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?