $18 million payment built into its five-year financial plan. Were that payment to end, it would open up a $90 million hole in the budget. The Administration has indicated a willingness to consider possibly a one-time support for the company, you know, in an amount up to $18 million. As I've indicated, we are in negotiations with the State. This is something that we are willing to consider. The 22 BILL NOS. 000583 AND 000590, 9/27/00 Administration is not prepared to recommend that the City forego the $18 million payment on a permanent basis.
Why has the company found itself in the position of exhausting its commercial paper authorization this early?
Councilwoman, I don't think we can say this early. The short-term commercial paper has been used over the last three to four years essentially to finance the deficits that were in the large part created by the warmer than normal winters. Had we had some rate relief in either the '95 or the '98 period, which Miss Wilkerson referred to earlier, we wouldn't be in the situation we are in now. We did not have that, and the warmer than normal weather has substantially depleted our earnings and we've replaced that cash portion of those with the borrowings.
I know that you referred to this, Miss Wilkerson, in your testimony, and we have all heard stories of upwards of 35,000 customers who are not receiving 23 BILL NOS. 000583 AND 000590, 9/27/00 bills from PGW. What is the status of your billing problem? And if these accounts were billed, would we still need the requested rate increases?
I will answer that. At the present time, PGW has corrected the billing portion of our problems. We are billing virtually all of our customers. That isn't to say that every bill is accurate. The bills are now going out. To answer the question about whether if these people were billed, these customers were billed, would we need the rate increase; the answer to that is that the rate increase is predicated upon a forecast for Fiscal 2001, in other words, from September 1st of 2000 to August 31st of 2001. We have assumed within that forecast both a billing of those customers, which we have accomplished as of the present date, as well as receipt of a reasonable and historic level of payment from those people. So our numbers now are independent of the problem that we've had this last year. This is a forward projection and we still have the difficulty. 24 BILL NOS. 000583 AND 000590, 9/27/00
How long ago was it when we put in the new computer system and 35,000 people have not received their bills? And if they have recently received them, are we saying to them you have X-amount of time in which to pay? Would you tell us all of that for the record, please?
The computer system went in in July of last year. When we came to PGW, Mr. Kishinchand and I, in March, the estimate was that we had about 35 to 40,000 customers who were not being billed. About a half of those were CRP customers or our income customers. That number was affirmed as we then brought those customers on line in the months of July and August. I'm sorry, I missed the second part of your question.
How long of a period are we giving the customers?
I beg your pardon. The tariff provides that we would give them as long as it took us to bill them for them to pay, but the Gas Commission, one of its last orders before 25 BILL NOS. 000583 AND 000590, 9/27/00 jurisdiction for setting tariffs transferred to the PUC has allowed a more generous repayment proviso, and that's what we're following right now. In other words, instead of it -- the customers, some customers haven't been billed five months, six months, twelve months. Depending on how long they hadn't been billed, they have either as much time or even twice the time to --
So if they have not been billed for a year, we are saying that the customer has a year or two years in which to have this catch-up.
I just wanted to -- there have been calls to our office and others, I'm sure, with the bills that have been put out by PGW that some customers were being billed as much as 18,000; 20,000. And I've been told that there are those in the gas company that are telling the customers, "Well, it could take 28 years to pay off the 28,000." I know it BILL NOS. 000583 AND 000590, 9/27/00 sounds ludicrous, but that's what I'm being told. I had two calls just this week. One got a bill 4 for $28,000, and then I got another one from a constituent in Mayfair and her bill was somewhere around 18 to $19,000. Now, they tell me, Well, you know, this is only from '98, '99 they're going back.
I don't care who it is, no one owes a gas bill in a row home $18,000. And it's very, very frustrating, Madam President. They don't know who to call. Of course, they're calling our office, they're calling their Council offices. They get no 16 response. When is this going to be corrected? I just wanted to expand on your question.
Let me respond to that. We are as unhappy as anyone when these problems arise. I attended the hearings last night where customers were allowed to express their opinion about PGW. Believe me, it was very painful to sit there and have them point their fingers at you. Let me just respond this way: It took us about four months to get the computer system in a 27 BILL NOS. 000583 AND 000590, 9/27/00 position to bill. That was sort of the top layer on the onion. The next layer down deals with the absolute accuracy of those bills, and that's what we're addressing right now. So that a rowhouse which we know doesn't get charged or shouldn't get charged more than $1,000 maximum during a year, that those bill simply would not go out. And we are putting in stringent quality control processes right now. But the problem that we had was we weren't sure what the issues were until we were able to get the bills out the door.
I certainly will have someone in my office contact you. I would like to thank (inaudible) because he's been very responsive when we do call.
We are attempting to address these terrible issues as quickly as possible.
You explained about the $45 million surplus. I think this Council is trying to determine what is 28 BILL NOS. 000583 AND 000590, 9/27/00 usually spent in the five-year plan. Is that possible?
The surplus that was anticipated at budget time has been fully appropriated. There is, however -- as we fine tune our accounting numbers, there are additional surplus available, and that's where we will be deriving it.
You're going to take it from the surplus, the 45 million?
Yes. And it's only a loan. The five-year period will go back into the five-year plan.
How will that loan be paid off in two years? That's a lot of money.
It comes from -- the issue we have here is finance and the purchases of gas. Had we not had this substantial run-up in gas costs, and we're talking tens of millions of dollars, and the need to finance that purchase before we get paid by the customer -- once we're paid by the customer in the springtime, then that money will be available to replenish that $45 29 BILL NOS. 000583 AND 000590, 9/27/00 million allowance.
You're saying once you're paid by the customer. Are you referring to customers that haven't paid in the past or what? Are you certain that they will pay?
Well, I'm saying that customers who are billed over the winter. We buy our gas in November and December and dispatch it. We can't bill that gas until January, and we normally get paid in February. So purchases that we might have made in December, we collect the cash for in February. It is covering that gap between November, December, and February that we're talking about right now so when normal customers pay their bills, we will then be reimbursed for the expense of the gas that we purchased and then that will replenish the $45 million balance.
I don't want to be facetious. Are you talking about the people that are being billed over that have to pay, such as the case that I just told you about, the one for 18,000? 30 BILL NOS. 000583 AND 000590, 9/27/00
I'm speaking of the bulk of the customers. Most of our customers are adequately and accurately billed, otherwise, we would be in a much different position right now.
Are we working on that condition such as I have given you?
Absolutely. It is Mr. Kishinchand's and my first priority is to, now that we are able to bill all customers, to make sure that those bills are accurate. That is our primary activity right now.
Maybe I missed your response to the Councilwoman's question. Could somebody have 28 years to pay back a bill?
I mean, that's interesting. That would mean they weren't billed for 28 years, I assume. For the record, we do need to keep that straight. Councilwoman Krajewski?
That was 31 BILL NOS. 000583 AND 000590, 9/27/00 told to me. That was an employee.
Just to keep the record straight, that's a bit longer than most of us might be here. You might as well have a mortgage. Councilman Kenney, you're next.
Thank you, Madam Chairperson. Mr. Knudsen, in your testimony for the PUC, you had indicated a reluctance to talk about the lack of a rate increase over the past ten years. You said you will not talk about why it wasn't raised in the past. But I have to go back a little bit because I think it's part of the reason why we're here talking about this sour situation. Is anyone here from PFM, Public Financial Management? Do you mind coming up?
Let me note while you're coming forward that when Lucien Blackwell was chair of the Commission for Rate Increase, we had management gave back 5 percent and everything worked fine and the world didn't fall apart and the gas company went on and the 32 BILL NOS. 000583 AND 000590, 9/27/00 citizens went on and everybody was happy.
My question is for, I guess, Mr. Knudsen. I know you were at one point in time on the other side of the table representing the consumer and you argued, of course, against rate increases. But I guess the question I have for PFM which is really representing PGW for the past nine years, eight or nine years, intimately involved with all of the bond issues, all of the financial aspects of the company, didn't yourself or anyone recommend to anybody in the prior Administration of the PFMC that the Gas Commission or somewhere in PGW's hierarchy that they need a rate increase and we ought to do it soon?
I believe that there were a number of recommendations made by the -- I'm sorry. My name is Barbara Bisgaier. I'm managing director of Public Financial Management. Yes, Councilman, over the last eight years of the previous Administration on a number of occasions the various managers, as you know there were many over that time period, did 33 BILL NOS. 000583 AND 000590, 9/27/00 discuss with the Administration recommendations to do increases to the base rate, and those were not pursued past that.
The recommendations were made, they were made to management or management along with a consultant of PFM recommended to the Administration that the rates be raised?
Who, if you recall, in the Administration was that recommendation made to?
Chiefs of staff. Do you recall what the response and what the rationale was for not increasing the rates in smaller amounts over a period of ten years, nine years, as opposed to this walloping -- while I agree 20 percent on international gas issues, 10 percent in the base, why they weren't pursued 34 BILL NOS. 000583 AND 000590, 9/27/00 then?
I don't know that specifically. I was never a party to their thought process.
Do you recall any of the responses from the Mayor and/or chiefs of staff.
They were taken under advisement. There was no immediate reaction given when I was there.
It seems to be, based on the attachment to your testimony of the PUC Standard & Poor's, to be one of the main reasons as to why we are partially in the situation that we're in today is that we did not seek the appropriate rate relief over the past nine years. 35 BILL NOS. 000583 AND 000590, 9/27/00
Miss Davis, we have experienced, as you know, three very mild winters over the past three years as one of the other components to our fiscal situation. The request that we lend PGW $45 million out of the fund balance is contingent, I assume, according to testimony, on our getting back into -- getting adequately into the gas acquisition situation and better reducing our expenses and then having this rate increase which will then pay back the City. In the event that we experience another one of these Miami winters, what is the prospect of the $45 million not being repaid to the City?
I will turn that over to Mr. Knudsen. We feel fairly certain that we will be able to manage it, but I'll turn it to Tom.
Obviously, it's a major concern if the weather were to be warm again. Obviously, we have also some recourse to the Public Utility Commission. I would like to make a point relative to our question. We can in a very timely way petition the PUC for relief on the gas cost 36 BILL NOS. 000583 AND 000590, 9/27/00 portion, in other words, on a monthly basis. If it was necessary, we could do that. So that portion, that two-thirds of the problem at least at present is somewhat under control.
I'm sorry to interrupt you, but two-thirds of the problem plus that one-third of other problems, those three-thirds are being borne by the ratepayer. There's no question.
I just want to make sure there's an understanding in this discussion that even though two-thirds are allegedly out of our control, the responsibility to pay that two-thirds plus the one-third mismanagement is basically on the back of the ratepayer. That is, even though we have the ability to go to the PUC for that kind of relief on the cost of natural gas, it still will continue to be borne by the ratepayer.
That's correct. Let me respond to your question. We have done some modeling of 10 percent warmer than normal, and 37 BILL NOS. 000583 AND 000590, 9/27/00 actually, 70 million more than the 97 million that's presently petitioned. And within that context, the $45 million is still adequate for us for the coming fiscal year. So in that regard --
That wasn't my question. I know the $45 million in your estimation is adequate for you in the coming fiscal year. The question I have is in the event that we do not meet our projections and if we do have another mild winter and the degree days are significantly down and our collections are significantly down, what is the practical problem the City faces in not collecting the $45 million loan after two years? What impact does that have on the City's five-year plan?
There's two answers to that. One is that we will be in proceedings before the PUC probably in late-November for the permanent rate increase, and those will be deducted over the winter and we will see precisely where the winter has taken us. And understand that under the law, as I understand it, of the Gas Competition Act, the PUC must provide us with necessary funds to operate. And 38 BILL NOS. 000583 AND 000590, 9/27/00 that's one of the legal issues that's now being discussed. The other is that we are presently contemplating buying some insurance, weather insurance that would protect us in the event that the weather again were much warmer than normal.
Is there any indication as to the expense of that insurance? It would seem to be significant.
It's not cheap. We are looking at that opportunity. I don't have any estimates right now.
Should they not be able to pay, of course, the City would have to make adjustments and we'd have to find alternate ways to fund that.
I guess my next question is based on if we can find a way to adjust to a potential $45 million loan, why can't we find ways to adjust to a shorter-term and more consistent $18 million loan?
The Administration is considering foregoing that 18 million this year.
Also in Standard & Poor's credit report or report on this utility, they made mention of the fact that a $52 million rate increase, which is an increase of 6 percent, the proposed tariff will increase rates 7 to above average in a service area with 8 blow-average income levels. In some ways, even 9 though it may be a necessity, are we not creating 10 a self-fulfilling defeatist policy of basically raising rates on people who are increasingly poor and cannot afford to pay the additional rates? And will not that set up a potential scenario where we collect less and less as it relates to bad debt expense and uncollectables by raising rates?
Councilman, there's no 18 question that this represents a major threat to the company right now. We had 140 to 150,000 customers who are at or below, I think, 125 percent of the federal poverty level. The answer to that has to be that we are doing everything we can to begin the outreach to these customers in order to mitigate and soften this requirement on them. And they are customers of PGW. We have 40 BILL NOS. 000583 AND 000590, 9/27/00 this requirement to pass these gas costs through. There's very little option that we have in that regard.
I just have one final question in this round. I'd like to come back. Standard & Poor's also indicates that to preserve its ratings, PGW will need to obtain rate relief and implement the projected productivity savings ranging between 5 to 10 percent annually. Cost reductions are critical to PGW's ability to fund future capital needs and maintain competitive commodity charges to retain customers following the introduction of consumer choice in Fiscal 2004.
Go to Appendix B, in your testimony to the PUC, and I look at one situation that kind of jumps out at me, and that is -- there's a couple different scenarios. There's a revised estimate of the budget for '99-2000, there's revised estimate of the budget for 2000-2001, and then there's also scenarios in there indicating no rate increase 41 BILL NOS. 000583 AND 000590, 9/27/00 revised budget 2000-2001, no CGR increase and no 3 rate increase revised budget 2000-2001, and I look at the area saying administrative and general costs. If I go across that line, even under the scenarios, it indicates no increase in the base, no increase in CGR, I see no decrease in the administrative and general expenses. Couple that with the fact that while I recognize there may have been a need to hire 30 additional people to deal with the problems, they don't seem to be the traditional tacts taken by a company in fiscal straits, in dire fiscal condition. We normally see in the private sector companies downsizing their employees, not increasing them by 30. Perhaps you could have rearranged people in another part of the company trained to work in the call center, or at least indicate under these various doomsday scenarios some reduction in administrative and general costs. I mean, are we looking to the ratepayer first and not to the internal workings and operations of the company? Because this line would indicate to me there's no 24 intention, even if we don't get rate increases, of reducing costs. 42 BILL NOS. 000583 AND 000590, 9/27/00
Let me respond. At the present time, going into this year, over the last six months we are 60 positions lower than our budget that are reflected here. That's the first action that we've taken. One of the reasons for the increase in the A and G account, administrative and general account, about more than half of that is health care costs. We have assumed in here and shown here an increase of about 5 million on a $25 million base for health care costs. It is a substantial portion of that A and G that is reflected in the $14 million that we are saying we are going to reduce costs by. So the administrative and general account is made up largely in the majority by health care, and we are taking very aggressive actions to reduce that bill for the company.
What are the health care reduction efforts that are being made?
There are a series of benefits that the company and the employees have enjoyed over the years: Very little co-pay, very liberal pharmacy privileges. All of those are 43 BILL NOS. 000583 AND 000590, 9/27/00 being evaluated, and we will be putting forward proposals to change all of that. In fact, that's one of our actions in the next week or so.
Does that include lifetime medical benefits for retirees and indemnity coverage? I don't know of anybody left in the world that has indemnity coverage but PGW employees.
That is part of the ongoing discussion right now and something that we are addressing. I can't be much more specific than that because we don't have the specifics yet, but that is an area that we are attending to.
That's one of those matters that will be addressed in the collective bargaining agreement, retirees benefit package is something over which we have to bargain collectively, but it is the kind of issue that we're developing now for discussion. You also mentioned, you know, why are we going out and hiring employees, can't we just shuffle people around in the company. I think over half of the employees we're bringing into 44 BILL NOS. 000583 AND 000590, 9/27/00 the cost are actually people that we bring from within the company, training them in order to put them in the call center. They're not all new hires from outside the company. New hires from outside of the company are actually individuals who have bilingual skills.
There are 30 new people in the call center, not 30 new hires.
In things that I've read and testimony I've had, it says 30 new hires.
No. Understand, we have been eliminating a whole series of positions. We have to hire back into certain positions that are now empty. From your point of view, yes, we are hiring a full 30 people back, but understand that the budget is now 60, and it looks like we're going to 80, positions lower than where we were entering this year. So we're still ahead in terms of reduction, but we have to bring back some people back into the fold.
I would think 45 BILL NOS. 000583 AND 000590, 9/27/00 that that kind of clarification will help your public position when it comes to both this body, PUC, and the public at large.
You're welcome. The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Miss Davis, is it my understanding that you are putting forth this bill based upon Section 2-301(a) of the Home Rule Charter; is that the basis of this request?
That reads that the Council may not make any operating appropriations in addition to those included in the annual operating budget ordinance except, A, emergencies which could not be anticipated when the operating budget ordinance is passed; is that right? 46 BILL NOS. 000583 AND 000590, 9/27/00
I'd like to take you through a series of items, many of which occurred, I believe, before -- you got here May 15th?
It's a story, Thursday, January 13, 2000, headline, PGW tops Street agenda, may lead to hike rates, sweep out management to survive. Friday, January 28th, Street asked to take decisive action at PGW. February 7th, PGW in crisis mode, Gas Commission called. February 9th, Street urged to up gas rates as one of the options to raise revenue at the financially troubled city utility. February 28th, PGW caught in financial crunch, rumors swirl over rate hike. March 14th, new PGW team to raise rates? April 12th, an eye on rate hike PGW team is checking finances. May 4th, City borrows bailout of gas 47 BILL NOS. 000583 AND 000590, 9/27/00 bills. May 23rd, PGW pay-out still rules as far as Council no-profit rep, phones and billing on the fritz. Tuesday, June 20th, Street, we need cost reductions, more revenue, PGW to increase rates. Was this something unforeseen in all of this?
The unforeseen piece was the unprecedented rise in gas costs which depleted the cash at a much faster rate.
Are you aware of any previous bills passed by the Council during those emergencies?
They were Bills 109 on April 20th of '76; 218 of 5/28/76; 558, 3/28/77; 596, 4/04/77; 599, 4/18/77; 681, 5/02/77; 713, 6/15 of '77; 1322 5/08 of '78; 1315, 6/29/87; 1283 4/11/91; and 18 4/29/96. And they were for higher court costs, medical and health increases, a recall vote with increased labor costs, 48 BILL NOS. 000583 AND 000590, 9/27/00 indemnities, health and medical, snow removal, higher indemnity payments, payments for care of children, weather-related labor agreements, labor agreements, and the blizzard of '96.
Okay. And it's your testimony today as Finance Director that this particular situation matches any of those unforeseen circumstances?
Yes. Your high court costs, higher indemnity payments, and indemnity health and medical payments.
I'm sorry, I couldn't understand what you were saying.
And how did you decide on the $45 million? Is that a function of what you're allowed to get out of the current contract? Or what is that number in the context of the current cash crisis? 49 BILL NOS. 000583 AND 000590, 9/27/00
I think the 45 million was derived from the gas company. We look at what our cash requirements were going to be going into the next year, sized in part as a result of the increase in gas prices.
It has nothing to do with the provision in the current contract that allows you to borrow up to $12 million.
Yes, the contract allows for a borrowing. I think we've asked to increase that amount by 5 million, actually. It is not at the same level that we're proposing now. We're proposing an actual increases in the -- from to $45 million, and it's based on what 16 the company has indicated it will need for cash 17 flow over the course of the next two years. 18
Walk me back 19 through the process which you developed to get to 20 the $45 million.
Councilman, we have prepared a number of scenarios, financial analyses that suggest that even where we could experience a much warmer than normal winter and a substantial increase beyond where we are right 50 BILL NOS. 000583 AND 000590, 9/27/00 now in fuel costs, 45 would be a comfortable level for us to satisfy their -- the separate periods during the year when we need supplemental funding. We can provide that to you for discussion.
I appreciate the answer, but that wasn't the question I asked. You have a certain dollar amount of need. Walk me through all of those numbers and tell me how you arrived at the 45. What are all of the components? And these analyses that you have prepared are they being circulated to us? Do we have copies?
When might we get them? (Copies distributed to Councilmembers.)
I'd like to direct your 51 BILL NOS. 000583 AND 000590, 9/27/00 attention to the --
On the third page, there's a 12-month cash flow requirement. Let me just draw your attention to the bottom of the heavily marked area ending "cash balance" which is about three lines from the bottom.
If you notice, there are two negative periods: One is in November, the other is in January. Now, this assumes an additional amount of gas purchases that we will need. This also assumes that if we need to, we will get a timely rate increase from the PUC for the gas costs, which is our right. That being said, we have two periods needed: One in November --
Let me make sure I been understand something you said earlier. I thought in response to a question you said it was your right but also that it was a legal question about that.
It's my understanding -- yes, we are litigating it and we are asking -- we have certain rights right now based on quarterly -- actually, monthly we can apply for an adjustment of gas cost rate. We're asking for an even more spontaneous response on the part of PUC, and that is what other gas utilities enjoy right now.
Well, we do have a monthly privilege right now. We would exercise that completely, so we don't anticipate getting too far out of since in terms of the gas costs. So we assume a certain timeliness of that response here. Regardless of that, we have two periods where we are showing end-of-month cash deficit, one in November and one in January. There is one other requirement, and that is, in May you will notice on the bottom line we show a negative 25.2 million. We must eliminate that 53 BILL NOS. 000583 AND 000590, 9/27/00 balance in order -- we have to demonstrate that we can essentially take that number to zero. We don't have the internal cash to do that. We would rely on the 45 million to --
I'm sorry. If you look at May on the very bottom line, you see a negative 25.2 million.
That's correct. We must take that to zero. So we have two periods that I think are critical. One is in January and we must bill that and collect it, all right, and then again in May. Those two periods together we would presumably have to draw on the 45 million. That's our present thinking, anyhow.
How much of the 45 would you spend in January? Isn't that figure 109?
No, we're showing a 12.6 and then the 25. So if we didn't get any of January months back in billings and receipts by 54 BILL NOS. 000583 AND 000590, 9/27/00 May, then the two could be added together to about 37 million.
I just want clarify one thing. When it talks about litigation, we're not going into State Court. I think he's talking about pursuing the issues in front of PUC.
Take me back to the oral statement that the sudden and dramatic increase in gas costs has depleted your cash on hand; is that correct?
No. Well, two things depleted the cash. One was is if we have nowhere to go in terms of a short-term debt provision, our tax exempt papers exhausted. But coming through this last fiscal period ending in August, we not only have warmer than normal winter which gave us at least a $15 million operating deficit in Fiscal 2000, but we also then had an increase in the amount of gas that we had to purchase, the cost of that gas by about 17 million. So we came out --
You're buying gas 55 BILL NOS. 000583 AND 000590, 9/27/00 now for --
We're buying gas for storage presently. We buy in the summer and we store it, both at the plant and in the storage facilities that we have throughout the Northeast. That being said, we have ended the year very cash-shy. And one of the things that we are saying to the PUC is we need at least 35 to $40 million at the end of the year to have any comfort that we can go forward into the next winter. And if you'll notice in this period, we ended -- this shows us with a half a million dollars of cash at the end of September. The months of September, October, November are essentially break-even on a cash flow basis. And then coming into December we have gas to purchase, and on the 1st of January we have a very large debt service payment that's necessary. So it's those combinations of factors that's driving our need right now for the January period.
Councilman Nutter, according to the computer here, you've been on for 14 minutes, and we have at least five 56 BILL NOS. 000583 AND 000590, 9/27/00 other Councilmembers that want to be recognized. So if you will ask a question now, we will then give them an opportunity.
Have the computer people checked the timer in the computer? Are you sure?
Fourteen minutes and twenty-two seconds. (Laughter.)
I'll ask this, and I'm sure you'll possibly have to come back to it, but I would like to get a better understanding. Can you tell me -- talk about these warmer-than-normal winters in the past three years. What have been the revenues versus the expenses during that time and the bad debt during those periods as compared to revenues and expenses during the last three cold winters and bad debt generated during those time periods?
Can I supply that to you? I don't have that information with me right now.
Do you have any sense of it? 57 BILL NOS. 000583 AND 000590, 9/27/00
Yes. In terms of revenues exceeding -- expenses exceeding revenues, trust my memory here, we have about a or $17 million deficit, operating deficit in 6 '98. It went from 22 million in '99, and we're 7 projecting about 15 million right now in 2000. 8
What happens in 9 the real cold winter situation? My assumption is 10 you sell more gas. What happens to the bad debt 11 figure when people who cannot pay or who refuse 12 to pay get higher bills? You just have more bad 13 debt? 14
Yes, we have a 15 substantially higher provision for bad debt and that is what we are looking at right now. If you'll look on the next page, there is a bad debt expense of about $63 million. That is substantially higher than we have been running in the last three to four years. And the reason for that is -- also understand that this analysis assumes another 70 million of gas cost, but be that as it may --
That's correct. Under 58 BILL NOS. 000583 AND 000590, 9/27/00 "contribution margins."
No, that is the provision that we would make for this year, this forecast period ending August of next year with the assumptions that are implicit on the first page. This is the worst-case scenario we have right now, in other words. And that's what we're showing here.