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.
So what we're hearing is if we have a mild winter, PGW's in trouble; and if we have a cold winter, PGW's in worst trouble.
We are most troubled if we have a warmer than normal winter. We are in next-to-worse trouble if we have a colder than normal winter because of the gas costs and the potential write-offs. We hope it will be just slightly warmer than normal. 59 BILL NOS. 000583 AND 000590, 9/27/00
No, I say in terms of what we hope for is a normal winter this year.
I'd like to go back to from the PFMC Board. The PFMC board members, are they a paid board?
The PFMC Board is a volunteer board. It's a board of volunteers. There are three members who are City employees, Janice Davis serves, I serve, and Charlie McPherson serves on the board. We're City employees. Everybody else is volunteering.
Are there members of the PFMC Board presently on the board who are on the board of the past Administration? 60 BILL NOS. 000583 AND 000590, 9/27/00
Who will be held accountable for the decisions that were made by that board and decisions not made by that board to which brings us to the financial position that we are now?
There is, I guess -- there are some actions. There is nothing contemplated against former members of the PFMC Board. There were certain actions of former employees and there is the potential of litigation against some of those employees that deals with gaslighting and the security system. The PFMC Board has filed summones against those individuals in order to preserve the possibility of litigating in order to recover some of the money that they spent perhaps inappropriately. That's the only litigation that might occur as a result of how the company is managed. There is no current conversation about going after the PFMC Board. 61 BILL NOS. 000583 AND 000590, 9/27/00
How is the PFMC board held accountable for its actions or inactions? Barbara stated earlier when there was a discussion about having the need for a rate increase. Your company made recommendations to the Administration? Or did you make them to the PFMC Board?
To the Administration and to the management; the executives of PGW, not to the board itself.
So there was no 13 discussion with the PFMC Board for the need for a rate increase?
I rarely, if ever, attend those board meetings, and I don't know if management had those discussions. I never communicated directly with the board.
Did you -- Public Financial Management prepared a five-year plan that identified a $20 million budget plug in the year 2002, and a former executive director of PGW and a former finance director told us in this Council and the Gas Commission that it would be 2002 before we saw this plug. How do we now get 62 BILL NOS. 000583 AND 000590, 9/27/00 to $50 million?
In the report that PFMC prepared, it was in the early part of 1999 before there was -- what turned out to be the second warm winter, the winter of '99, and then the subsequent third warm winter in the winter of 2000, so that was our best estimate at the time. Not being able to take into account two warm winters, higher gas costs subsequently arose.
That five-year plan was presented to the management of PGW, not the PFMC Board?
Mr. Knudsen, you were on the side of the consumer when you were working with the applicant and you attended many commission meetings where we discussed financial situation at PGW, and you are now management at PGW?
Could you 63 BILL NOS. 000583 AND 000590, 9/27/00 outline for us what cost savings you are making now relative to changes that you do have impact on as kind of management and how many how many of those cost-saving measures are tied to the labor management, labor agreement? And what is the amount ratio; is it higher on the labor side?
We have identified a series of areas of the company to which we are directing our attention right now. As I mentioned earlier to Councilman Kenney, this whole health care area, we are looking to reduce costs there by about $4 million, which is about what the increase was from last year. It breaks down proportionately: About a third to management, two-thirds is the community. So those -- and retirees. So those will require a certain amount of the negotiation. Retirees are not necessarily tied to the negotiations in the spring, so we may be able to make (inaudible) there. Certainly, the nonunion, we have the opportunity to effect savings there. So from that area, yes, we do have to wait until next May. We will move as quickly as we can on all of 64 BILL NOS. 000583 AND 000590, 9/27/00 the others in our IT area. There are a number of past contracts that were negotiated that we feel could be much more effectively renegotiated. We haven't had the opportunity to do that in the last four or five months for a whole host of reasons. We will turn our attention there to look to get substantial savings there. As I mentioned to you earlier, we have substantially fewer numbers of people now than we budgeted for, for a whole host of reasons. One is that people have an option and they are exercising that. That means if they have 30 years of service, they can then elect to leave and take a pension. A lot more people are leaving than we anticipated and we are not replacing those positions. So there are a number of these initiatives.
A number of those people taking 30 and out are key management of PGW?
Several of them are, and as I addressed with Councilman Kenney, we are replacing those people. We have to get fresh 65 BILL NOS. 000583 AND 000590, 9/27/00 young people with skills into the company or we won't survive.
You talked in your testimony, Miss Wilkerson, and perhaps you can answer this question. On of the testimony, at the bottom, it says PGW has gone on a short-term debt to fund normal operating costs. It is my understanding that under the management agreement, that this commercial paper can only cover accounts receivable and gas inventory.
I think one has to realize that this fundable is only used for a number of purposes, but we could say that they were used to finance the increase in the accounts receivable purposes, and money itself was used that way. But one has to also be realistic there and say that when you have an operating deficit, how do you fund that deficit? And the last source that we had available to us was the short-term debt.
Would you have that same opinion on the other side of the table?
Let me put it this way, I'm trying real hard to avoid this happening in 66 BILL NOS. 000583 AND 000590, 9/27/00 the future. I would have raised a similar objection possibly, yes.
First go back to the BCC system. You said to us the other day that you are resolving the customer billing problems and you were turning up your call center operation. In relationship to the statement that Councilwoman Krajewski made, the comment given to her by an employee, what training are you providing to the call center?
I'm always taken aback when we hear that kind of statement. Here's what we are doing. When we are -- first of all, the people in the call center that now are there are now undergoing extensive retraining. A lot of these people do not have good training relative to the new computer system. They also didn't have good training at home. What we have done with these new hires is to put them through a much more complex training process where we've actually look at their attitudinal ability; for instance, can they, in fact, take the pressure of a call center operation such as we have. All people cannot do 67 BILL NOS. 000583 AND 000590, 9/27/00 that. We have found that they get angry or they lash back at customers. Understand that these people have been under the gun for months now. 5 It is relentless. All they do is process 6 negative emotions from customers -- as well they 7 should, that is their job. It's very difficult. 8 We are attempting to handle a very difficult 9 situation. 10
Many of the call 11 center employees, I know, are moving within -- 12 being promoted within the company? 13
Are they the 15 residents of the City of Philadelphia? 16
The call center employees are residents of Philadelphia?
Oh, I'd have to inquire. One of the issues we have is that a lot of our employees come to the call center from within our old employees that were grandfathered back in.
I guess my point is if they were paying the high rate for gas, 68 BILL NOS. 000583 AND 000590, 9/27/00 they would not have a poor attitude.
Um am I finished? One more question for the call center. (Inaudible.)
Yes, we have interviewed and that person will be coming on board soon. We did have one person prior to this selected several weeks ago, and that person (inaudible), and we have essentially reselected another person who we think will do a wonderful job. He comes from a background of running complex call center installations, and we certainly have a complex installation.
Thank you, Madam President. It's very difficult not to be supportive of your request based on the fact that you're suggesting that people may freeze to death if we don't get additional money to buy gas, but I'd like to talk to you about process. If we buy December, January, and February, explain the process of how we pay for that gas. Do we have 69 BILL NOS. 000583 AND 000590, 9/27/00 to pay before we purchase it? Do we get a float? Do we get 30, 60, 90 days to pay for the gas? I'm hoping that this isn't just a spin to get our attention. How do you pay for natural gas when you buy it from the source, the supplier?
We have to pay for the gas within 30 days. We don't bill in that 30 days. We don't collect for another 45 days on average, so quite a long time.
So with our suppliers, we have no credit other than we have to pay like within 30 days?
Have we talked to the suppliers to see if there is another way to get 60, 90 days and maybe pay a bit more than have to come in and say that the customers are to be without gas? Is there another way? Is there another solution to this problem?
I don't think in that corner we would get it. In fact, much to our chagrin, with the reporting done in the papers in 70 BILL NOS. 000583 AND 000590, 9/27/00 the last several days, we have been getting a flood of calls from vendors, some of whom suggest they want a letter of credit. We are not getting help from any quarter.
I'm not saying there isn't an answer. Certainly, we've been looking at options but it's not something --
I'll be perfectly honest with you. I perceive some of what I've been hearing in the last few days as spin, as not really the real deal, because I talked to some folks that run gas utility companies and they're amazed that this is even part of this request, suggesting that people are going to be without gas and there are people that --
Councilman, we never made that statement, but the only thing we said in the process was that projections are showing that in November we will cease to have enough cash to operate. That's all we ever said.
Well, then what does that mean? 71 BILL NOS. 000583 AND 000590, 9/27/00
It means if we get the required cash, get monies via a loan to pay for the gas in advance and bill the customers, we will continue operations.
What happens if you don't get the loan? In other words, are you able to stall payment for this gas until the actual billing generates revenue?
That's a no? Then some people are going to stop getting gas, some people are going to be without gas, and some people are going to freeze to death?
I don't want to assume here. This is a real serious subject.
We would be looking for, you know, we would be looking for some other -- we will be looking for some other kind of financing. It's not clear. The reason we're here is because we don't have other resources to draw upon, that the company really is in a low (inaudible) prices. And if it doesn't have internally generated resources available to it 72 BILL NOS. 000583 AND 000590, 9/27/00 from time to time, the company will borrow from capital reserves. We've had a line of credit. That's not available. We are here because we have not been able to identify resources within the company that would allow us to, you know, fund the purchase of gas.
In a briefing, I asked about a Plan B. Do you mean to say that you're so confident that this transaction's going to occur that there isn't a Plan B in place right now, whether we would -- the State would come in and operate the utility, to fund the utility, the federal government? I've asked this question before. I don't think I got a good answer. I asked it a week or so ago. What is our Plan B in the event you don't get this $45 million.
I think we would have no option, Councilman, than to go to the PUC for an emergency relief of some sort. And exactly how that would make out, I don't know what conditions they would put on it. I don't know. The relationship with the PUC is very 73 BILL NOS. 000583 AND 000590, 9/27/00 up in the air right now. Where it would fall, I don't have a clue. It would definitely be one recourse, one path, one opportunity. We would have to address that situation. By law, they are required to make sure that we have funds we need for operations. That is what the statute says.
Again, so I have it straight, if this doesn't happen, there is a chance we cannot buy natural gas? In other words, you're a utility company without some Plan B and would be in a position not to have natural gas to supply to customers of PGW?
If we could not pay for the gas and we could not make other arrangements with the PUC, I'm telling you right now, we are here exactly -- if we could not, we would have a few days of operation from our plant. The system would not have gas. I don't have any other answer for you than that kind of dire result.
I won't pressure you any further since you don't have another plan in place, but if you do, I'd love to hear it.
As I said, the only option were we not to get funds from the City to 74 BILL NOS. 000583 AND 000590, 9/27/00 carry us over this period would be an emergency rate. That would be our only option.
If this were not to be passed, would you be able to meet payroll by the end of November?
No. We're showing -- if you look at the schedules on the second page, we're showing -- at the end of November, we are adding negative cash balance.
Thank you. The Chair recognizes Councilman O'Neill.
Thank you, Madam President. Both Council President Verna, Councilwoman Krajewski, and maybe some others mentioned the part of the testimony that deals with the 20 months that we weren't billing people and now getting billed, but I want to be clear on whether we're trying to collect from the months that they weren't billed and how much money is involved in that potentially if we were to get 75 BILL NOS. 000583 AND 000590, 9/27/00 it. And are we collecting it already in the budget, the back revenue, the revenues going backwards? I know going forward, but I wasn't clear. That really gnaws on a lot of people that there are others who might not pay because they're paying for them, somebody else who was billed is paying for them.
There are people who were not billed for a month, five months, twelve months, and there may have been certain select people who in the old system were not being billed. It wasn't huge numbers. We're really talking about a problem that started with the implementation of (inaudinble). We are now billing all of those people. We have extensive collection actions going to make sure that they do pay for two reasons: One, we want the cash --
That's right. We want them to pay everything that they owe for two reasons: One, we need the cash; but secondly, we 76 BILL NOS. 000583 AND 000590, 9/27/00 need to prove to auditors that we are capable of collecting in order that it not be written off our bond indenture requirement. That being said, those customers who were not billed for a period of time, they have with the new Gas Commission allowance periods of additional payback. In other words, I think they get eight months or ten months. We are going after them very, very --
The interest-free loan, the 45 million, how much interest -- because you don't have to use it all at once. How much interest is budgeted if the money that you're going to get from the City, you draw it down as needed, how does that work? I'm not sure anyone's going to earn interest on it. Is it just money drawn when you need it? Or do you get the 45 million, bank it, and then -- I'm just trying to understand.
The money will be invested in a segregated account with the (inaudible).
How much estimate anticipate? 77 BILL NOS. 000583 AND 000590, 9/27/00
Okay. The last question is unrelated to this but related to operations. The loan itself, the last time we were talking in these hearings, we were discussing capital budgets and something else that had been going on. The other day, I saw a letter that said that the City Controller reviews every City capital item to determine whether it's really capital or operating, and oftentimes there's a difference of opinion on that, but usually operating -- but they can stop and that goes on between the Administration and Council items and the City Controller's Office, and it's a check and balance. Does the capital budget, and I'm going back now -- I'm not too concerned about the last couple of months or going forward, but what audit function occurs from the City Controller's office or somewhere else before something is spent at PGW for a capital item and not for an operating item?
I don't know 78 BILL NOS. 000583 AND 000590, 9/27/00 specifically with regard to the controller's office. I do know that our audit of financial statements will make that distinction that they review the assignment of expenditures between capital and operating. So that piece of it would satisfy the external auditor. I'm not sure what Mr. Saidel's procedures call for.
Okay. Madam Chair, if we could get information on that and if the controller does it, I would like to find some mechanism for them to do that. I'm just concerned that in the absence of -- as much as I'd like to have trees cut down with capital money, I understand the difference of opinion within the Controller's Office on things like that and how easy it would be in the absence of an audit function like that to use capital money for operating. And I would like to see some response afterwards on that.
Thank you. Councilwoman Miller. 79 BILL NOS. 000583 AND 000590, 9/27/00
Thank you, Madam Chair. On of the testimony, it talks about the fact that PGW waged an information campaign that will better advise customers about the program, and it says you are considering an energy assistance program. Has anyone actually sat down and really got their specific plans or information campaign? 'cause my concern is for those low-income customers who can't pay bills, and with a 30 percent increase, to me it's just going to put them right back or keep them in the same situation of having their gas shut off. I'd just like to know if there are any specific plans.
Councilwoman, we are very sensitive to the fact that that many of our customers will be in jeopardy. We are in the process of formulating an outreach program right now to involve people in the customer assistance or energy assistance programs that we have available right now. We have 41,000 customers who enrolled last year in our program. We would like to substantially increase that number this 80 BILL NOS. 000583 AND 000590, 9/27/00 year.
Do you have a number of people that are eligible but have not applied?
It's a difficult question for us. We have some information that there are about, as I indicated earlier, 130, 140, 150,000 of our customers who have qualified at various points over the last number of years and upon whom we have some information but not current information. It's hard for to us get that information, but that was a part of the program that we're going to put in place to identify those folks.
Do you have a number of customers that are currently shut off?
I don't have that figure, Councilwoman. I can provide that to you.
Thank you. One other question. All in the news this morning and last evening when people were -- well, I didn't get the testimony from the public hearing last night, but it seems that people are talking about tightening their belts also and cutting costs and 81 BILL NOS. 000583 AND 000590, 9/27/00 eliminating extra things with their children and things for their home. When I walked back into the room, I noticed that you were answering Councilwoman Tasco's questions about tax-cutting and cost-savings methods.
I don't get this on our telephones in our office at this time. Can we do that? Can you repeat the measures that will be taken?
Yes. Management has committed to our board and to the Administration that we will effect cost reductions for this fiscal period in an amount approaching $14 million and then another 6 to $8 million in the next fiscal period. That will take a substantial effort on everybody at PGW's part to bring that about. What I was discussing with Councilwoman Tasco was our health care plan, which is an area that we can, I think (inaudible). We are not replacing people who are leaving the company, and in fact, we have substantially fewer people than we originally budgeted for in September. And we have areas where certain contracts that have been 82 BILL NOS. 000583 AND 000590, 9/27/00 written in various areas of the company, including our information technology and our computer center, we're going to renegotiate those contracts. All of these items together we hope will approach our $14 million goal.
I have one other question. If we have another warm winter, what situation will that put PGW in? And if we have a cold winter and you end up having a surplus of gas, is there some way that customers will be able to get a credit or a refund or what?
If we have a warmer than normal winter, much like we've had in the last few years, it will be a difficult circumstance for us. As I indicated, we are considering buying insurance for that purpose. The heart of that is the deficit experience will be paid for by the insurer. If we have a colder than normal winter, the financial consequences of that will be -- in other words, our costs are almost $200 million. How much we'll have to write off of 83 BILL NOS. 000583 AND 000590, 9/27/00 that because it's colder than normal and how much we will have to put into repairing the streets where we'll have many more main breaks in the cold winters than we do in the normal winters, we don't know. So we aren't sure exactly what that result will be. Whether we can think about a refund to customers in that circumstance, that's a situation we'll have to address when the time comes. I don't think I can make any commitments to City Council at this point on that issue.
Has there ever been an occasion where people were refunded? I can't remember.
Councilwoman, the only thing that we can talk about in terms of a refund, I think in the spirit of the question is that the gas costs which are approximately half of our costs, now will be more than half of our costs, are passed through to the customers on a one-to-one basis. In other words, we don't make any -- there's no profit associated with it. If we overestimate in this situation, then next -- when we are aware that we are 84 BILL NOS. 000583 AND 000590, 9/27/00 overcollecting from our customers, we will file 3 for an adjustment to our gas costs and reduce them. So that as quickly as we can, we'll reverse the problem. That's the closest we get to a refund in the manner in which I think you asked the question.
That's good to hear. One other question and that's it. Will the loan cover the costs of a cold winter, the cost of purchasing the gas if it's a cold winter?
Our estimates in the handout that I gave to the City Council this evening suggests that we do, the 45 million would be sufficient for that purpose.
You're welcome. The Chair recognizes Councilman Ortiz.
Thank you, Madam Chair. We are talking normally about 45 85 BILL NOS. 000583 AND 000590, 9/27/00 million, are we not? You're telling us about the $18 million payment that PGW gives to the City?
What the Administration has proposed is the $45 million loan. There is conversation about the $18 million payment in the company's negotiations with the PUC.
But realistically speaking, I do not argue that PUC has these problems, and realistically speaking, we're talking about that in the short term problems, the $18 million has to come into play. Is that true?
That's under negotiation with the PUC. Yeah, I mean they're asking the question, you know, why should the City get the $18 million payment in light of how the company's been operating in the past. There is a sentiment on the part of a lot of people that that ought to be at issue.
I'm not asking about the PUC, I'm asking what is the opinion of the PGW management. Is there a financial need for more than a one-time loan of $45 million and 86 BILL NOS. 000583 AND 000590, 9/27/00 that $18 million is also going to be requested from the City to be able to really take it over the hump?
My testimony before the PUC presently says that $45 million is a working capital loan that must be repaid. It cannot become part of our capital structure, it must be repaid. Our position is that with $52 million, as these numbers will indicate here, we do not have much flexibility this year. We are representing to the PUC that we will keep the $18 million as a contingency, as a backstop in the event we get into trouble.
So the City should not count that $18 million we incorporate in the budget?
You should have said that at the get-go. We are not going to count $18 million for the operating budget this year.
At this point, the process going forward is very complicated. It really is in negotiation with the PUC. 87 BILL NOS. 000583 AND 000590, 9/27/00
We're here to really get to the bottom of what PGW needs, and it's a simple question. Will the needs of PGW go beyond the loan, and does PGW then need $18 million that usually comes to the City's operating budget in order for PGW to get over that hump? I understand that negotiations are going on with the PUC. I want from you and the management of PGW to tell us that realistically speaking this loan is not going to resolve the problem.
This loan doesn't resolve the problem. What resolves the problem is the $52 million rate increase. To the extent we don't get the rate increase, then there will be other supports that will be needed. And it's in that context that we're talking about the $18 million.
So if you get the $52 million increase, does that mean that you will need the $18 million? The City can then on count that $18 million in its operating budget? 88 BILL NOS. 000583 AND 000590, 9/27/00
If we get the full rate increase, we may not need the $18 million. I think that there are a lot of risks that we have in play right now. We have made very, very aggressive assumptions about what will happen with the PGW budget. We have budgeted for average weather moving forward, and so there are a lot of things that could make the $52 million inadequate. The City's committed to putting PGW on the right course. And that's why we're talking about the $45 million, that's why we've indicated that the $18 million that we are willing to make a commitment to make sure that the company gets over this hump. I think we're also mindful of the kind of burden this imposes on customers. Some of it results from how the company's been operated historically, some of it results from the fact that the cost of gas is higher than ever before. We understand that this $18 million can play a part in trying to address some of those issues.
If you don't get the $18 million, don't we then have to come back 89 BILL NOS. 000583 AND 000590, 9/27/00 to Council and raise the appropriations expectation by another $18 million out of the operating budget?
We are due to receive the million at the end of the year. If we 7 determine that PGW is unable -- they will still 8 have to make the payment and we will have to give 9 it back, in essence, is what would have to 10 happen. At that point, we would come back to 11 City Council. At that point, we'd have a better 12 sense of what the City's capacity was to handle 13 it because it would be towards the very end of 14 our fiscal year and we'd have to make whatever 15 adjustments that had to be made at that point. 16
One of the things 17 that disturbs me was when Councilman Nutter asked 18 you about when the City had an unanticipated emergency and raise the appropriation expectations, you mentioned a whole series of circumstances. Those circumstances did not go really without some sort of payment down the road. Each one of those circumstances, I think, really put us in a situation in the late 1980s in which the City was operating almost at a bank 90 BILL NOS. 000583 AND 000590, 9/27/00 level, and that this type of budget under which we raise the appropriation level to meet the need without really having a handle as to what revenues are going to be forthcoming during the year. And I'd like to find out what happens if and what expectations we really have that PGW will be able to pay this in two years.
It is a loan, and at this point, we're doing it from our surplus which we've determined is larger than the surplus we used going into the budgeting process. We're going as a loan that PGW will be able to repay within two years, so its impact on our five-year frame, which is what we've been using as a guage --
Councilman, as I indicated in the paper that we distributed, we fully anticipate that within the structure of what we've asked for from the PUC and even if we got less than that somewhat, we will be in a position to pay this loan down over the 24-month period.
The thing is that I'm just asking what reasonable expectations we 91 BILL NOS. 000583 AND 000590, 9/27/00 will have, because a $45 million hole and revenues are not forthcoming in order to meet that, I think the City budget or the operating budget of the City of Philadelphia is going to be in some serious circumstances.
I think it's a very legitimate concern on the part of City Council. All I can say is that there are mechanisms in place at the PUC to address the cash flow needs of the company as we move over time. The problem that we have right now is that we're caught between the two jurisdictions. We didn't have enough time after July 1st to really do this thing, to file for the rate increase and so forth in a way that fully met PUC's requirement and we're into this interim process. Once we get beyond this and we're able to file for, for example, gas cost increases on a regular basis were we to need them, then the cash would come from the customers which is appropriate and it's where it should come from to finance the gas that they consume.
Thank you, Madam Chair. 92 BILL NOS. 000583 AND 000590, 9/27/00
You're welcome. We do have some witnesses here that would like to testify, and several of them have been here since about 2 o'clock this afternoon. I would please ask my colleagues to be as brief as possible with our questions so that we will have an opportunity to hear the other witnesses. The Chair recognizes Councilman Clarke.
Thank you, Madam Chair. I'd like to ask a couple questions more for points of information than anything else. I'm kind of following up on Councilman Nutter's earlier questions about warm winter/cold winter scenario, and I needed some clarity. In your earlier testimony you talked about three successive warm summers and that has created a substantial deficit, and I'm assuming that prior to that we probably had three relatively cold winters. If we have three cold winters, please bear with me, the fourth winter is warm; in terms of purchase of gas, how does that work? Do you purchase it on a monthly basis 93 BILL NOS. 000583 AND 000590, 9/27/00 or do you just purchase all of the gas that you anticipate needed for that particular year?
So as you go on in that fourth winter, you're not purchasing as much gas as you would normally need, therefore, there are less expenditures for that particular fiscal year?
In addition to which, you are substantially decreasing your work force. What I'm hearing is that over the last several years you've substantially decreased your workforce.
Since 1989 PGW has reduced its workforce almost a thousand positions.
So in the last three years you've decreased it substantially, marginally? 94 BILL NOS. 000583 AND 000590, 9/27/00
It's been substantial. In the last three years it's been what we call by attrition, by simply people leaving and not being replaced.
So with the decrease in expenditures, i.e., the purchase of gas, the number of employees has diminished, why does the deficit continue to grow?
There are several reasons. One is that all of our other costs have increased; inflation has been an issue. Secondly, we haven't had a rate increase since budget period 1991-1992, so it will almost be ten years. So we've had inflation. Because we have had to finance our capital budget exclusively from debt and with no, what we call, internal generation of funds, the capital -- the outstanding debt has grown substantially and we've had to support that increase in the capital balance. That's been very expensive for us. The third element in this is that with the regulation that's occurred over the last seven or eight years, we have lost profits on our sales to individual customers and the accumulated effect 95 BILL NOS. 000583 AND 000590, 9/27/00 of that profit loss has also created problems for us. So it's essentially those three issues. There are a lot others, but it's those three issues that have delivered us where we are and then we had three warmer than normal winters. The combined fact is that we don't have any money left.
I still don't understand the warm winter scenario. I mean, I understand the other issues that relates to this. But I'm saying if you purchase it this month and you don't -- the next month you don't need it because -- you don't purchase it because you have a warm month, I don't understand why that's an increase in the cost.
We purchase gas depending upon the weather, either buy more or buy less. That's a pass-through to the customer. It doesn't affect the financial position of the company. What I referred to you before in terms of inflation, loss profits, and capital charges, those are fixed costs in nature and those must be recovered over all of our sales. To the extent that we have fewer sales in any one year, we have 96 BILL NOS. 000583 AND 000590, 9/27/00 less profitability but a lot of our costs have not gone away even though the weather is warmer.
So the profit margin associated with the sale of the gas helps you pay the other inflationary costs?
No, we make no profit off of our gas at all, off of the commodity of gas.
How does the sale of additional gas affect the other issues? I don't understand that.
Well, because there is -- it's complicated. There are two pieces to the charge to the customer: There's the gas cost and there's what we called the base cost, okay. The fact that we would sell less gas does not relieve the customer from paying for the fact that we have pipes in the ground, we have employees to pay, we have debt service to pay and so forth. It is the fact that we have lost the sales and lost that contribution to cover these other fixed costs that has put us in the position we are. The gas is one issue and then there's the base requirement, our base rates are what is 97 BILL NOS. 000583 AND 000590, 9/27/00 really --
And what we have allowed in the base rate. To the extent that we don't have sales, we don't have those costs recovered and yet we still have to lay out the money for those charges.
Okay. Why is the cost of gas gone up, natural gas? That's another one I don't understand.
Well, it is. The more straightforward answer is that over the last several years there was less of a demand for gas. People in the gas business did less drilling, and 98 BILL NOS. 000583 AND 000590, 9/27/00 then there was a surge in requirements for gas as people are using gas more to generate electricity, so it was the demand on -- it was the call on the gas supply in the country for other purposes than we've historically used gas. It started this problem several years ago and the industry didn't respond in time. So now we have people chasing to get more drilling going in order to bring the price back. But we aren't there yet, and we probably won't get there probably until next spring or so.
In that original policy, they didn't foresee that we were going to have this problem down the line?
No, no. That's correct, that's correct. And the fact that the price of oil is so high right now relative to gas also supports the gas market at a higher rate because oil and gas are used interchangeably in some applications.
Thank you. 99 BILL NOS. 000583 AND 000590, 9/27/00 There's mention in prior testimony as to the amount of PFMC management fee. What is that fee and how much is it?
I think there is within the present PFMC contract, as amended several years ago for the last management team, I think it was an increase from about $350,000 to $800,000.
That is the salaries for the chief executive, the chief financial officer, the chief operating officer.
So this has nothing to do with the PFM's authority? It is a contract with the PFMC to pay the top executives at PGW?
The top executives of PGW are essentially employees of PFMC.
So it's got nothing to do with the running the actual board?
No, the board is volunteer and there's no compensation for the board.
Maybe we ought to 100 BILL NOS. 000583 AND 000590, 9/27/00 compensate them and get a little better board. No comment necessary. We had talked in the past and also today about this $18 million payment to the City. I raised this before, but didn't get a specific answer. Is there a way that the City could accept some of PGW's outstanding receivables in the amount of $18 million which wouldn't, in fact -- it wouldn't strip PGW of the $18 million cash, but it would allow the accounting process to occur that would not throw the City's budget out of balance. And there is some value, I assume, to receivables. Maybe we can collect a little better than PGW has.
We looked at receiving PGW's paper. In order to get million of 18 value, we would in all likelihood have to discount that very deeply.
The additional burden, administrative burden, would be on PGW, however, to maintain a separate accounting. It's not the best way to deal with ensuring that the City's 101 BILL NOS. 000583 AND 000590, 9/27/00 fiscal health is maintained. It's just a very chancy way of plugging up that hole in the budget.
Is it a step or two better than simply foregoing the million? 7
The Transition to 18 Excellence Program which is the new effort to streamline and economize and put the utility back on course, what's been the cost of that? How many contracts were involved with consultants and other firms to advise? I realized when I read through the testimony for the PUC there were a number of outside firms that were hired to consult on 102 BILL NOS. 000583 AND 000590, 9/27/00 customer service opportunities and customer service procedures and other things. How many and what's the total cost of the Transition to Excellence Program?
To date, we've only had -- for those initiatives we really only had two major contracts; one is with Anderson Consulting who we brought in to advise on the computer turnaround. They are experts for the reason that they have put any number of these systems in and have backed away from the business and know what the problems can be and they've advised us very effectively. I don't think we would have made the transitions where we are without them. That total contract was a little less than $300,000 for a period of two and a half to three months. The other is with a company called Vanguard, and those are the call center experts. They have also advised us very well. And I believe that contract is slightly in excess of $100,000, and that's been over a period of four or five months.
Are there any other additional contracts that are being 103 BILL NOS. 000583 AND 000590, 9/27/00 considered?
I'm sorry, I'm looking at KPMG Control Study, Deloitte & Touche, Mara, Vanguard, which you mentioned, Hay Study Implementation, Risk Management Department Reorganization.
Yes, let me respond. There are others that are part of that process that also address some of the structural problems. The Hay Study was to essentially help us understand how we should organize our personnel, how we should compensate them. One of the problems we have is that the lower level of our administrative personnel, actually, the first level of supervisors make less than many of the people they supervise in the union. It's causing us a lot of issues, and we're looking at that in order to change some of that. That is part of the Transition to Excellence as well.
Give a total number on the Transition to Excellence Program and its cost?
I could get that for 104 BILL NOS. 000583 AND 000590, 9/27/00 you.
I would say three-quarters of a million dollars so far. I mean, I think that would be fair.
As a rule, does PGW consulting contracts, other kinds of contracts, are they bid? For example, the City does. I would suspect with the exception of legal work and other types of bonds issues, things that relate to that, that 98, 99 percent of all City contracts are bid in the competitive process and the lowest most responsible bidder receives the work. What's the situation in the culture over at PGW?
I think it certainly has changed over the last several years. I think it's our intent to bid out for competitive bid as much as we can. In these several instances, for example, Hay did work for us in '95. It would not have been sensible not to build on that base. Vanguard, I believe was competitively sought. Anderson was not simply because we were looking for a very specific set of skills. 105 BILL NOS. 000583 AND 000590, 9/27/00
Is there any limitation on the ability to competitively bid to work at PGW?
So we could do it -- it makes sense and didn't have any other ramifications that we could do it as a matter of general course?
I think as a general policy we will do that and then we'll look at the exceptions depending upon the situation.
That is an issue that the board's taking a look at. I think the point is well raised that we could probably be more aggressive in how it is that we obtain all kinds of services. I wanted to add one thing about the Anderson contract. We actually had them -- the City approached Anderson. They offered to do it pro bono at a time when we had no idea what was going on with the computer system. There was a 106 BILL NOS. 000583 AND 000590, 9/27/00 point in time when we weren't sure that we were going to have to ditch the whole system and then bring in something new. Anderson came in, as Tom said, was very effective in helping us figure out what we were dealing with and then actually organize in PGW so that we could make the corrections that we've been able to make. There's also the KPMG contract. It's not a contract between PGW and KPMG. Do you want to follow up on that?
That contract is a contract the finance department funded because it's important to us at PGW, so we thought it essential that there be a controlled assessment. Additionally, the risk management was provided by our risk management department and there wasn't an outside consultant engaged.
One of the things that I raised early on when this issue first came to light, and it's probably one of the more symbolic problems with this agency, that over the last 30 years it has become a, I guess, a legal playground of some sort for outside legal firms and no-bid work. Could you give me an idea what 107 BILL NOS. 000583 AND 000590, 9/27/00 is being implemented? I heard rumors. A couple people told me off the record that there was some effort to eliminate entirely, if possible, the outside legal work that's being paid that agency had over the past years. 8
We are bringing 9 in-house most of the tort work that the company's 10 doing with the exception of the explosion cases. 11 The more serious explosion cases are still being 12 handled by private firms. We have hired one 13 attorney in order to handle most of those cases. 14 My overall strategy is to bring everything 15 in-house that we can. We are, nonetheless, 16 experiencing unusually high legal costs, and most 17 of those result from the deregulation process. 18 We have a whole series of negotiations that are 19 ongoing as we convert from the PGC governance to 20 PUC governance. And what we can do is provide 21 you with a detailed list of what our plan is, you 22 know, how we intend to bring cases in-house, you 23 know, those cases where we've actually hired 24 somebody, give you that information so that you 25 can even make the assessment. 108 BILL NOS. 000583 AND 000590, 9/27/00 This is a real opportunity area for us and we're serious about capitalizing on that. I think it's been interesting having Joe Rauscher on our board. And one of the things he said is that at the same time you go about asking the unions to give back and as we go about looking at some of their benefits, we've got to tackle in-house some of the other kind of patronage that goes on in the company, and he identified legal contracts and some of the other things, and so we are taking a look at that.
Would that take 10 percent of some of the firm's fees over the past 25 years and that will be able to fill the gap on our rate increase?
There has been a dramatic increase over the years, but it's still room for opportunity to cut some of those costs, but your point is well taken.
Thank you. With the permission of the committee, what I would like to do is call some of the witnesses that have been sitting here since early this 109 BILL NOS. 000583 AND 000590, 9/27/00 afternoon and maybe we can hear their testimony and then continue on with our business. Lance Haver. I really want to thank you for your patience. I know you've been sitting here since 2 o'clock. (Witness comes forward.)
Good evening, Madam President. Thank you very much. With me is Tina Nelson who is CEPA's executive director, but for those of you who know me over the years, I am the institutional memory for CEPA on PGW, so I will be very brief. My name is Lance Haver. I'm now a board member of CEPA, the Consumer Education Protective Association, and I'm an active party in PGW's rate hike case that is pending before the Public Utility Commission. I am here today to urge you to amend the ordinance before you pass it so that future payments from PGW to the City will be tied to performance. Unless you amend the ordinance first, you are in effect allowing the problems that created PGW's financial crisis to continue. There is no question that PGW is in a 110 BILL NOS. 000583 AND 000590, 9/27/00 financial crisis. The past management of the Gas Works wasted literally tens of millions of dollars. They bought a computer system that has failed to operate. This has cost tens of millions of dollars in overruns that has led to problems that have hampered billing and collections. In addition, past management abuses such as forcing consumers to pay contributions to private colleges, limousines, massages, and bath robes have added insult to injury. The major problem is the City and the Board of Directors of the Gas Works, the Philadelphia Facilities Management Corporation, have no economics incentive to run PGW well. As members of counseling know, every year the City collects $18 Million a year from PGW regardless of how well the Gas Works is run. This is unconscionable. The City should only be entitled to collect a payment from PGW if the Gas Works is well run. Like all owner of all other utilities, the City should only receive a dividend if the company is well run and profitable. All future payments from PGW to the City must be tied to PGW's production and 111 BILL NOS. 000583 AND 000590, 9/27/00 efficiency. The City is not entitled to a single cent from the Gas Works if it cannot adequately manage the utility. On top of PGW's internal problems, the rising price of natural gas at the well head is forcing PGW to seek a rate increase that will lead to thousands of people falling behind on their bills. I want to be very clear on this point. PGW is seeking a 30 percent rate hike. The rise in price of natural gas is responsible for percent of the 30 percent rate hike. In 13 other words, 66 percent of the total rate hike 14 PGW is seeking is being caused by the price of 15 natural gas at the well head. The doubling of 16 natural gas prices has been caused by the 17 nation's faulty energy policy that allows big 18 business to price gouge and act in collusion with 19 oil companies conspiring to raise prices as high 20 as they can. There is little, if anything, PGW can do to bring down the price of natural gas. At a time when President Clinton says he's concerned about the price of heating oil and released millions of barrels from the country's strategic reserve, he has been absolutely quiet 112 BILL NOS. 000583 AND 000590, 9/27/00 about the price of natural gas. I believe this Council could and should act as a body to ask the President and the Department of Energy to care as much about the people who heat with natural gas as they do about the people who heat with oil. In closing, I would like to state on the record that I have faith in the new management team of PGW, and I am very thrilled that Mayor Street has hired Mr. Knudsen and Mr. Hershey as they have for many years worked with consumers attempting to make utility bills affordable. I believe consumers will be well served by their tenure. In closing, I urge you not to pass this or any other ordinance having to do with rescuing PGW before amending the ordinance so that there is a link between PGW's performance and the payment to the City. I'll be happy to answer any questions.
Thank you. Are there any questions from members of the committee? (No questions.)
Thank you 113 BILL NOS. 000583 AND 000590, 9/27/00 very much.
Good afternoon, everyone. Madam President, I'll be very candid. I was not able to attend the hearing last month in reference to the 30 percent increase to be paid by the customers, so judging by what I'm going to say today, it will be very clear how I feel about the increase to pay for future purchases of gas. There was less trouble before PGW took over the Gas Works Company and ever since PGW has been financially oppressing the residents, the customers low income. PGW does not hesitate to cut off the customers' supply if they do not pay up. Now, after hiring someone to head the company who have mismanaged the money from PGW Company expect their customers to pay for that mismanagement. It's, again, putting their foot on the customers' necks to pay the current charges. I suggest that you legally 114 BILL NOS. 000583 AND 000590, 9/27/00 demand restitutions from the manager who mismanaged the company's money. Second, if you must penalize the customer, consider the 30 percent. You put all types of information in the monthly bills sent to the customers, therefore, state the exact amount that is paid each that will go towards making up the loss due to the mismanagement. Approximately seven years ago at a public hearing, I suggested to the Philadelphia Gas Works, Philadelphia Electric Company, Philadelphia Water Company that they should publish through the media at the end of each fiscal year their assets and liabilities and purchases. This will promote a better public relations in dealing with the customers. Thank you.
Thank you so very much. Thank you for your patience. Reverend Shine? Is Reverend Shine still here? (No response.)
He's out here. (Witness comes forward.) 115 BILL NOS. 000583 AND 000590, 9/27/00
Good evening, Reverend. Thank you for your patience. I appreciate your waiting this long to testify.
Madam President and Councilmembers, the PGW has made a very comprehensive and exhaustive case. I think it's time that John Q make their case. John Q. is represented here in the person of these elderly citizens, and I include myself in that number. Thank you for this opportunity. My name is Reverend Robert Shine, Vice President of Black Clergy of Philadelphia and Vicinity and a user of PGW's services. Ella Hendrix is a 75-year-old widow and a kidney dialysis patient with a very limited, extremely limited fixed income. And I'm not privy to the count of the spots on the roll of the dice for this rate increase, but I am privy to the Anna Hendrix in every Councilmatic District in this City because they are there, and every Councilman and woman has the Anna Hendrix 116 BILL NOS. 000583 AND 000590, 9/27/00 who could ill afford a significant rate increase. Whatever the weather conditions might be, it will not be in the best interests of our City to have the citizenry who are on fixed income, those who we applauded from welfare to work now being strapped with an additional financial burden and then to have the citizenry to have to pay for acts of God, whether the weather is inclement or whether the weather is very mild and then to have PGW services. Earlier this year we warned City Council about the fiasco the computer problems that they had and the millions of dollars, then the hiring of others with exorbitant salaries and the cost overruns when that problem existed. Then to come before City Council and to suggest that the citizenry pay the burden for their bad management, the utter catastrophe over there, the fiasco in financial management, and then to say that the elderly can afford it, to say that those from welfare to work on limited incomes can afford it, to say that the jobless can afford it, to say that many who are just eking out a bear existence can afford it. 117 BILL NOS. 000583 AND 000590, 9/27/00 Anna Hendrix lives in a six-room home on a dead-end Street, 58 East Earlham Street, where it is a home that has been there for centuries and the house does not have all of the proper weatherizing and so, therefore, she's doing the very best that she can, but the Anna Hendrix that I know is all over the City. The bottom line is in the comprehensive case stated by PGW is to passed on to the citizen, those who can and those who cannot and those who can least afford this rate increase are the significant one. Problems encountered by PGW must not be the burden of the citizens. If there is an appropriate management style there and the consultant fees paid to put that house in order, who's helping put the house in order of all of those who can least afford this and living in houses that need weatherizing year after year? In addition to that, the fiscal accountability if this chamber should decide -- this is one of the best chambers that I've ever had the privilege of coming before. But if this chamber should, then there should be some way by 118 BILL NOS. 000583 AND 000590, 9/27/00 which any rate increase, whether we speak of the million, the 45 million, whether we speak of 4 the combined amount needed to operate the PGW, 5 then there ought to be some kind of 6 accountability in the system by which City 7 Council holds PGW responsible for. Because 8 without this, this is a ten-year, perhaps even 9 longer, problem. And now to get out of the that 10 problem, let's give it to the citizens, let them 11 bail us out. Well, then let the citizens take 12 over the PGW, let them operate it, and let them 13 bring in management. 14 The gas crisis ought not to be the 15 consumers' responsibility. We have this problem 16 at the pump; now we're going to have it at the 17 meter. We're paying large amounts for gas at the 18 pump. Now you're suggesting the citizens to pay for it at the meter.
One thing I could ask, would PGW, without being cold and callus about the rate increase they seek, be as humane and considerate and as compassionate for the elderly and give them some relief? Why must they bear the same rate increase as others who can well afford it? 119 BILL NOS. 000583 AND 000590, 9/27/00 Why not give them some relief? Why across the board of every spectrum of age should everyone be responsible for their mess-up? That's what we have. So we urge this body not to support, as is, this significant increase until City Council in its majority are satisfied that how they plan to do this and not to place this burden on every citizen. We know what we have in our City. Our churches have all these members, whether in the synagogue, the mosque, or whether in our churches. At times during the winter, pastors such as myself have to go to the church's treasury to pay the gas bill for some of our members. And having to do that means with an additional increase, how many more will suffer from that? So then with these exorbitant salaries, this extravagant wasted computerized system that was installed over there and the litigations and all of that that was going around this thing, then it is our good judgment that some consideration be given, that PGW just not 120 BILL NOS. 000583 AND 000590, 9/27/00 give comprehensive data and fill our heads with a lot of information that maybe John Q. does not really truly understand at all anyway. But they do know when they've got to take out of their check that they get monthly and pay an additional cost, they do know what that means to them. They, too -- we hear about the mental care expenses and the health care for the employees and union in support of this. , they're on fixed income, they've got Medicare, they've got food, they've got other incidentals, they have the regular day-to-day operations, the doctor bills, the hospital bills, they have all of those things above; and yet we're asking them to pay for the mistakes and problems from PGW. Before we entertain the idea of a rate increase passed on to the public, why not come up with some other alternative ways of managing that. Could it be more downsizing? Could it be more other passing on? The federal government will at some point in time, I'm sure, provide more money to the cities if the weather becomes so severe and 121 BILL NOS. 000583 AND 000590, 9/27/00 inclement. And how will that money be spent? Will it go toward large salaries that were earlier this year paid out? Would it go to some other expenses for renovations for capital expenses? There needs to be more accountability brought before this chamber, and the public needs to be the last and the least ones to have to bear this out. The public must pay? What must the public pay, for what, for whose mistake? Who pays for my mistakes? Will PGW come and pay for my mistakes? Who pays for the mistakes? This is a utility. It has a management. Unfortunately, it was a bad management. Everyone has admitted to that. So the way we get out is to put it on John Q. You cannot expect these elderly to keep bailing out. When I retired, I had hoped to live happily ever after. And everyone who does retire does not want to have additional expenses. And now after all of the working years and we're going to say to these people, "Ma'am, too bad. Pay up or we'll shut you off. Then we'll give you a period of time if the weather's too bad, 122 BILL NOS. " Incredible thinking. Let's be more sensitive and compassionate toward the people who you are asking to bear this responsibility. Madam President, I think there can be, because of this office, the Chambers of City Council, and the wisdom that comes from here in the past year, I am certain that together with PGW you can find together an alternative, perhaps maybe putting it on a referendum and let the citizens of the City vote on it, perhaps doing that may be the result. Thank you, Madam President.
Thank you so much, Reverend. Are there any questions or comments from members of the committee to Reverend Shine? (No comments or questions.)
Thank you so much. I believe we have one last witness that I'm aware of, and that is someone from Action Alliance for Senior Citizens. I believe we have a representative. 123 BILL NOS. 000583 AND 000590, 9/27/00 (Witness comes forward.) UNIDENTIFIED SPEAKER: Madam Chairperson, could I get a minute after this lady?
Yes, if you'll just be patient. ACTION ALLIANCE REPRESENTATIVE: Thank you very much.
Good evening. ACTION ALLIANCE REPRESENTATIVE: I have patience after all these years. Good afternoon, good evening, or whatever it is by now, Madam President. Congratulations on your elevation.
Thank you. ACTION ALLIANCE REPRESENTATIVE: I have seen you since that day. I have been coming here representing Action Alliance for Senior Citizens for over 20 years. I'm still here. And I see new faces. I see new people at the gas company. Some of those that we knew have gone. And these are new fresh faces, but they have the same problems. I see my friend over here, 124 BILL NOS. 000583 AND 000590, 9/27/00 Councilman Cohen. He's by my side all the time. He's been with us and we appreciate it. So to get back to -- not to reiterate and not to repeat the problems that have come up, but it is going to be a great problem with the increase of gas for us seniors. We know, as they say that this is has been going on for years. 9 We know it. With the new management and old 10 management we knew it. We're still fighting it 11 and we're still not getting anything any better. 12 Now they tell us to turn our heat 13 down to save our bill. I've got osteo, I've got 14 arthritic legs. I cannot walk around my house 15 with a cold house. I should not have to. I'm 16 four score and more, I should not have to, and 17 every other older person in this City should not 18 have to keep their house cold to save their money 19 so that they can pay their heat. And some of 20 them can't eat. They have to figure it out, "Should I get my medicine, should I have something to eat, or should I live in a cold house?" This is obscene. This is not necessary. This is a old city, we know. Some of these people have not been here. I was born 125 BILL NOS. 000583 AND 000590, 9/27/00 here. My father was born here. I know what the gas business was. When I was little, we didn't have gas heat, we had the little incandescent light, you know, and if they'd run out you'd have to run to the corner and get a quarter and put it back on. These people don't know this history. I can give you the history of this City. And then later on we had coal. And then as we progressed, we got gas. And we should not have to suffer because we can't pay our gas bill. And, of course, going along with our Councilperson Krajewski, I got bills for a thousand and some dollars. Some of my members of Action Alliance got a thousand and some dollar gas bill. For what? They were paying their gas all winter. Now getting back to the mild winter as they want to excuse it. We had a mild winter. But they reduce their production is that we're supposed to have so much cold weather that's why they didn't get the heat, they didn't get the money in. Well, that's too bad. God gave us a break. We had a mild winter. But we had a hot 126 BILL NOS. 000583 AND 000590, 9/27/00 summer. We had hot a summer. We didn't have one last summer, but the summer before and going all the way back to '93, we had a hot summer and we lost people due to heat. And we were still paying the gas bill. The heat in the summer, we lost 90-some people in August because of the heat and we lost 113 people in September because of the heat and we were paying the gas bill. This is outrageous and nobody in this City should condone it and no gas company should condone it and this is unnecessary. And I certainly believe that something should be done and we insist that it be done. Action Alliance has over 300 clubs and centers, and we should insist upon it being done. We have to live, too, and we have lived through three wars and we have brought our children up who are paying taxes. No thanks, we do not want that today. Thank you very much.
Thank you, I'd like to have you on my side when I'm in a real battle. Thank you so much. (Applause.)
Mr. Hershey, would you mind approaching the witness 127 BILL NOS. 000583 AND 000590, 9/27/00 table and addressing the concerns as we just heard from Action Alliance and how this would in fact affect seniors? (Witness comes forward.)
Thank you, Madam President. My name is Steven Hershey. I represent the City of Philadelphia in matters related to PGW. As you all know, I also spent 29 years as a legal services lawyer representing low-income people and many of those years were involved in fighting PGW with Tom Knudsen as my chief consultant. We were lucky enough to create with the assistance, with the more than assistance of Gas Commission chaired by Lucien Blackwell and Marion Tasco, in particular to create regulations which protected poor people during the winter. With the current Gas Commission regulations and the current PUC regulations, it is almost impossible to shut a residential customer off during the wintertime. The regulations are so difficult that the utility has to apply to the regulating commission and 128 BILL NOS. 000583 AND 000590, 9/27/00 approval to shut off a customer is almost never granted. In addition, it should be very clear that regulations that are currently in place at the Gas Commission and at the Public Utility Commission are such that low income customers will not feel the burden of the proposed rate increases. Customers at or below 135 percent of poverty pay their gas bill as a percentage of their income regardless of how much the rate increases are in the tariff. They will pay a fixed amount. Between 135 and 150 percent of poverty, they will be on a budget plan with additional protections. The people who are obviously the most vulnerable to the kind of rate increase that we're discussing here are people above 150 percent of poverty. And I don't mean to minimize the exposure of the burdens that they will endure. But there are protections in place for the most vulnerable people in our society. I also have to say that in all of the time that I've been in Philadelphia working as a legal services lawyer or an attorney now in private practice, no City Administration has been 129 BILL NOS. 000583 AND 000590, 9/27/00 as sensitive to making PGW run right as the current Administration. This Administration has for the first time that I know of put the $18 million City payment in play. They've gone to ask for this loan. And I must tell you that we have looked for every alternative that we can find and we have -- we have budgeted in cost savings, we've done everything possible to minimize the burden. The problem is that we inherited a very, very difficult mess. I think everyone understands that. Your question is, what are we going to do now? No one's going to be shut off in the winter. Are we going to fix this utility and do it right or are we going to throw up our hands and say it shouldn't be the customers' burden? I think everybody has to share the burden. That is the only way this utility will survive, and that's all that we're asking.
Thank you very much. Sir, would you mind pushing the button and identifying yourself for the record.
My name is David 130 BILL NOS. 000583 AND 000590, 9/27/00 Swanson. I'm just a concerned taxpayer here in the City. And I thank the Reverend. That was a very good talk that he had there. The train is running toward the wall and I don't know if Council is -- I'm sure they're aware. I don't know what they can do, but I'm seriously thinking about leaving the City. It's just these quality-of-life issues and they just keep mounting. The Gas Commission has been a boondoggle for a very long time, and I can't fault the people here although some of them have been around for a while. But how it got in this disrepair, I'm not sure, but there are people like me that will be leaving and when I leave you'll only have the older folks here to tax and I'm not sure how many of those folks will be left after a while so... It's not just this issue, it's all of the issues in the City here, and this is just one of them. But I can relate to constituents in Miss Krajewski's district. I had a bill, what, last year I think it was, for like 15 or $1800. I was trying to get a loan, a refinance loan for 131 BILL NOS. 000583 AND 000590, 9/27/00 my apartment and being that I got this 2,000 or $1800 bill, it held up my getting the loan. I wasn't too happy about that. When I tried to pay it, the person that I called -- well, first of all, it takes a half hour to get through. You know, if this were a regular business, these people would have been out of business a long time ago. It takes a half hour to get through and then the lady was almost like clueless, you know who I have to come down to pay and it would have to be a certified check. Fortunately, two months later after I got this problem taken care of, I was able to get my mortgage, but it held it up for a while. Then I had another problem. When my apartment was being refurnished downstairs, I set the heat on 60 degrees so the pipes wouldn't freeze and the gas bill I got throughout that winter was the same almost as what I had for my apartment. So when I called the gas company to get some kind of answers, how the bottom floor apartment could be the same almost as the top floor, the lady said, "Well, when you set the heat at 60 degrees, it cost almost as much as 132 BILL NOS. " Now, I'm not a rocket scientist, but it doesn't take a lot of intelligence to figure out that when you have your heat set 75 degrees versus 60 degrees, the bill should not be the same, but I wound up paying that. It's situations like that that people, the taxpayers don't have any faith in the gas company at all. So if you're going to pass this bill, I will be very careful about how you disburse the money. And I heard these other folks talking earlier about the City's going to try and help them and whatever. That may all be good, but unless there's some major reconstruction at the gas company -- I think you should just probably sell it if you can because I don't know if it can be fixed even with the new people there in place now. And I'm sure Council is concerned about that. I know you were talking about going to the PUC and getting a rate request. Well, I'm sure that part of this when Harrisburg when you go there asking them for money and they look down 133 BILL NOS. 000583 AND 000590, 9/27/00 at Philadelphia and say, "Well, gee, you know, they cost them $200,000 to move the new manager in and they waste money doing this, that, and the other thing," I can understand their frustration; and if I was in Harrisburg, I would probably be concerned, too. So I don't want to take up a whole time of time, but I just trying and ask the Council to be very, very cautious. And maybe with the money going up for the gas increase try and take care of that problem. As far as any other money problems, I would not try and bail them out. And if you do loan them the money, to be honest, I don't think you should say, we're not going to get this money back because and I think you realize that Mr.
Ortiz was basically going down that street, too, that you're not going to get that money back. And as far as I think it was Councilman Clarke there saying that he was trying to understand how they keep incurring all of these costs every year. Well, I mean, if I was in the gas business, I will try and forecast -- I'm sure other people do, they use long-range 134 BILL NOS. 000583 AND 000590, 9/27/00 weather forecasting. I'm sure other people use that if they're in that type of business. And why the Gas Commission doesn't or why the gas company doesn't do that is beyond me. Also, what does the Gas Commission -- how come they haven't foreseen all of these problems that we're in now. I don't know if that needs to be taken under the Mayor's Office or what. Is that possible or how do they sit back and see all of these problems coming, the Gas Commission? Can anybody answer that? Do they really have any authority or what do they do?
Well, I mean, there is a board, the PFMC board who has the contract with the City to manage PGW, and you can hear from the testimony today that those people who were here prior to this Administration are no 21 longer a part of the board. And it is a question of accountability and authority which we will be looking at because there is no accountability.
That's true. The Gas Commission, that's different than this PMC Board 135 BILL NOS. 000583 AND 000590, 9/27/00 or something, right?
The Gas Commission was the regulatory body prior to any set rates and tariffs. That responsible now rests with the State PUC. The Gas Commission now has the budget oversight, but there's no one entity in the City that has teeth to hold PGW accountable. While we have this interim team here, we still have to look at what mechanism we put in place to hold the company accountable.
Was Mayor Rendell, was he aware that the Gas Commission train was heading toward the wall?
Thank you. Is there anyone else who would like to testify? (No response.)
If we don't 136 BILL NOS. 000583 AND 000590, 9/27/00 have anyone else, I would invite the members of the Administration back to the witness table. (Witnesses come forward.)
Thank you, Madam Chair. I want to make sure I understand the comments of the person in front of us. Mr. Knudsen. (Witness comes forward.) In terms of the potential involvement by the City in the Gas Works present financial difficulties, is it my understanding that you are seeking, not only upwards of a $45 million loan from the City, forgiveness of the $18 million payment that you normally make to the City, and somewhat less discussed, potential $5 million backstop for debt service coverage ratio if you have the need; is that correct?
What we're seeking is a loan of up to $45 million to address cash flow problems. The City is in conversations with the PUC and may end up recommending that the City place on the table $18 million. 137 BILL NOS. 000583 AND 000590, 9/27/00 On just-ended fiscal year there some question about the company making debt coverage, and the City is prepared to stand behind the company to assure that we don't violate the covenants. The fiscal condition at PGW is perilous, and the City is prepared to stand by the company to prevent a collapse. We have been advised that if the company begins to fall apart, that eventually it will end up the impacting the City's credit rating. We do not want to start down that path and so the City has committed up to $5 million to assure that debt coverage is achieved this year. We are prepared to -- we are making a request for the $45 million loan to assure that we can continue in business past mid-November. We are involved in negotiations with the PUC. We are trying to minimize risks as we go forward and have a whole host of issues on the table and conversations with the PUC. The PUC views the kind of commitment, the kind of potential loan commitment from the City as being extremely significant in its discussions with the company. We use it as a move in the right direction, and that is one of 138 BILL NOS. 000583 AND 000590, 9/27/00 the reasons that we're urging the passage, the timely passage of this bill is that those negotiations are ongoing right now.
The negotiations with the PUC over the interim rate. When the PUC first took jurisdiction, the City asked for a number of things. We asked for the PUC to give us an emergency rate increase. The PUC indicated to us that that was not available. We have begun talking with them about an interim rate increase that will be in place while they could mount a full-blown base rate case.
Let me go back to that. You said that they said it was not available. Now, in earlier questioning I believe I asked Mr. Knudsen what happens if you don't get the $45 million. I thought his answer was we would then pursue emergency rate relief --
-- which we believe the law allows us to get because the PUC 139 BILL NOS. 000583 AND 000590, 9/27/00 has to ensure that we have the money to operate. Now, have we taken that particular step?
There is a difference between interim rate relief and emergency rate relief, and you're going to pursue emergency rate relief from the Gas Commission?
The PUC has different regulations regarding permanent base rates and what they call emergency rates. We have asked for interim rate relief because the rules on that allow for faster proceeding that are more suited to the needs of the company right now although the parties participating and the PUC have agreed to allow that.
Have agreed to what? I'm sorry? Both parties have agreed to what?
They have agreed to this procedure but only on the condition that it be followed immediately by the longer process base rate case which would lead to a so-called permanent order, more permanent than the interim 140 BILL NOS. 000583 AND 000590, 9/27/00 order. Now, having said that, we've argued at the PUC that under the current statute, the PUC obligated to follow the practices and procedures that exist at the Gas Commission. And if we are successful in persuading them to do that, then the final base rate case would be completed somewhere around May. There has not --
Talk to me about this emergency rate relief issue. I'm trying to understand that.
I would not use the word "emergency" because it's not called that. That's a different animal of the Public Utility Commission. It's the interim rate case which we are in the middle of now.
I understand what you're in the middle of. I'm not talking about that. Mr. Knudsen said if you don't get the $45 million, your next move would be, I thought the phrase was "emergency rate relief" to which you believe you are entitle by the law. Now, Mr. Knudsen, did you say that or did you not say that? 141 BILL NOS. 000583 AND 000590, 9/27/00
There is provision in the Public Utility Code for this emergent kind of proceeding.
Well, it means that if our backs were absolutely to the wall and there was no alternative, that's what we would have to do because the law requires the PUC, not the PUC Code as it applies to the utilities, but to this municipality they have to provide us rates and we would prevail on them to do that.
We weren't in a situation that -- an alternative was available and that is the interim proceeding as they have defined the process. They wanted -- there were certain restrictions --
But the interim procedure, it seems to me, is going to take too long for your cash flow problem.
The interim procedure will be over by the 9th of November. We asked 142 BILL NOS. 000583 AND 000590, 9/27/00 initially that the litigation and the decision be over and rendered by the 1st of November. Their first meeting after the 1st of November is the 8th or the 9th, so that's what they have committed to giving us. That will get us into getting our buildings in position by the beginning the winter season.
The other half of your question, you said you thought that the rate increase would come too late to meet the cash flow problem, and that is correct. That's exactly why we're here because even if we are completely --
That's the point where I want to be. I guess I'm trying to figure out if you have another avenue, if you have another step which is this emergency process, if for some reason you did not have access to the City resources but you have already assumed that you have access to City resources. But if for some reason you had no access to City resources, wouldn't you be pursuing that particular track simultaneous to the interim rate increase process? 143 BILL NOS. 000583 AND 000590, 9/27/00
You made an assumption in there which I think was not accurate, and that was that we assumed that this loan would be available before we went to the PUC. We went to the PUC and were successful in obtaining the fastest process that we could get from the PUC. After that was underway, the impact of the increase in gas costs became larger and clearer. And as the testimony that's been filed here says, for the months of July and August we ran up costs that were $17 million above budget. That has continued during the month of September, and it's clear that it's getting worse by the month. And it is with that information it becomes clear to us that a PUC decision on November 9th will not remedy this problem because even with the decision on November 9th, you change the rates, you send out the bills over the next, you know, beginning immediately, and the cash doesn't start coming in in response to that billing for 45, 60 days, and it takes a long time to capture the benefit of that. And so that's what has put us in the process of coming to this Council to ask for a loan. 144 BILL NOS. 000583 AND 000590, 9/27/00
Now, the document that was handed out earlier in support of the bill Mr. Knudsen was going through earlier, this is your projection on your revenues through August of next year; is that correct?
Yes. As I indicated, this our worst-case scenario. Right now we're pursuing an additional $70 million beyond what applied for with the PUC.
It's included in the revenue projections and in the receipts projections on the third page. It's in these numbers.
Well, it would be on the third page, the additional receipts associated with $70 million would be under the gas line and on the fourth page, which is the state of income, it would be throughout the first 145 BILL NOS. 000583 AND 000590, 9/27/00 section of numbers there for total operating revenues of 764 million. It would be in those numbers.
No, the 45 is not reflected here. I wanted to demonstrate to you, as I did with our earlier discussion, where in the year and for what reasons we would need to call upon that $45 million.
We are proposing to pay it back within the months as the PFMC 16 agreement allows us. 17
I understand 18 that. Where in this first year of expenses, 19 revenues and expenses would you be able to show 20 that you would be making payments? You're going 21 to make monthly payments? Do you anticipate 22 making any in the first year? All in the second 23 year? 24
Well, the only place that it would appear would be on the cash flow 146 BILL NOS. 000583 AND 000590, 9/27/00 statement. Frankly, Councilman, it's hard for me to say specifically because we don't know what the interim rate relief is associated with all of this. So think it would depend on when we got it, first in the fall and then again in the April-May period, as Mr. Hershey indicated. Depending upon that, it would affect when we could reduce the outstanding balance. But as I indicated earlier, it is our intent right now, it is being purchased essentially to fund gas purchases when we recapture those purchases in rates and those rates are paid, we would presumably have the funds at that time.
Well, do you have one of these documents that goes out for the two years and shows how you would be able to repay the $45 million? I mean, is there a document among anything that you have given us that shows a repayment of the $45 million?
For the second year we don't have that. I don't have it with this additional 70. I do have it with the 97.
So then what is the basis upon which your testimony is that you'd 147 BILL NOS. 000583 AND 000590, 9/27/00 like 45 million and that you intend to pay it back? What to we have that demonstrate that? What is that commitment based upon?
We have the requirement under law of the PUC. We are having difficulties right now being between jurisdictions and not having had time to work all of these things out, and that's why we're here.
Let me just add that the difference between the $97 million request for the increased gas cost which is currently on the table at the PUC and the $70 million additional cost will be reflected at the PUC timely so that to the extent that we believe that those forecasts are accurate, we have the right to file and get recovery from the PUC for those costs. In fact, some of the parties at the PUC have already urged us to increase the amount of our request to reflect what every other utility in the State is experiencing and so we are confident that when it is clear that we will actually experience costs at those levels we can ask for it again and so that provides reassurance on the cash flow which in turn provides 148 BILL NOS. 000583 AND 000590, 9/27/00 reassurance that we'll be able to repay the loan.
Regarding an issue with executive director (inaudible) raised an issue with regard to PGW. Knowing PGW's created a situation independent for the City and asked the City to be at risk for all five years of the plan there is thus strong a likelihood that the City never realize the $90 million of revenue it presently anticipates over the five years. (Inaudible) had the payment not been made the City faces a net loss of about $17 million. Whether it's the $45 million loan or the $18 million forgiveness of PGW payment to the City, what does that do to the City's budget and its present five-year plan?
Because we're funding the 45 million from the fund balance, the fund balance that was not anticipated when we originally budgeted, at this point it does not create a problem. The 45 million does not create a problem at this point. The 18 million is more of an issue, but one that we feel we will be able to address as time goes on.
Madam Finance 149 BILL NOS. 000583 AND 000590, 9/27/00 Director, you expertly preface your comments by saying "at this point."
We're looking at our revenue projections and where those are, and provided we have no other catastrophes, if we should need to forego that $18 million, we could make sufficient adjustments to accomplish that.
Is it accurate to say that at an earlier point in time in the year you did not necessarily feel that way about the $18 million?
You actually opposed the forgiveness of the $18 million and expressed very strong views that the City needed the $18 million and you expected to get it.
I still feel that way and we did, in fact, get it in our Fiscal Year 2000. It is not something that I relish giving up. It's something that is essential and a very important part of the City's continued financial strength so I don't relish the thought of foregoing it, but I think the alternative if PGW 150 BILL NOS. 000583 AND 000590, 9/27/00 needs it, allowing PGW to fail is not an option that this City has. There's too much that's riding on it. The City is the owner of the gas company and we would be the deepest pockets around under any circumstances. I don't think there's a way we can absent ourselves from this situation.
I understand that. All I'm saying is a month ago, you said or was quoted as saying, "I can only say that it is required. We cannot make up for the sins of the past by punishing the City. The City requires that $18 million and it's a part of the City's five-year plan and it's part of what's keeping the City's solvent." Has there been a change in your position?
Given what we've seen in our year-end, there has been growth in the surplus from where we budgeted. We are better able to absorb it for one time. We cannot make it an ongoing commitment. An ongoing commitment forgiving that $18 million on an ongoing basis would be devastating to the City. 151 BILL NOS. 000583 AND 000590, 9/27/00
What's to prevent the company -- once you do it one time, what's to prevent the company from asking for it again under distressed conditions?
We're trying to put in place a rate structure that will protect against that. That is why we're here, in part, asking for the 45 million. It enables us to have negotiations with the PUC that will help us try to avoid that.
I can't overemphasize how closely linked the various pieces are. This is, you know, this is a negotiation that's ongoing. Having the City come to the table prepared to make a $45 million loan is critical, the discussion about the $18 million is critical, and it is our judgment that, you know, that if we're able to lock down a negotiated firm rate increase, it is very much in the company's interest and also in the City's interest to do that.
If I can just emphasize 152 BILL NOS. 000583 AND 000590, 9/27/00 one point that Miss Wilkerson made about the rate increase that we're likely to get from Harrisburg being linked directly to anything that the City is willing to pay, that has been made painfully clear to us from every party participating at the Public Utility Commission, and that is that our chances of getting the rate increase that we need in order to stabilize the company are just about zero unless the City makes a commitment to share the responsibility. That has been made clear time after time, and it's linked.
By whom and under what authority and jurisdiction? I know you're saying that. I guess, if you went back and the PUC said, you know, is not enough and we think 17 the number should be 50 or we think the number 18 should be 100; I mean, where does the PUC have 19 any jurisdiction whatsoever to demand anything 20 from the City for loans or anything else to this company? And who said it?
We've heard it from every consumer party, meaning specifically the Office of Consumer Advocate. We've heard it from the Philadelphia consumer groups being 153 BILL NOS. 000583 AND 000590, 9/27/00 represented by Community Legal Services. We've heard it from the Office of Trial Staff of the Public Utility Commission. We've heard it from the commercial industrial groups. And we've heard it, shall I say, informally.
Councilman Kenney's question was where did we hear that the City -- that from their perspective they didn't want to agree or testify to a rate increase without the City sharing the responsibility, that's what we heard. And we've also heard that --
Part of what the City's challenge is, is at least to get the interim rate case nailed down. I think there are a lot of issues that are ripening that the City may challenge, but that is a long-term proposition and the City has very short-term emergency needs. We are interested in trying to negotiate some kind of interim rate relief while we explore the fuller rate case where we intend 154 BILL NOS. 000583 AND 000590, 9/27/00 to protect our rights under the State statute. We think that it's very clear that the rates are supposed to be set based on the budget that is adopted by the Gas Commission, you know, and those are issues that we'll be raising an pursuing in the base rate case.
But that budget historically never included any particular loan, contribution, or anything else from the City.
That's right, because the company wasn't in need of that kind of assistance, that's right. What has happened is anomalous. The company is end up being caught between jurisdictions. One of the questions you applied was why there was this, you know, people identified and the need for rate relief. What we ended up doing was falling into a no man's land where not enough time left for the Gas Commission to provide relief and at the same time there was no 22 jurisdiction on part of the PUC. And so this has been a very difficult period of time for the company. It's come at a time when gas costs have gone through the roof creating all kinds of cash 155 BILL NOS. 000583 AND 000590, 9/27/00 demands for the company that were unprecedented. There is no clear course. The PUC is reluctant to being aggressive because it doesn't understand the company. And so in a lot of respects, we are charting new ground trying to nail down as much as we can so minimize the risks, both for the company and the City.
As you know, the Mayor is going to be on in about three minutes. Would it be appropriate to make a suggestion that we either continue this hearing to a date certain so that we can view the very important words of Mayor in relation to the School District?
I'll raise the question to the president. Madam President.
President Verna, we have a point of order on the table. Councilman Kenney request that we recess to hear 156 BILL NOS. 000583 AND 000590, 9/27/00 the Mayor or recess until tomorrow.
Or to a date certain. The Mayor is on in two minutes. I'd like to see it. I don't know about anybody else. We could recess to a date certain.
I think the Mayor has indicated it's only going to be seven and a half minutes.
Seven and a half minutes is an important length of time. I'd be willing to come back another day and discuss this with more information. I don't see the reason why we need to do it today.
This committee will stand in recess for ten minutes, please. - - -
The Committee of the Whole will stand in recess until tomorrow morning at 9:30. Thank you. (Adjourned at 8:15 p.m.) - - - 157 C E R T I F I C A T E I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of Wednesday, September 27, 2000, were reported fully and accurately by me, and that this is a correct transcript of same. RE: COUNCIL COMMITTEE OF THE WHOLE BILL NOS. 000583 and 000590 __________________________________, JOSEPHINE CARDILLO, Registered Professional Reporter