COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE ON PUBLIC PROPERTY AND PUBLIC WORKS - - - Room 401, City Hall Philadelphia, Pennsylvania Thursday, February 8, 2001 2:40 p.m. - - - RESOLUTION 000773 - Resolution authorizing City Council's Public Property Committee to hold public hearings on the potential benefits and drawbacks to the City of selling the Philadelphia Gas Works. - - - PRESENT: COUNCILMAN JAMES F. KENNEY, Chairman COUNCILWOMAN JANNIE L. BLACKWELL COUNCILMAN DARRELL CLARKE COUNCILMAN DAVID COHEN COUNCILMAN MICHAEL A. NUTTER COUNCILMAN FRANK RIZZO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 (215) 561-2220 I N D E X RESOLUTION 000773 PAGE JOHN B. KELLY, Public Financial Management .. DAVID THORNBURGH, Pa. Economy League ........ 48 PHILIP BERTOCCI, PGW Public Advocate ........ 82 FRANK REDDING, President, Local 686 ......... 128 ANN RUBIN, Assoc. of Realtors ............... 148 TINA NELSEN, CEPA ........................... 150 LERAY WILLIAMSON, Action Alliance ........... 153 FRANK SETSMAN, Home Owners Association ...... 155 JUDITH SUSSHOLTZ ............................ 157 ROY HILL, Robert B. Hill Co. ................ 164 ALFONSO COHEN .............................. 169 LUIS FIGUEROA ............................... 172 3 RESOLUTION NO. 000773
Good afternoon, Ladies and Gentlemen. The Council Committee on Public Property and Public Works is now in session. Due to the fact that this a hearing on a resolution, the hearing is purely informational in an effort to gather information from various segments of the community as it relates to the potential sale of PGW, the benefits and drawbacks to such a process and strategy. There is not a need for a quorum. Councilmembers have told me -- a few are in other meetings but will be returning as the testimony proceeds. So in the interest of time and with thanks to people in the audience for waiting, we're only about 11 minutes late, 12 minutes late. Thank you for your patience. This is a committee hearing on Resolution No. 000773, authorizing City Council's Public Property Committee to hold public hearings on the potential benefits and drawbacks to the City of selling the Philadelphia Gas Works. I would like to read the body of the resolution because I think it does layout at least my particular view on what has gone in the City relative to PGW for the past 30 years. 4 RESOLUTION NO. 000773 Whereas, the Philadelphia Gas Works recent percent rate increase for the typical 4 homeowner will make their rates the highest in the country; and Whereas, corporate patronage continues to take too large of a share of the Gas Works limited resources with millions of dollars over the last distributed to law firms and other politically connected companies without requiring competitive bidding for a single contract; and Whereas, the Gas Works management still has not resolved the many problems with their computerized billing system, while only last year executives were abusing their expense accounts at the expense of the customers; and Whereas, the future of the Gas Works looks even bleaker since the recent rate increases are merely "interim" and are likely to continue to increase due to future warm winters, enormous debt, increasing the worse bond ratings and deregulation while the City has become dependent upon the annual $18 million Gas Works contribution; and Whereas, mismanagement, poor service, patronage, and the lack of accountability at the Gas 5 RESOLUTION NO. 000773 Works have a long history going back to when the City first got into the gas business in 1835, yet despite many different reforms and structures over the years, the City has repeatedly demonstrated it is not capable of running a gas company effectively. Whereas, the possibility of selling the Gas Works to a private corporation could guarantee rates and jobs and provide improved management and service to its half million customers while relieving the utility of choking debt and continuing some financial payment to the City. Now, therefore, be it resolved by the Council of the City of Philadelphia that authority be given the Public Property Committee to hold public hearings on potential benefits and drawbacks to the City of selling the Philadelphia Gas Works. The purpose of this hearing, despite my own personal opinion on this issue which has been well publicized, is to gather information, both positive and negative as it relates to the ongoing disposition of this public utility. The City of Philadelphia runs another utility, and that is the Water Department, and does so in a very capable manner; it collects its bills and delivers good 6 RESOLUTION NO. 000773 quality water to the citizens of Philadelphia. The problem that the Water Department does not face that the gas company does face is in the northeast part of the United States, water is not a commodity in short supply. Part of difference between the water company and the Gas Works is that the Gas Works, due deregulation and other factors int he gas production industry, needs to be responsive in a business-like way to the changes, dynamic changes that happen in the gas purchasing business and the gas distribution business.
In my opinion, because of the overlapping governance that the PGW must exist under, PFMC, the Gas Commission, the PUC, and the long history of political interference and political activity within that utility makes it almost impossible for this business to respond in an economically responsible way to the changes that almost happen daily in the gas production, gas purchase and gas distribution business. So we would like to hear from everyone in the community who has an opinion on this. We don't believe that any opinion is right or wrong. What we would like to do is to be able to gather and put together a body of knowledge and information and 7 RESOLUTION NO. 000773 opinion that could act as a City's strategic guide to what should be done in the very near future. I would like to read a letter at this point from Joyce Wilkerson who is the Chief of Staff for the Mayor. They have declined to testify here today but at my request have offered a written letter to be read into the record, which I will do now. "Dear Councilman Kenney: You have asked the Administration and the management of PGW to provide testimony on February 8, 2001 regarding the possible sale of PGW. Respectfully, we must decline your invitation. Recent comments by the Administration concerning the question of a sale have resulted in enormous anxiety for PGW employees, concern within the financial community, and among PGW's business partners. "As the Mayor stated in his Budge Message to City Council on January 23, 2001, the City is considering the sale of the Philadelphia Gas Works. It is one of several options available to improve the quality and cost of natural gas service to the residents and businesses of Philadelphia. "Well-operated, PGW might be of benefit 8 RESOLUTION NO. 000773 to the City. City residents could receive lower gas rates that reflect the benefit of the City's tax-exempt status and its ownership of the largest LNG facility on the east coast. Unfortunately, in recent years, that has not been the experience. Instead, as a result of a number of factors, in recent months, PGW has become dangerously reliant on the City for financial assistance. Since November 2000, the city has had to loan PGW $45 million to enable it to address its cash flow problems as the price of gas soared 400 percent. "Even if PGW were well run, however, it is unclear PGW can survive in a deregulated environment. With the participation of the PGW Recovery Collaborative Team comprised of representatives of City Council and the Philadelphia Gas Commission, the City will consider not only the myriad issues involved in a sale, but also the feasibility of permanent management both by qualified executives and a management company. The City has committed to complete its analysis and search by no later than this fall. Once the analysis is complete, the Administration will engage in a public process, before final decisions are 9 RESOLUTION NO. 000773 made. "Again, thank you for your invitation. "Sincerely, Joyce S. Wilkerson, Chief of Staff" We thank the Mayor's Chief of Staff for their input in the hearing. We'd now like to call to the witness table Mr. John B. Kelly from Public Financial Management. )
Good afternoon, Mr. Kelly. Please identify yourself for the record and proceed with your testimony.
Good afternoon. My name is John Kelly. I'm with Public Financial Management, which is a municipal consulting firm located here in Philadelphia. Chairman, if it's all right, I'd like to read an opening statement and then open up to questions.
Thank you. In 1998, the City of Philadelphia hired Public Financial Management to research the issues 10 RESOLUTION NO. 000773 surrounding the sale of PGW. This report was completed in January 1999. Our direction from the City was to address the sale of PGW in terms of what price it might bring in the marketplace, what costs are involved in selling it and the ability of the sale to achieve the following four goals that have, for the most part, been achieved under City ownership. The four goals include the maintenance of the value of the City's million contribution to provide 12 competitive rates, maintain the social programs, and 13 to maintain job levels. 14 Because the City wanted an independent 15 view and did not want to start rumors that a sale 16 was imminent, we were prohibited from discussing the 17 issues with PGW staff and with any Wall Street-type 18 financial professionals. Prior to publishing the report, we were allowed one interview with PGW executive to get its view on the ability to reduce costs at PGW. Therefore, our report was somewhat academic in nature and is based on publicly available information. The conclusion of our report was that financial limitations of what buyers would be willing to pay for PGW and the taxes and the 11 RESOLUTION NO. 000773 return to shareholders that would flow out of PGW under of public ownership would it make it impossible for PGW -- excuse me, under private ownership. That would make it possible for PGW under private ownership to achieve the four goals laid out by the City at that time. Under private ownership, either rates would be higher or there would be significant cuts in jobs or the social programs or the City would have to sell it at price that would not compensate it for the loss of the $18 million dividend. Another way to look at it is that if the City were to make the policy decision to reduce employment at PGW, reduce social programs, or to cut its divide. Under City-ownership, these choices would accrue to the benefit of the ratepayers in terms of either lower rates or better service and infrastructure. We recommended at that time that some of the benefits of privatization could be achieved through contract operations with private firms. One possible model is the UGI model under which PGW has managed for many years prior to the formation of PFMC. Or you could experiment with smaller or even 12 RESOLUTION NO. 000773 larger scale contract operations. Efficiencies gained through these could enable the City to continue to achieve the four goals laid out and to keep benefits from foregoing any of these here within the City. Since this report was produced in January of '99, many things have changed. Deregulation of the retail gas industry in Pennsylvania, PUC oversight of PGW, the rapid increase of cost of natural gas, among others. There have also been changes that directly affect our findings in the report, including the repeal of the State Gross Receipts Tax, increase in PGW's debt and a decrease in the cost of the feasance of the tax-exempt debt beyond the face value of the debt itself. Going a little beyond the scope of the January '99 report, I'd like to make a few comments that may help in your deliberations. First off, PGW bonds are revenue bonds. They are not debt of the City. There's no general obligation backing these bonds. The City has no 24 obligation to pay PGW bonds if PGW defaults. Second point is that the current crisis 13 RESOLUTION NO. 000773 affecting rates and cash flow for PGW is a nationwide crisis caused by precedented increases in natural gas prices. These costs are being passed on to ratepayers throughout the Commonwealth and throughout the country. The third point I'd like to make is that it is in my opinion that deliberations should not focus on the immediate crisis, which will pass with time, but the longer term problems of PGW. The longer-term problems at PGW is the structure of its governance.
This is not a criticism of the individuals involved, but rather the structure itself which has been in place for the past 30 years. How can we Philadelphians expect PGW to be well-managed when the governance structure has left PGW with no management for long spells at a time and interim management for many other periods. In essence PGW is what we've asked it be, no more, no less. Certainly, the sale of PGW is one solution to the governance problem. But there are also other ways to change PGW's governance that should also be considered. 14 RESOLUTION NO. 000773 The City runs one of the finest water utilities in the country. Perhaps PGW could be restructured to resemble the governance of the Water Department. Many municipally-own utilities are structured, including gas utilities, are structured as departments of the City. Another common structure is that of an independent authority. These options should also be explored and considered as solutions to the governance problem. PFN and I are neither pro nor con to the sale of PGW. We have advised municipal clients that have privatized, and we have advised others that have municipalized various utilities. Each situation is unique and deserves its own consideration. Our role in writing the 99 report was to provide the City with information about the financial context of a sale. If my comments today may appear to lean away from a sale, it is only because there appears to be stampede toward sale under the assumption that private companies always do a better job than, quote, inefficient public bureaucracies. Well, this is a popular view that is not 15 RESOLUTION NO. 000773 always correct. There are many well-run municipal utilities, including the Water Department here in Philadelphia. And there are some poorly run private utilities. I think it's important to remember that we are still dealing what is necessarily a monopolistic utility structure. Even after deregulation, there will be no choice or competition in the local distribution of gas. And, therefore, there will be no pressure other than the PUC oversight to keep the private owner on its toes. I suspect the customers of the municipally owned electric companies in California are very happy right now not to be served by California IOUs as an example of good municipal management of utilities. Of course, there are also very well-run private utilities. My point here is only to remember that there are other options. That concludes my remarks and I'd be happy to answer any questions on our 1999 report.
Thank very much. Just one housekeeping question relative to your testimony and the '99 report. You indicated that you were told you were not permitted to interview or have discussion 16 RESOLUTION NO. 000773 with -- what was the group, PGW employees?
Sure. At the time we were engaged, I guess, was early fall of '98 when we spent a couple months researching it. During the time between then and when we actually published the report, those of us at the firm who were working on the report were not permitted to speak to PGW staff or executives nor to any Wall Street firms in terms of gathering information of other sales. We had to deal strictly from publicly available documents.
What do you feel that that prohibition -- did it hamper you in any way in attempting to gain as much information as possible and what would you suppose would be the reasoning or rationale behind not allowing you or suggesting that you do not talk with PGW executives or with financial experts? 17 RESOLUTION NO. 000773
The purpose of not talking to PGW was twofold. One is they wanted an independent review that was not biased by, you know, the self-interest of the people working at PGW. Secondly, they also didn't want to creating fears and concerns that there was an imminent sale and, therefore, a flight of quality employees. In terms of the Wall Street person, not to talking to Wall Street people, they didn't want to create rumors that there was a sale out there and then have the report biased by people trying to pitch in and trying to get part of a deal and making their fees on it by becoming part of it and making a deal happen that may not good for the City, but generates good fees for an investment firm.
Do you feel in any way that hampered your ability to do a thorough investigation or do you think that they were prudent suggestions?
I think in regards to us assessing potential values the companies would pay for PGW, I don't believe it inhibited our work in that area. I think the area that we could have used 18 RESOLUTION NO. 000773 some more insight into PGW was assessing the validity of the ability to cut cost there by a private operator. Although talking to PGW may or may not have improved that, but we were working a little bit in the dark on that. We had to use the use of comparing ratios between PGW and other publicly-owned utilities, or investor-owned utilities may be a better word o use, to determine if their cost ratios were in line or if they were indeed high as everybody suspects them to be. So we were able to make some determinations, but I think that area improved if we had more access at that time.
You had mentioned that there are successful municipally-owned utilities, successful private-own and unsuccessful both municipal and private-run utilities. What are the areas of failing as it relates to the current operation of PGW? Besides the cost of natural gas, which has exacerbated the situation tremendously, where are the areas that you thing needed to be changed even if it's not sold? And where do you think the real failings are within the current operation of the company? 19 RESOLUTION NO. 000773
Well, that's an area that was, I think, in detail is a little beyond what our work in the '99 report did. So I don't know if I'm qualified to say what departments or what specific areas.
I'm talking about not the issue of day-to-day operations, I'm talking about the issue of governance.
Oh, in governance? Again, we did not study it thoroughly to come up with a firm recommendation. I only observed that the structure that the Water Department is under appears to work much better. And there's two aspects that are different. One, it is reporting to one entity, to the City Administration instead two and now three at PGW where it's reporting to PFMC, the Gas Commission, and the Public Utility Commission. The other difference is that they have more control over their rates so that they are able to raise their rates in a timely manner to make improvements that need to be made in a timely manner, which I think in the long run achieves more efficient capital operation, at least. PGW has gone since I think 1992 without an increase in its base rates. 20 RESOLUTION NO. 000773
That was probably a mistake; do you have an opinion on that? I mean, part of the problem with this whole governance issue is that the Gas Commission at least on two separate occasions recommended modest gas increases during the '90s. Because, I believe, of political considerations and the lack of a desire for elected officials to absorb that criticism at the time, those relatively small increases were put off and, therefore, we find ourselves, at least on the base rates side, in a much more difficult situation primarily because of the political considerations of not raising rates on two separate occasions when recommended by Gas Commission staff. The Mayor through PFMC, Mayor Rendell at the time, made a determination that that was not a politically acceptable circumstance and, therefore, it never happened. I guess what I'm trying to get to is that in the private sector or in an appropriately-run utility when staff recommends the need for modest rate increases in an effort to deal with changing industry dynamics and the politics of the situation determines that it's not going to 21 RESOLUTION NO. 000773 happen, isn't that really kind of the crux of what our problem is in dealing with the management and successful operations of PGW?
I can't comment on the specific rate increase requested or suggestions by the Gas Commission at those times. I was not involved in it then.
Do you have an opinion as to whether or not there is a difference between running a water utility in the northeastern part of the United States as opposed to a gas or electric utility in the same area? Do you believe that they're equal or that there are some differences in -- and my question begs to water is not an unreasonable commodity in the northeast section of the country. I think if the Water Department were being run in southwestern United States, we may have a different set of standards. So do you think that there's a difference between the two?
There's certainly a difference. In the Water Department you are in control of your own supply. You pump it out of the river, clean it up, and deliver it to the homes. 22 RESOLUTION NO. 000773 With gas, you are dependent upon the interstate pipelines for getting your gas here. Other than that physical difference, though, I'm not sure that that would make a difference in how or whether or not the City can run it effectively. The part that is under the control of the management of PGW are the pipes in the ground and the physical assets here. Now, the overall price to the customer will move up and down with the price of the gas off the interstate pipeline. But that's true for any gas company in the State of Pennsylvania, whether it's investor-own or publicly-owned.
Did PFM investigate at all the differences in collection technics, rates of collection of water bills of the City of Philadelphia, Water Department versus collection of outstanding receivables as it relates to PGW and also concurrent shutoff, moratorium shutoff regulations and the like.
We did not review that in the sale report of '99. It was an issue reviewed by some of my colleagues in the five-year plan that was done the subsequent year. At that time, I believe 23 RESOLUTION NO. 000773 PGW had bad debt ratio of around 6 percent, and the Water Department had something around percent, 4 4 and a half percent maybe.
Do you have an opinion or have you in any way researched or as a result of the your research do you have an opinion on what -- let me rephrase the question. You indicated in your testimony that deregulation and competition here in Philadelphia is not an issue in PGW's ability to compete because of this monopolistic status?
Well, the deregulation of the gas in the retail gas market in Pennsylvania has to do with the gas portion of your bill. And that has been for many years here at PGW and in most utilities in Pennsylvania a pass-through cost. So from an economic point of view, deregulation in my opinion does not have a big effect on PGW other than how their rate structure is. Currently PGW includes in their gas cost recovery calculation some of their social programs and I believe a few other cost items are wrapped into that gas cost calculation. Under deregulation, PGW's at risk that they could lose some of the larger industrial and commercial 24 RESOLUTION NO. 000773 customers to other gas suppliers. While they would still be delivering the gas to them and charging a pipes charge, they would not be able to recover -- if they continued to charge those costs as the gas cost, they would not be covering a share of those social programs and other costs that they embed into the gas cost from the customers who buy from other suppliers.
So therefore, the overall industrial user would potentially have the opportunity to get their gas delivered at a cheaper rate than PGW and, therefore, would decide to leave PGW for some potential competitor?
Under the current tariff. But most -- certainly, it would be my recommendation as you approach deregulation to take those costs out and only include in the gas cost recovery actual gas costs. And therefore, you would continue to collect all of your necessary cost out of the base pipes charge, which everybody will be paying. No one's going to come in here and lay another set of pipe in the street to deliver gas.
But the removal from the tariff or the ability to collect, the ability to 25 RESOLUTION NO. 000773 spread the social programs partly to the industrial customer, if that is removed in a deregulation or competition scenario, would not then the base rate of the residential customer need to absorb that charitable arm or that charitable mission of the company?
Currently, everybody is contributing towards that through the gas cost rate. I think the recommendation in facing deregulation would be to move that charge to the base rate so that everybody continues to pay a share of that.
But if that is removed -- as it relates to industrial customers, not residential customers, it wouldn't make a difference at all?
Well, if you do not change the rate structure, by the fact that the large customers may find it beneficial to buy their gas somewhere else and have PGW deliver it for them, they can avoid that. And that's why it would be recommended that you move to the base rates so that no one can avoid it.
And would, in your opinion, the PUC allow that move to take place? RESOLUTION NO. 000773
I can't speak for the PUC. But the PUC has a social program in their program for --
Is that social program as generous as the social program that currently exist at PGW?
I haven't studied the others as closely as I've looked at PGW's, but I do not believe it's quite as generous. I can't give you any numbers on it.
Do you have an opinion on what the social program of PGW has, what effect that has on the company's fiscal condition and ability to operate in an effective manner?
It is certainly an expense. I think that's policy decision, you know, how generous you make that.
How generous the City Council as a whole or the City as a whole makes that decision.
Are you aware of any other social programs that are part of municipal gas delivery in other parts of the country? 27 RESOLUTION NO. 000773
Most of them have some form of a low-income assistance program, yes.
Are you aware of any that are not means tested, other than Philadelphia?
I'm not aware -- I think in particular you might be thinking of the senior --
THE senior citizen discount, because the low-income assistance, the customer responsibility program is means tested, is based on a income level relative to the poverty line. But the senior citizen program, I believe most are means tested; but, again, I have not done a thorough survey of all of them around the country.
Thank you very much. I hope I haven't missed some of the testimony. In your opinion, how would the sale of 28 RESOLUTION NO. 000773 the Gas Works affect the ratepayer's bill? And given the fact that we've already committed to or given $45 million and in view of the fact that according to the Mayor in his budget address the cost of gas has gone up 400 percent and people are seeing their bills at least double, what would happen, in your opinion -- how would it effect the ratepayer's bill if this utility were sold? Do you have an opinion?
Sure. In our report in '99, and while there are some changes from then and it certainly would be appropriate to have us or someone update the study, at that time we believed that there was approximately a $90 million impact of a sale to a private entity in the form of required return to investors, additional taxes that would have to be paid to the state and the federal government. One line item in particular has changed. The state has repealed the gross receipts tax on gas sales, which PGW has never been subjected to, but a private intent would be. And that was 23 million of that 90. So part of that burden I know 24 has gone than away. The rest of those numbers would 25 have to be updated, though. 29 RESOLUTION NO. 000773 But at that time we saw a $90 million burden that would have been to be absorbed or paid through either in higher rates or in increased efficiency, i.e., fewer jobs at PGW. Or, in fact, from the best indications we had, if they reduced their cost ratios down to similar levels above the utilities, that would have paid for the bulk of that 90 million but not all of it and there would have had to been cuts to the social program as well if you insisted on keeping rates the same.
I am certainly not an individual who necessarily agrees that we should raise rates. Many of us in Council are concerned because we've had no direct role, but constituents stop us on the streets and call us 17 hours a day because of the impact. Just today I 18 talked with one of the vice president of the 19 University of Pennsylvania complaining. Everybody's 20 hit certainly with this increase, and if we're 21 talking about a proposed increase, then I assume 22 that means bills would go even more than they have, 23 and they've doubled. 24 Is there some way that we could, through the $18 million that the City gets from PGW or 30 RESOLUTION NO. 000773 through some other formula put a subsidy someplace so that the public doesn't see higher bills?
Well, the bulk of the increase that everybody is seeing right now and also the loan made by the City are both caused by the same factor, which is the higher cost of gas that PGW is buying to then deliver to the customers. There's not much that can be done about that. I mean, if you want gas to keep the system intact, you have to buy it off the pipelines, and the market prices have gone through the roof this year.
Then why -- I'm just piggy-backing on that question. Why was there a request for an increase in the base rate also? If the issue of higher rights is lack of availability and higher cost and lack of production last year, why then the need for a base rate increase requested in addition to the cost of gas?
I did say most of the increase -- well, actually, all the increases so far that have been passed on, I believe, is all gas cost related. There was a requested increase in the base rate I believe something around $50 million this past summer. I believe something around the effect 31 RESOLUTION NO. 000773 of approved but not been implemented yet. Although I may not be up to speed within the last week on that. But as of about a couple weeks ago, it had not yet been implemented.
What do you 7 attribute that, in your opinion, to that need for a 8 $50 million request in the base if it's all cost of 9 gas generated? 10
Their cost of increasing, and I have not done a detail study of their internal cost structure and what individual line items may be high relative to other utilities, but their costs have increased. In addition to that, and I know you've all heard it, but PGW and many gas companies have been affected by the sequence of warm winters that we've had prior to this current one. What's unfortunate is that while having a cold winter would normally be good because they sell more gas and a great deal of their revenue is more volume driven than their cost is. So typically in a cold winter 32 RESOLUTION NO. 000773 they do better. Unfortunately, this year with the cost of gas jumping before they were able to get the gas cost rate increase, they were actually losing money on all that higher volume during the months of November, December. So after suffering through three warm winters, they've now had a problem at least during November and December where they were selling gas at a loss at a very high volume.
What do you think -- in your opinion, what would happen to a senior citizen discount, for example, if this utility were privatized? Would they not have -- would a company not have any particular responsibility in dealing with that as an issue or could something like that be written into an agreement, or what's your opinion on that?
Well, I'm not sure how the PUC would review things, but I know in other cases where we've assisted municipalities in privatizing assets or contracting out the work on assets, they are often able to put in restrictions on the behavior of the buyer, at least for a period of time, if that was the political or the policy choice of the selling entity. Again, I don't know how the 33 RESOLUTION NO. 000773 PUC would -- whether they would allow that sort of cost into their cost recovery. But the impact of making those policy choices is going to be either higher rates or a lower price in the purchase price. They're only going to pay a certain amount so they can get a certain return. A private entity will only pay you a certain price and will be expecting a certain return. And if they aren't going to be able to charge the customers for something, then they'll lower their price that they would pay the City which would then either leave bonds unpaid or would leave the City without compensation for its current equity in PGW.
It seems to me that obviously we don't control the price of gas coming into our City so we didn't control the last increase, but at a time when the bills have so dramatically increased, I don't know how -- not that we have a direct role. I don't know how we could be expected to support customers paying more when they can't pay the bills they have now. We're really concerned about people using kerosine heaters which would cause many deaths, people using gas illegally. And then if caught, what can you do? They still 34 RESOLUTION NO. 000773 can't pay it. So we're really, really concerned that all of this even comes at the same time. Is it your role and have you made a decision on what your ultimate recommendation should be, or have you just kind of put the pros and cons on both sides of the issue?
I don't see our role as to recommending whether the City should sell or not sell. I think our role is to try to answer some of the financial questions so that the policy decision-makers can make their own way weighing of is this cost worth the benefits on the other side.
Thank you. And I will say finally that we've talked a lot in here about advertising and letting the public know the role we play and do not play as a Council. But I don't think the word has gotten out there. I don't think that John and Jane Q Public understand that we don't control that and that we didn't do anything with, other than being citizens in the world, that we didn't control the cost gas coming into our country going up and I don't think that word and that the PR arm of it is going out, even though there is some PR. I think it asks 35 RESOLUTION NO. 000773 people if they meet criteria to apply for grants, but I don't think it explains the problem. And so for those who are in that arena, we would certainly ask you to re-look at that because the word isn't out. The advertisements I've heard don't, in my opinion, adequately tell the picture. Thank you, Mr. Chairman.
Thank you, Mr. Chairman. Again, I understand the position you're in and why you're here. We've heard earlier that possibly delaying some increases could have gotten us into some trouble, but I'm wondering if you're in a position to comment on -- we constantly hear people suggesting that we sell this company, and I'm wondering if you could comment on what we could do to structure this company, continue it being a municipally-owned utility company and make it run right, to make it run like we suggest the Water Department is managed and operated? We've got some of the finest technicians working at PGW come from the utility industry, 36 RESOLUTION NO. 000773 talked to some folks work in other utilities have come here to help during emergencies when our people were up against it, some of the finest talent that you could find in the utility industry, and it's hard for me to believe that we can't assemble a team of gas professionals to run this company like a business. What's the problem? Is it political tinkering, is it patronage? Is it the lack of rate increases? I just can't believe that we can't assemble a team of people to run it based on the talent that we have there to run it and run it probable properly without going to the extreme of selling this company. Do you think we can fix it and make it work the way it's supposed to work?
I think it's certainly possible to. You have done a good example in the Water Department that you can look to as a way possibly to structure it. I think you could look back in PGW's history. I was not in involved in the business back then, but my understanding was that under the UGI structure back in the '60s and '50s that it was well run. Whether the rate structure 37 RESOLUTION NO. 000773 was good, I don't know. But I believe the company itself was well run under that, and that's where they contracted with a private company, the management of PGW. The employees I think were still PGW employees, but the management team was part of larger gas company, United Gas --
For the record, the UGI executives managed for PGW were hired by the City of Philadelphia to continue to manage the company at that time a significant savings. Rather than pay UGI a premium, those executives were hired to do the job that they were doing as an employee of UGI. That's the real deal. But I'm just concerned that maybe considering selling this utility company is an extreme when we really I think our first effort to run it properly and make it the utility that it once was.
I would agree. You pointed to two examples here in Philadelphia. But the other 38 RESOLUTION NO. 000773 thing you could do is look around the country and look at other municipally-owned utilities, both gas and other electric, water, and see what structures seem to work, which are the successful ones and what kind of governance structure they have. Before actually trying to hire managers, I would recommend at least addressing the governance structure.
Thank you. I agree with Councilmember Rizzo that we do possess in this company probably some of the best technical expertise on street service operations in the country. The problem has not been them. The problem has been middle level and upper level management through both ineptitude and political involvement that have run the company in a direction that the workers on the street and the people who are actually servicing the public have no control over. They're not listened to. They're ideas are not considered. And there's a major problem in the management of PGW. I mean, I know I listen to people from the Gas Workers Union, for example, who are actually on front line of dealing with people. 39 RESOLUTION NO. 000773 They're the ones who go into your house and fix the heater. They're the people that, because they can't answer the phone at PGW, that the public complains to. And they have very little or anything to do with the mess this company's in. So I think part of the problem is getting some direction whether it's a sale or whether it's management sons politics to allow these people to do their jobs. The problem has been that the ability to keep politics out of this process for the past 30 years is virtually impossible because of lack of a will. So in some respect I agree with Councilman Rizzo; but in the other respect, I don't think that we have the capability, fortitude, or the will to change something that the politicians have benefitted from for the past 30 years. Councilmember Clarke.
Thank you, Mr. Chairman. Good evening, Mr. Kelly. I apologize for missing the earlier part of your testimony, so I'll ask some questions. First, I'd like to know a little bit about your company. Are you a regional company, a national company? 40 RESOLUTION NO. 000773
PFM is a national company headquartered here in Philadelphia. We serve exclusively -- almost exclusively, about 99 percent municipal clients, that is, city, county, and state government agencies and direct governments. We have two primary businesses. One is advising municipalities on the issuance of their bonds. The the other is in the investment of their funds out of our Harrisburg office. In addition to that, we do a great deal of consulting along the lines of this kind of study that we've done here for PGW -- we did this for the City but on the subject of PGW, as an adjunct to our bond business.
As we make our decisions -- well, I should speak for myself. As I make decisions in Council as it relates to pending legislation, one of the things I like to look at is comparables. And you representing a national company gives me a sense that you know a lot about the industry, a lot about various companies throughout the nation. Can you give me a sense and can you give me a comparable of the Philadelphia Gas Works across the board? Let me tell you the reason I ask this. 41 RESOLUTION NO. 000773 In interacting as an elected official, you talk to people on the street on a daily basis, and I think the majority of the people feel that this particular company is in the condition it is based solely on the inadequacies of the people who ran it or possibly some illegal activity of some of the people who ran that. And I guess I'd like to get a sense from you on a national level, where is the industry at in a comparable situation similar to Philadelphia?
I'm not sure exactly in terms of whether other municipally-owned gas utilities are --
Either municipally-owned or privately-owned. I guess I'm asking in terms of the size is there a comparable city the side of Philadelphia that has maybe a comparable work force, and if it's a private entity, is that entity being run more efficiently than the City of Philadelphia right now given the --
You could find -- in the investor-owned utilities, you could find many examples of other cities of this size or systems of this size or bigger of gas companies, and we 42 RESOLUTION NO. 000773 attempted to do that in looking at some of their cost ratios. It's difficult to compare them because the features in each area are a little different, different labor costs and different characteristics of the environment. We attempted in the study to make the comparison to PECO's cost structure because we figured they're in the same economic region, it was a reasonable comparison. You could compare it to a number of them, and some cases, PGW stacks up okay. In others, it doesn't look so good against them. I don't have that many comparisons right here to rank them for you, but that certainly could be done.
It would be very helpful to me. I mean, to talk about PECO is one thing but, you know, this issue with respect to the gas company versus the water company, that's a commodity that we don't control. We have substantial amount of water in the City of Philadelphia, fortunately so we can kind of keep some regulatory powers as it relates to rates. But what I need to get a sense of is there -- I know often in the discussion people talk about Boston, they talk about other municipalities that are close 43 RESOLUTION NO. 000773 to population and size probably with work forces close to size. And I guess what I want to see if there's a privately-owned facility in a City who's comparable in size. Where is that particular gas company at this point, given the uncertain advertise of the commodity being natural gas and oil, and is it solely based on the private nature of that or is it public? Because these are really -- the bottom line, we're talking about a decision. Should it be private or should it be maintained by the municipality of the Philadelphia? Personally I need to make that decision and I want to make sure that I've done that based some analysis of other situations.
Let me try to answer your question a little more then. On the gas purchase side, PGW is facing the exact same cost that other entities are. PGW has actually has an excellent reputation in that area. I think every gas company and local distribution company in the country is passing on similar costs on the gas purchase side. On the costs that are under PGW's control, and this is an area that Chairman Kenney asked me about earlier in terms of whether we -- or 44 RESOLUTION NO. 000773 I responded to his question about whether could have used more information when we were doing this report. And it is an area I think we certainly could have. But we did physical compare on thier financial reports as being publicly available data. For instance, compared to PECO, the operating costs at PGW of the controllable costs, excluding the gas costs were almost identical on a per customer basis. At first that looked like, well, then PGW is doing a good job. Anecdotally we kept hearing that PGW isn't do a good job, so we tried to scratch a little further. We looked a little deeper than cost for customer. We looked at the concept of Philadelphia being a little more densely populated than a lot of the PECO's territory for gas delivery. That perhaps PGW should have a lower cost because of the higher density, they have more customers per mile so they only have to maintain a certain amount of pipe or less pipe per customer. So we did those kind of comparisons. And we came up with some numbers that showed that PGW was less efficient than PECO with those adjustments put in place. And this is a case where if we had had the opportunity to discuss it more with PGW 45 RESOLUTION NO. 000773 executives or personnel at that time, we could have tested those ratios. Again, we did develop them on a very high level in terms of looking big numbers on their financial statements and not getting down to the nitty-gritty of how many people they have on a shift and how many people they have in a truck and that kind of thing. It was on a very high level financial statement level. Although I think it was a pretty good comparison because the ratios we came up with showed that there was the potential at that time to perhaps cut PGW's operating expenses by or percent, I 14 think it may have been. It is in the report. I 15 believe you have copies of it. And that jives with 16 other numbers that I've heard subsequently that PGW 17 at that time was about 2000 employees and their 18 target is to get down to about 1500. So that seemed 19 at that time to be a reasonable number, about 20 halfway there, I believe, now already in that 21 progress. So they're making improvements and 22 getting down towards that level of efficiency. 23 What we concluded in our report, though, 24 was that the tax cost associated with a sale put a 25 burden on the private owner that they would have to 46 RESOLUTION NO. 000773 pass through or recapture either through higher rates or by achieving those efficiencies. But, in fact, those efficiencies were not quite enough to offset that wedge between private and public ownership. Fortunately, as I also discussed, that wedge is a little narrower now because Pennsylvania repealed the gross receipts tax which was $25 million out of a $90 million wedge. And there may be other changes. For instance, the cost of defeasing the tax exempt debt was 50 million at that time two years ago. It is now down to million 13 because PGW has refinanced the higher coupon bonds 14 since then. 15 So there are a number of features that 16 are making the financial wedge between public 17 ownership and private ownership a little narrower. 18 At the same time, they're methods for paying for 19 that through higher efficiencies may be getting 20 narrower as well, as PGW has improved and reduced 21 its own work force. 22 So again, to get a precise answer, you'd 23 have to update the study again.
But at that time, 24 we did make that comparison to PECO at least and saw 25 that at least under that comparison of ratios that 47 RESOLUTION NO. 000773 at that time it looked like PGW could be more efficient.
Is there any either municipally or publically-owned or privately-owned gas company in the United States that is not in a position of either close to where we are as it relates to -- I understand the cost associated with the rising cost of gas, but at least in terms of structurally, can you give me an example? Give me a couple of examples of some very well-run gas companies that, although the rates are increasing that's based solely on the fact the cost of fuel is extremely high, but other than that.
Everybody's costs, because of the pass-through gas costs, are pushing everybody's rates up. But, yeah, there are a number of good -- there are some higher rated gas companies, municipally-owned gas companies around the country and the higher ratings reflect the fact that the rating companies at least like their governance structure better, like their financial performance better.
Do they tend to be on a private side or on a publicly-owned side? 48 RESOLUTION NO. 000773
Both. There are some better rated ones on the investor-owned side, and there's some weaker ones rated on investor-owned side. And there is certainly both on the municipally-owned owned side as well. Philadelphia is the largest municipally-owned one in the country.
Thank you. Thank you very much. Thank you for your testimony. I don't think there are any other questions. Thank you. David Thornburgh, please. (Witness comes forward.)
Good afternoon. Thanks for waiting. Please identify yourself for the record.
David Thornburgh, Executive Director of Pennsylvania Economy League here in Philadelphia.
Good afternoon, Mr. Chairman and Members of City Council. I appreciate the chance to share some thoughts with you giving 49 RESOLUTION NO. 000773 some of the information and analysis that the Economy League has developed about the Gas Works over the years. When I say over the years, I mean over the years. The Economy League's roots go back to early part of the last certainty and I would wager that about every or years we would wade 8 into some aspect of the provision of gas in the City 9 of Philadelphia which I think demonstrates that 10 there's a continuing and ongoing sense of urgency 11 and these kinds of questions about this utility and 12 the way it's performed. 13 I wanted to, if I could, share with you 14 a couple things. One is some summary conclusions by 15 the two most recent pieces of work that we've done 16 on PGW. One was in 1989 and one 1995, and I may 17 have some more insight or answers to some of the 18 questions that you asked in terms of comparables and 19 so forth and so on. 20 The 1989 report -- I won't spend a whole lot of time on except to note that that report which I would be more than happy share either of these with you and your staff, however you'd like, but that report was focussed on the consequences of selling PGW at that time to both taxpayers of 50 RESOLUTION NO. 000773 Philadelphia and to the ratepayers of the Gas Works. Went through a number of comparables, worked through some of the tax implications, some of the implications on rates. I won't spend much more time on that because, frankly, years ago, a number of 7 things, significant things have changed. The gross 8 receipts tax being one. The PUC's entry into the 9 governance process this last July. What is 10 striking, though, about that report is that much of 11 the same -- many of the themes that we're talking about today in terms of deterioration of the company, in terms of the deterioration of the base, in terms of the governance difficulties, were true then as they remain true today. And that led us in 1989 to a strong recommendation that the City pursue the sale of the Gas Works. And our estimate at that time, and there have been other estimates in this same range, although today is a different market, the estimate at that time was that would net the City something on the order of $200 million from the sale of those assets. But what I wanted to spend some more time on today is the work that we did in 1995 with the cooperation of the Administration, the Mayor's 51 RESOLUTION NO. 000773 office and the PFMC Board, the Phoenix Management Company that had been hired to help turn the Gas Works around, and that was centered on this issue of governance because I think most people involved in the intricacies of the gas business in Philadelphia pretty quickly acknowledge that that's one of the core problems. And so we spend some time looking at other utilities, other municipally-owned Gas Works across the country trying to shed some light on those tissues, develop some scenarios as to how the City of Philadelphia might address those. Let me just kind of -- I think you should have a copy of some what I call relevant highlights from that report, so I'm going to do a double summary of those and then end with some concluding thoughts. I think the first thing just to kind of reiterate, the first thing that shocked us in that analysis is that when you look at this picture over time, given the best intentions of some very talented public officials, some very talented people at the Gas Works, that the continuing sense of crisis at the Gas Works really have to be seen as Simmons of problems in the governance process, in 52 RESOLUTION NO. 000773 the governance structure. That there was simply not a political framework and an economic framework that forced the Gas Works to deliver efficient service and a high level of customer service to both its residential and commercial customers.
At the same time, I think -- and when we did this in '95, we were recognizing even at that point some of the changes in the regulatory environment that were going to force those changes one way or the other. That actions at the federal level and at the state level in terms of deregulation as we said within three to five years were going to open markets to new entrants and new players and were going to force entities like PGW to act in a very different way. Whether or not, frankly, the weather is warm, the weather is cold, I think as has been noted, we have no control over that. What we do have control over is how this entity responds to challenges like that. So as I said, these changes were going to force PGW to drastically change its practices and that in order to respond quickly, which is another characteristic of more competitive markets, you have to move quickly. That in order for PGW to be able 53 RESOLUTION NO. 000773 to be able to move quickly and effectively that changes would have to be made in the governance structure, the process of making decisions about PGW. And frankly, if that was not possible, then we return to our conclusion in 1989 which is to say sell the Gas Works and, frankly, let other entities deal with managing in a much more volatile environment. I said earlier that the core problem of governance for PGW was that there were not sufficient economic incentives to perform and there were not sufficient political lines of responsibility to perform. You can think about those are the things that motivate people, I think, most often is pocketbook issues or, frankly, issues of power and responsibility. One of the things that we noted in terms of the economic incentives is that the payment to the City, the 18 million so-called dividend hadn't changed since 198O. And if you think about it, given how the cost of living and the rate of inflation has changed since 1980, with every year there was less and less of pressure put on the utility to respond to its owners, if you will, the 54 RESOLUTION NO. 000773 Citizens of the City of Philadelphia. If that payment had just tracked the increase in the cost of living in that period of time, it would have been on the order about $30 million a year. So that was one signal to us that this was not, let's say, performance based relationship and that there wasn't that kind of pressure on PGW to perform. What's also illuminating is comparing that $18 million payment to the payment that other municipally-owned Gas Works make to their host governments, if you will -- and I didn't reprint that but it's included in our report -- just quick note, the City of Philadelphia's ownership of a municipal gas works is such an anomaly that comparisons with other municipal gas works is almost not meaningful. It's 60 percent larger than the next biggest one which is in San Antonio. The next biggest one is in Memphis. And you know San Antonio and Memphis don't have to deal with things like cold winters. They're selling gas to people for cooking and heating. So these are different animals. Nonetheless, in 1994, which was the benchmark year we picked, that $18 million payment from PGW to the City represented about 3 percent of the utility's 55 RESOLUTION NO. 000773 gross revenues. The payment in San Antonio represented about percent of the gross revenues 4 of the utility. And in Memphis, it was about 5 5 percent. So right away there's another angle on the 6 sense that PGW did not have the financial pressure, 7 the economic pressure on it to deliver to its owners 8 at the City level at nearly the same rate in other 9 jurisdictions. 10 Turning to the political side, one of 11 the things that we also did was take a look at those 12 other municipalities and map literally some 13 decisions that are made in the course of operating a 14 utility, passing a capital budget, hiring a CEO, those kinds of things. And frankly, the City of Philadelphia's looked like a nice bowl of spaghetti.
There were so many players and so many arrows and so many lines going in all directions that that was a good visual reminder of why decision-making takes so long and is so cumbersome in PGW's case. Many people have pointed out the fact that in the early '90s PFMC literally went five years without a CEO. Well, that's the best example that there is, I think of a decision-making process that is cumbersome, convoluted, has probably too 56 RESOLUTION NO. 000773 many cooks trying to create that meal, if you will. And, in fact, you can look at other utilities where there's a municipally-owned Gas Works where there's a much cleaner process of decision-making for those kind of major decisions. Let me get to kind of our summary conclusions. I think we came to the clear sense that if PGW does not have the economic incentives to perform as maybe other utilities in other cities do and lacking clear lines of authority which, frankly, has been made more complicated by the PUC's entry into the game last July, but lacking either one of those it was hard to see how the utility was going to be able to right itself and perform effectively and efficiently at the same time when the competitive wolves were at the door, as it were. And this was not a choice. It wasn't a choice that we could make to say, we're going to take our time to do this or we're going to react a little more slowly or it's okay if it takes five years to higher a CEO because the people that we were playing the game with weren't laboring under those same obligations. So ultimately and in increasing rapid period of time, we were likely to deteriorate. 57 RESOLUTION NO. 000773 Again, as I said, no matter what the weather is doing, we were going to have a hard time competing. That led us to three possible alternatives. One is to say, well, you can make a really good concerted effort to clean up these lines of accountability and decide what the Gas Commission's going to do, what the PUC's going to do, what the Mayor's going to do, what the City Council is going to do, what the advocate's going to do, what PFMC's going to do, and if you get it right and follow some other models in other cities, you might improve things. At the same time, you might want to restructure the financial relationship between the City and the PGW. So that, for instance, rather than being on a flat basis of $18 million a year, you put it on a basis of 5 percent of the gross revenues of PGW or 8 percent, pick a number, and that, I think, would have added some economic pressure. So those -- I wouldn't underestimate the dramatic nature of those two changes by themselves. And if you could do them, I think our research suggested, you would be a lot better shape. That's 58 RESOLUTION NO. 000773 a significant "if," and I'll come back to that. Option two is sort of a more less ambitious role. It just says, well, let's hire a new management team. Let's not try to tinker too much with the basic structure here, but surely good people, we'll do a nationwide search. We'll find some good people who have some experience in these kinds of things. We'll put them to work. They should be able to rise above the problems with the governance structure and do a good job. And that, frankly, was the path that we took in 1995 and '96. And we hired CEO Haas and his management team, and frankly, that hasn't worked out so well. I think would be an under statement. Then the third option is also a dramatic one. It's one that would have some high impact to it and it is one that has a certain amount of complexity to it, political, economic, fiscal, etcetera. That is to say that given the trouble, the challenge, the time it would take to work through these changes in governance, changes in economic structure, given the fact that the wolf is at the door in terms of the competitive environment, that this is a task that is essentially and 59 RESOLUTION NO.
000773 functionally not doable by the City of Philadelphia, that the job of righting the ship of PGW, of improving its customer service, its billing, taking care of its debt, trimming payroll, cutting operating costs and so forth is best left in the hands of those folks who are in the gas business all the time, do it for a living and, therefore, that would lead us to what we've now returned to, which is to say, sell PGW. Leave that obligation responsibility in the hands of those who are equipped to do it. As a reminder of where we are right now with PGW, let me just pull a couple of numbers out of the five-year plan came out just last week or a couple weeks ago. To my mind, there is a sense of incredible urgency about these numbers because, frankly, this was all well and good as long as the utility was sending its check for $18 million a year and we didn't have to worry that much about -- there was always going to be this problem of customer service and so forth, but as long as that $18 million came in, there wasn't a pressure on the City's budget, it wasn't asking us to do a whole lot more. But that picture's changed quite a bit. 60 RESOLUTION NO. 000773 Let me just run through these. There's been an percent drop in annual sales of gas. 4 There continues to be $51 million in low-income and 5 senior citizen discounts loaded into PGW's cost 6 structure. Receivables at the end of Fiscal Year 7 '99 were up to 12 percent from 9 percent in 1971. 8 Payroll costs as a percentage of revenue ae 50 9 percent higher than investor-owned utilities with 10 similar characteristics. Payroll costs are 50 11 percent higher, which if you look at it, is not that PGW's are much better paid, it's just that there are a lot of more of them than there are in investor-owned utilities. Long-term debt per customer is highest among comparable firms. The newspapers clearly have been filled with stories about the problems with PGW billing, collection, and customer service system. They have aging infrastructure. The utility is only able to replace half the cast-iron pipe per year that it should be replacing to maintain service levels which ultimately conjures up images of major, at the least, disruptions of service, if not other emergencies. And finally, we're left with the decision that you had to make, which is the request 61 RESOLUTION NO. 000773 for the $45 million loan to tide PGW over, we hope. So clearly the tide has turned on that score. It's one thing to have $18 million coming in your direction and quite another to have $45 million going in the other direction. So five summary, I guess, conclusions from all that and then I'll be happy to take your questions. First is that -- and this is a fairly straightforward observation. These problems have been longing in the making. They have intensified significantly within the last five years. Five years ago when did this, we thought we were on the right track. We though we had the game plan that you hire the management team and, frankly, the City spent in the millions of dollars hiring consultants and search firms and doing a national search and so forth and some on. And we're now back to square one. I guess the second conclusion that we have is that when you look over the long-term history of PGW, major overhauls of management structure, operating costs, policies, and governance have successfully resisted the best efforts of every Mayor and Councilmember and millions of dollars of 62 RESOLUTION NO. 000773 consulting fees over at least the last dozen years. You could probably extend that dozen years much longer that. Third fairly obvious conclusion, we believe that PGW's plight now represents a significant threat to the City's fiscal stability. The fourth point, I guess, which may be a subtle one, that PGW's current state occupies an inordinate amount time and focus on the part of the Mayor, on your time and other members of the Administration that in other cities your counterparts don't have to deal with.
They can spend more of their time looking at issues that people really care about: Schools, crime, jobs, neighborhoods, taxes, those kinds of things. So at some point it seems to me just the fact that, frankly, you wouldn't have to have to hold a hearing like this and devote the time and the energy to trying to figure out what's going on in the gas business, I think is worth recognizing in and of itself. And the fifth question, I guess, is maybe our bottom line. We said in that 1995 report that if we're not able to fix the problems with the 63 RESOLUTION NO. 000773 governance structure, if we're not able to fix the economic incentives for PGW in the face of the competitive changes, then it's in the best interest of the City and its citizens to sell PGW for whatever gain we can realize lest the utility become a long-term drag on Philadelphia's future. I'll end on that note and I'll be happy to answer questions.
Thank you for your testimony. One bullet point you have on indicates an 11 percent annual sales of gas. That is attributed, in your opinion, what factors? I think I know the answer, but I'd like to hear yours.
Well, you've a declining population base and a commercial base and an industrial base in the City. One of the challenges that PGW has is it's got a constrained market. It can only operate in the City of Philadelphia. So there's that and then there is the competitive piece which is to the say for the larger commercial industrial concerns they have much more of an option, essential cut their own deal with 64 RESOLUTION NO. 000773 other suppliers and therefor, fall out of PGW's network.
Mr. Kelly testified that -- and maybe if you heard his analysis, you can comment on the layoff, for example, of social programs and discounts to the cost of gas as opposed to the base rate that we apply for when we go to the PUC or Gas Commission for rate increase. He said that if we laid -- I'm trying to rephrase exactly what he said. If the social programs and the discounts laid off to the base, that would make a negligible difference of the impact of competition from an industrial side. Did you follow that line?
I have a little trouble, frankly. And I'm not sure I could comment.
Let me go back. What effect long-term will intense competition have on both the industrial customer that PGW has and the residential customer?
Well, I think the industrial customers will be the first to leave. They're the most attractive ones from a competitive standpoint. Clearly, when you can sign up a higher volume gas user -- I think most people suggests that 65 RESOLUTION NO. 000773 the same kind of competition that's come to electricity will at the very least be long in coming to retail customers in the gas business. So you might see a decay, even a rapid decay among larger industrial commercial users, which is a real problem for PGW because -- the residential customers are the hardest and the most expensive to serve. They're small users, there's a higher level of service. So that's not an attractive proposition from PGW's standpoint.
And obviously, the loss of population and loss of jobs in the last decade, years have put a significant dent. 15
And I guess this is the problem that we struggle with, this is in a issue of providing gas service to varied segment to our population, but it's the same problem we deal with in our budgeting for City services and we've had this discussion as the course of the budget hearings have proceeded with the Administration, and that is that despite the fact we've lost between 180 and 200,000 residents in the past seven or eight years, the size of our municipal government is 66 RESOLUTION NO. 000773 practically the same as it was seven or eight years ago. Sometimes higher or sometimes lower, but usually within a thousand members of the government, a thousand personnel, we're about the same as we were. I sense a similar dire formula here in the Gas Works in that we're losing population, obviously losing customers, losing jobs or at least lost jobs for a period and now kind of stabilized, although I wonder whether or not that job uptick has been a increase in gas use because it's in the service sector, I guess, hotels use. It's a changing type of user.
That's another longer term but significant challenge for PGW is that, you know, economic activity -- there's not as much manufacturing as there was. The growth has not been in the manufacturing sector and, therefore, there isn't, let's say, the same energy usage per employee as there once was. So you might see more economic growth in the City, but it's service companies, information technology companies that are not high gas users. They actually -- sometimes IT companies can be quite significant electricity users, but they're not buying gas. 67 RESOLUTION NO. 000773
So if I coupled the loss of residents, which seem not -- the tide is continuing to leave, and the change in the jobs that are done within the City, that the future potential marketing opportunities coupled with deregulation could be a disastrous scenario.
And one of the criticisms that was made about PGW which, again, if you're not playing in the competitive environment you don't see the need to do this, but some gas companies have had a decent amount of -- have had some decent experience in trying to promote the use of gas for other uses, for clean natural gas vehicles, for other kinds of things. So essentially aggressively marketing the use of natural gas to replace other kinds of energy uses.
Could you talk a little bit about the issue of the 12 percent receivable up from 9 percent in '71 and how that compares to collection rates, if you know of comparable privately-run utilities, say a PECO or PSE&G? Do you have any information as to what the average annual receivable rate is.
Let me preface my question. It seems as if a electric utility in the City of Philadelphia would be serving predominately the same type of customer that the Gas Works is serving and that argument that somehow the Gas Works portfolio of customers are poorer, older, and less able to pay seems not to jive with PECO's experience that they are serving basically the same age population, income population, and there seems that the receivable levels are probably substantially different. I don't know if they are or not, but I'm wondering if they are.
I suspect they are. I can't recall where I saw some numbers to that effect. But I think you're right. Yeah, there's no 17 reason on the face of it that PGW's experience should be much worse than the Water Department or PECO. The other way to look at that is particularly relative to the Water Department. There could be potential efficiencies on the collection to be gained by some kind of joint or coordinated effort. But these are systems issues, management issues, leadership issues, and I think seemingly for -- I've been in this City for 15 years, and for as long as 69 RESOLUTION NO. 000773 I've been here, we've never approached the kind clarity of decision-making or the incentives, political or economic, to pursue these kinds of things.
No, I'm talking about the kinds of efficiencies that you're talking about trying to realize.
Mr. Thornburgh, you indicated in 1989 you issued a report. Are you issuing a report currently? In reference to the document, is that a report?
There are two documents that my organization produced. One was in 1989. That was focussed on the consequences, costs, and benefits of selling the Gas Works. And then there was a piece we did in 1995 that was specifically looking at the governance issues. 70 RESOLUTION NO. 000773
Okay. I wasn't sure. I thought it was one more recent than that.
You talked about in 1995 we did some things locally, we hired the people, we did the national search. Now, would you say that was -- you talked about three options. What option would you say that was, one, two or three?
That, I would classify as sort of the -- it's option two, it's the less aggressive one. It says, we can't figure out nor do we want to spend the political capital to make some dramatic changes here. We're going to hire a turnaround company to try to turn this around. We're going to hire a new management team and our bet is essentially that that new management team sheer force of personality and skill we'll be able to right this ship. I frankly took the path of least resistance.
You referenced 71 RESOLUTION NO. 000773 Memphis and San Diego was --
San Antonio. I'm sorry. (Continuing) the second and third largest his municipally-own gas companies in the northern part of the --
No. They're not in the northeast and there only three among the top 10 cities in the country. That's what I said, we're 11 such an anomaly that I don't think we quite 12 understand that. 13
The other thing I 14 want to add for emphasis is that the other two, one 15 is in San Antonio and the other is in Memphis. And 16 I believe Mr. Thornburgh testified that the issue of 17 cold water there is not a substantial consideration. 18 Memphis sometimes gets cold. I don't know about San 19 Antonio. 20
The $51 million in 21 low-income and senior citizen discount, what 22 percentage of that in your estimation would be 23 effective if there was means based discount program 24 in place? 25
I don't know the answer 72 RESOLUTION NO. 000773 to that question. I would say, though, that the issue of subsidies for lower-income citizens or senior citizens are often issues taken up in the budget and appropriations process, in other areas of City administration and budget. So the option to address the subsidies, even preserve those subsidies, even expand those subsidies remain no 9 matter what happened.
I understand you made reference to a means base. That is actually on the table as we speak in these discussion.
I believe the revenues of PFMC are in the $500 million range so call it about 10 percent of their gross revenues would be those subsidies, but I don't know what would happen if you means tested the senior citizens discount.
There are certain things, there were discussions of various levels of means test, and I just wondered if you did an analysis. You referenced this particular number, and I thought you did an analysis and categorized what it would be, but you haven't done that. 73 RESOLUTION NO. 000773 There was another statement with respect to employees. Can you clarify? You said 50 percent higher in net was based on the number of employees?
Yes. The statistic, and again, this is just taken directly from the five-year plan. PGW's payroll costs are 50 percent higher than comparable investor-owned utilities. So not San Antonio and Memphis, but investor-owned utilities probably in the northeast. When you look at those payroll costs, they're 50 percent higher not because PGW employees are making a lot more money than other employees, it's just there are many more of them than in those.
Well, the payroll cost for a function of the number of people and their annual compensation. So I can't say I don't know that there are 50 percent more people.
Well, you're throwing these numbers out and you don't seem to have any level of detail to support the numbers. I'm just a little concerned about that. You say 50 percent higher, the first thing inclination is for 74 RESOLUTION NO. 000773 somebody to think that, oh, PGW employees are getting paid 50 percent more than everybody else. You're saying that's not the case. You're now saying there are more employees. And I'm trying to get a sense of, you know...
I would think -- let's just say this, if PGW employees were getting paid the same as they were in those investor-owned utilities then there would be in fact 50 percent more of them, yeah. But these numbers came from one of -- let's say one of the numerous reports produced by one of the numerous consultants that have been hired over the course of the last half dozen years to look at various aspects of this.
I hear what you're saying. I'm just, you know, you throw these numbers out ther and I would have hoped you would have had a little more detailed information or tell me where I could get a little more detailed information as it relates to supporting the evidence associated with these numbers. Is there something that I can get that you can refer me to?
Again, I took these from the five-year plan, so I would think that the 75 RESOLUTION NO. 000773 best source would be to come from the folks at PGW, I would assume, who contributed that piece of the five-year plan.
In all fairness to Mr. Thornburgh we could have had some detail if executives from PGW people and the Administration who have some involvement with PGW would have been willing to come here to testify today. We may have been able to question them on these issues. But since they are not here, it's difficult to suppose. But if they were at the table, we could have either had the issue debunked or we could have had it confirmed, but having this Chair empty makes it difficult to do that.
Respectfully, Mr. Chairman, when you put numbers out there, particularly numbers that talk of such magnitude, and you're talking about employees and you're talking senior citizens, you in fact know those are flash point issues as we move ahead in the discussion, it's my hope that you would have some level of specificity as it relates to those numbers.
It says on the handout that fundamental issues for PGW from the 76 RESOLUTION NO. 000773 City's Fiscal Year 2002-2006 Five-year Financial Plan. Are those bullet items from that?
I understand that, but the City is not submitting that evidence in the record today. If the City would do that, I would expect them to have that information also. The gentleman before us is submitting that information.
Did you have an opportunity to read the five-year financial plan from the City or did someone in your staff.
Well, you don't have what you don't have. That's okay. Thank you, Mr. Chairman.
I'm looking at the conclusions and recommendations again for the PGW's future. PGW should be sold for whatever gain can be 77 RESOLUTION NO. 000773 realized lest the utility become a long-term drag on Philadelphia's future. That was in the 1995 PEL report? MR. THORNBURGH Yes.
Could you comment on that statement? That's great for the City in itself to get rid of the company and that long-term drag be no longer their problem. But could you comment on what you believe would be the ramification for the ratepayer, the customer? How could we as elected officials assure that selling the gas company would be good for the ratepayers, the customers, not just the City itself.
Well, first, we haven't done a current analysis of that particular issue. You'd have to factor in sales price, the structure of the sales, what kind of -- one way that you could guarantee or protect against some increase in rates is to structure that into the sale. So I can't -- I don't have the numbers, I haven't done an analysis, and it depends on the nature of the agreement. We did try to address that issue in 1989 and sketched out three scenarios, one of which -- i.e., sort of high, medium, low scenario. One of 78 RESOLUTION NO. 000773 which had modest, maybe predictably, one had modest decreases, one was the rate stayed about the same, and one had modest increases. But didn't really go further than that because, again, it's very dependent on exactly what kind of a deal you cut.
You noted that millions of dollars have been spent studying this utility company's problems, but I want to not be -- I don't want to identify the particular company, but many people have had conversations with executives of PGW, representatives of the Administration, and a lot of private companies, utility companies, investor-owned utility companies have wasted millions and millions of dollars studying it, restudying it, making presentation, and basically being just turned away saying, we're not interested in a management agreement. They're not interesting in selling the utilities. These companies have finally said, look, if you want to have a conversation, you call us because we're not calling you. So by some of the things that I've heard, it convinces me that this current management and the Administration aren't really sincere about trying to fix some of the problems that we're dealing with 79 RESOLUTION NO. 000773 here today and all along. So it's upsetting when you hear people discuss the fact that they've expressed an interest and basically just discard it and a lot of money wasted.
Well, I'm afraid I can't really comment on that. It's just to say that, you know, ideally and maybe even theoretically, the City would love to approach a possible sale from a position of strength, that you'd like to have, as it were, fattened up the turkey before you took it to market.
The problem is there's not a piece of meat left on the bone.
It's like after Thanksgiving in a large family; it's gone. To comment on Councilmember Rizzo's question as to why after all these studies from private utilities and management agreements and other things, why no one took the bait was because there was too much meat left on the bone at that particular time. And now we're again, as governments always are, seemingly always are, at 80 RESOLUTION NO. 000773 point of crisis. We are now dealing from a position of weakness as opposed to a position of strength.
But I think in making this decision, you have to compare the alternatives and you have to say, what would it take? Is it possible, and I look back over just the last 28 years of PGW's path, do I really think it's possible to fix PGW, to hire new management structure, give them the incentives to perform, clean up the governance issues that have been mentioned here today in a reasonably short period of time? And frankly, that was the assumption in 1995 and it didn't turn out to work that way. So you have to balance the sense of the possible and, again, the time and effort that you have to allocate to these kinds of questions and sort of ultimately decide what's the shortest and best distance between two points.
So based on the 1995 recommendation, that's still the recommendation?
Well, yeah. And what we said there is, here's what you have to do in order to make this work as a City-owned utility. But, frankly, if you can't do that, then sell it. 81 RESOLUTION NO. 000773 And I think since the six years, the five and a half years since we did that have convinced us that it may be theoretically possible to engineer those kinds of changes, but it doesn't seem practically possible.
Well, that confirms my thought because when I knew of efforts to manage the company and even share in the profits that could be realized by a private management agreement, when that was rejected, I just couldn't believe that a sharing of the profits and a management team coming in that has experience in this region operating a local gas utility company and not, as Councilman Kenney said, biting on that, I just realized that there wasn't a sincere effort to repair or salvage the meat that was on that turkey. Thanks.
Thank you very much 82 RESOLUTION NO. 000773 for your patience. Please identify yourself for the record.
My name is Philip Bertocci. I'm the supervising attorney of the Energy Community Legal Services. I'm testifying today as the Public Advocate under a charge from the Philadelphia Gas Commission to advocate on behalf of residential ratepayers of the Philadelphia Gas Works. I've submitted some testimony in writing. And I'm not going to give all that testimony today because I know that you can read it. You know who I am. And also some of the things that I'm going to say would just repeat what Mr. Kelly has said concerning the effects of the sale of PGW. So I'll try to truncate a little bit of my testimony, knowing that there are other people behind waiting in line also.
I do want to say that I was invited to provide this testimony by Councilman Kenney who is the Chair of the City Council Committee on Public Property. Although I strongly oppose the sale of PGW, I appreciate the efforts of Councilman Kenney and others in City Council to 83 RESOLUTION NO. 000773 provided a public forum for discussion of PGW matters other than the shameful scandals of the last few years. This is a valuable opportunity to identify PGW's current most pressing needs. It's a opportunity to increase public understanding of the policy choices which must be confronted by PGW, and if I may say so, I believe that this is an opportunity to identify misconceptions which may prevent clear thinking about PGW's problems. Changes have occurred in PGW's situation which require new analysis and new approaches. We have a situation where PGW and the City have become particularly subject to forces not within the City's immediate control or even within any control at all. I'm referring to the new run-up in gas costs which have increased customers bills by over 50 percent and there's the transfer of jurisdiction to the PUC. That transfer has occurred under circumstances in which the City has really lost control, at least temporarily, of one of the most important mechanisms for controlling and managing the utility, the structuring and setting the rates. I want to say something which I think can never be repeated enough. Tens of thousands of 84 RESOLUTION NO. 000773 Philadelphians live in financial circumstances where they have difficulty paying for the most fundamental necessities of life, including utility service. PGW's problems may not be seen just in terms of management abstractions - cash flow, debt equity ratios, debt service coverage, average time of response to a service call. When PGW costs too much, fails to provide efficiently the basic services needed to keep row houses warm, fails to provide consumer protections which are routinely provided throughout the state, when PGW does these things or fails to do these things, it inflicts real suffering on our own Philadelphia families. As a municipality, we cannot allow ourselves to lose site of that human reality. Even with the consumer protections provided in the PGW's tariff. PGW terminated gas service to over 25,000 customers between May and October of last year, a fact that should give pause to those who would like to believe that PGW's financial problems could be resolved by more widespread use of termination as a collection device. By way of introduction, I'd like to look at the question which Councilman Kenney has squarely 85 RESOLUTION NO. 000773 paused. In recent weeks, there have been various reports that various parties have expressed interest in purchasing PGW from the City. We don't know much about what kinds of expressions of interest there have been, and so we're not really in a position to talk about any particular proposal that's been made. And as you all know, the devil is often in the details. In this testimony, I'm simply going to focus on three subjects which commonly come up when sale is discuss. One, if PGW is sold, will rates go down? Two, if PGW is sold, will the costs of PGW's low-income, senior citizen, and consumer protection programs be eliminated or reduced? And three, will a decision to sell PGW resolve the issues involving PGW that must be resolved in the next nine months? Such issues as whether the City should commit to grant back the 18 million City payment? What cost and productivity savings should be sought through the negotiations with the Gas Workers Union in collective bargaining which is to take place in May. And the issues related to PGW governance and management. On the first issue, the one as to 86 RESOLUTION NO. 000773 whether rates will go down, I think the best information suggests that if PGW were sold to an investor-owned utility, rates will inevitably go up, ratepayers will inevitably pay more.
And I think that you have heard basically the reasoning that's been presented by Mr. Kelly on that subject. There's someplace between 50 and 70 million dollars annually in savings that come from municipal ownership. And that just to stand even, any privately-owned utility that acquired PGW would have to achieve 50 to 70 million dollars in savings just to keep rates where they are or where they will be at the time PGW is acquired.
I don't mean to interrupt, but I wanted to just verify. I think Kelly at the end of his testimony indicated due to a PGW bond refinancing, that gap on the municipal bond status may be as low $25 million, not 50.
Well, he didn't explain how he arrived at that conclusion and I'm really not in a position to comment on it. I will say, however, that that's not the only study that's recently been done. PGW had an expert who has provided pre-file testimony to the PUC which 87 RESOLUTION NO. 000773 estimates about 50 million, the Luken study. And if you have difficulty acquiring that, I'll be glad to get a copy of that for you.
So I'm still working with a $50 million figure. If the figure turned out to be less than that and everything is up for debate and discussion, then that would be a figure that we'd have to look at and then we would have to make our judgments based on whether if it was only $50 million -- if it was only rather than 50, then it 13 might change the conclusions that we were draw. 14
That's fine. Everyone is 17 welcome to interrupt -- or to ask questions; I won't 18 call it an interruption when it comes from 19 Councilman Kenney. 20
In my judgment, at this 22 particular point, it does not seem that the savings 23 that could be realized, that there's really room for 24 a savings at PGW that could make up that difference. 25 And one of the reasons is that the main area of 88 RESOLUTION NO. 000773 savings that would have to be targeted are really wages and benefits. $108 million of PGW's budget goes for about or percent goes for wages and 5 benefits. That's about 33 percent of the non-gas 6 cost. PGW has already estimated that it's going to 7 try save 20 million in operating costs going 8 forward. We're not sure that it can do that. But 9 in order for an investor-owned utility that acquired 10 PGW, they would have to achieve additional savings 11 on top of even the savings that PGW claims that it 12 can make in order to break even. 13 So I think that at this point, from the information that I have, the conclusion is unavoidable that the sale of PGW is likely to result in an increase in the customer's overall bill at least in the range of 5 to 10 percent above any rate increase that would otherwise take place. And such a rate increase would be more like an increase in state and federal taxes on PGW customers because most of the process of the rate increase would flow to the state and federal government to compensate for the increased tax burden which ratepayers would have imposed upon them through the pass-through of those tax costs to the ratepayers. Increased gas 89 RESOLUTION NO. 000773 rates would increase the burden on Philadelphia's struggling households without significantly, therefore, benefiting the City's General Fund. At same time from an economic development point of view, higher rates for energy, as you know, would not stimulate the development of business in the City. On the second issue, the cost of PGW's low-income programs, I believe the sale of PGW to an investor-owned utility will not significantly reduce the cost of those programs. Discussions about PGW often include the view that if PGW were privatized, the cost of PGW's universal service programs would be reduced. I use the term "universal service" because that's the term that the PUC uses to designate low-income programs. Particularly, PGW's customer responsibility program called CRP, a program which for most participants provides gas at a discount base on ability to pay. CRP also includes a conservation works program. That's a weatherization program which through customer education and various improvements reduces consumption of low-income customers with particularly high usage. 90 RESOLUTION NO. 000773 The aim of these programs is to provide reduced rates and weatherization assistance so as, in the PUC's terminology, to assist low-income retail gas customers to afford natural gas services. These costs vary from year to year. That is, the cost of the low income program, depending on the volume of gas consumed and the price of natural gas. PGW's latest estimate of a total CRP discounts in Fiscal Year 2001 is $40 million. Let me say at the outset that neither PGW's low-income programs or the senior citizen discount are the cause of the current crisis at PGW. in fact, there is substantial expert authority to support the view that PGW's low-income program, that's CRP program, makes economic sense, that it reduces collection costs by charging low-income customers a price that is affordable and enables PGW to recover all its variable costs and something against the fixed costs of maintaining people on the system as a whole. Even if you don't agree with that theory underlying the CRP program, nevertheless, the hard fact is that these costs are unlikely to significantly change if PGW is privatized. It's 91 RESOLUTION NO. 000773 important to keep in mind that even in an investor-owned utility will still be a company regulated by the PUC.
And PUC regulations and even the Gas Deregulation Act itself require that a national gas distribution company, whether municipally owned or whether investor owned maintain at a minimum existing levels of consumer protections and policies and services to assist low-income customers to afford natural gas services. " So really what we're having and what you'll see is that the low-income program, the customer responsibility that PGW has is a program that is likely to be maintained by the PUC at the same levels as it is today. Moreover, no one should think that the PUC is going back away from that. In fact, our experience has been with PECO, for instance, in the electric restructuring, PECO's customer assistance program went from 30,000 people up to 90,000 customers with a program cost of 92 RESOLUTION NO. 000773 approximately $50 million annually. So turning to the senior citizen discount program, I want to point out to you that the sale of PGW in itself will not bring about changes in the senior citizen discount program either. When the legislature passed the Natural Gas Choice in Competition Act, the General Assembly grandfathered the senior citizen discount as of the fall of 2003. Unless Council acts between now and then, senior citizens becoming 65 after the fall of 2003 will not be able to apply for the senior citizen discount. However, the Deregulation Act also provides that any change in the senior citizen discount program is a matter to be addressed not by PGW, not by PFMC, not by the Gas Commission, but by the Philadelphia City Council.
And I'm saying if PGW were to be sold, the buyer will not have the legal authority to alter the existing senior citizen discount unless that was actually in the terms of the sale. And City Council, I believe, would have to approve the sale of PGW as it's part of the Home Rule Charter. 93 RESOLUTION NO. 000773 Did you have a follow-up question you wanted to ask me?
No. I'm sorry. We are painfully aware of that responsibility. I wasn't here when it happened, but I'm here now so...
The third point I want to make is that the sale of PGW is not a quick fix. The sale of PGW will not eliminate the need to resolve the issues facing PGW in the next nine months. We would all like to have a natural gas utility company in Philadelphia which is expensive efficient and safe and which will further the welfare of Philadelphia residential customers and the economic development of the City. Even if a decision is made to sell PGW, that sale would likely take months, if not years to negotiate and accomplish, including probably approval by the PUC. While I commend the Councilmembers for providing a forum for discussion of PGW's problems and elevating the level of public understanding, discussion of sale of PGW does not address PGW's most immediate and pressing needs. There are important problems calling out for resolution and I'm highlight just a few. 94 RESOLUTION NO. 000773 First, the City as the owner of PGW must accept the challenge in addressing the crisis at PGW, a crisis which as the Mayor himself has stated in his recent budget address has been caused by, quote, years of poor management compounded by a monumental computer system failure, unquote. The most basic need is for the various parts of PGW governance to work together in the fulfillment of the City's ownership responsibilities.
It's easier said than done, but when we look at Los Angeles, for instance, as form PUC Commissioner Hanger pointed in a recent article, you look at Los Angeles and you say there's Los Angeles with all the chaos in California, Los Angeles is sitting pretty because it has an electric municipal utility which has shielded the citizens of Los Angels from all the problems that have been experienced in California. And I say to myself, are we -- what's the matter with us in Philadelphia that we can't achieve the same things that can be accomplished here in Los Angeles. Certainly, we're not a second class City. And certainly, we have the 95 RESOLUTION NO. 000773 same resources in terms of intelligence, in terms of civic spirit, in terms of commitment that they have out there. And so I don't buy the notion that somehow or another there's something about Philadelphia that makes it just allergic to running a gas utility efficiently.
Not to interrupt again. I've done this a couple times. But the one thing we're missing that Los Angeles has is population. That's one of our major problems I think in this whole issue of both gas issues and city service issues. If I had the population of LA, I could do a lot of things with gas and schools and others that we simply can't do because of the continuing reducing size of our tax base and our ratepaying base.
Well, I think that is a factor, although I think it can be exaggerated. The reduction in the rate base of PGW has been relatively small over the last decade. It's still significant and we'd like to see it expanding because the more customers you have with a constant network, usually the less burden on each customer or maintaining a network as a whole. 96 RESOLUTION NO. 000773
But if we've lost, say, 200,000 people for argument sake in the last eight years, that would probably represent if we did four on average in the house, divide that and that will tell you the number of customers we lost which I would think is substantial and they're probably paying customers, people who have the ability to pay at least.
That's right. I think that in recent weeks we've seen the City taking positive steps in that direction, in the direction of acting as a real owner and accepting its ownership responsibilities. I think that the City Council's action in providing the $45 million advance was one of those steps. And I strongly disagree with those who say that the City will not get this money back. I think that the City has the capacity to assure that the Gas Works is provided a leadership structure and takes the steps necessary to have the efficiency and productivity which would guarantee that this money would be paid back. And I think we come into -- just to comment on what was said before by Mr. Thornburgh, I think one of the problems has been that people have 97 RESOLUTION NO. 000773 thought, well, if we appoint a competent management, that's all that we need to do. The problem is not just a matter of getting an competent management, but it's also supporting that that management in a way which really is constructive in clearing the way for that management and protecting management from having perhaps some of demands which have been on managements in the past. It's not a magic thing to appoint some people and throw them into a situation and then say, okay, guys, you're the professionals, get to work and don't expect further support. I think really we've reached a stage at PGW where we have to recognize that PGW is not a low maintenance operation on the part of the political establishment in Philadelphia. That if we are going to make the commitment to not to sell PGW and to hold on to PGW, it's going to require continuing cooperative efforts between a professional management and essentially the owner, which is the City of Philadelphia. The second issue of the three issues that I think we have to face is the allocation of the economic burdens created by prior PGW mismanagement. Is the City going to continue to 98 RESOLUTION NO. 000773 insist that ratepayers pay through rates for the full cost of this mismanagement? Or will the City resolve to grant back the $18 million City payment for this year and as necessary until PGW gets back on its feet? And I want to say here, I don't think that anyone can responsibly say that the General Fund indefinitely should be subsidizing PGW, but the fact is, for years, PGW has been subsidizing the General Fund to the tune of $18 million a year. It's only reasonable to think that in this transition period where essentially the City was caught and where the governance structure is unwieldy, that the City is going to have to recognize that -- or at least I urge the City to recognize that you just can't get the million 18 every year, and the thing to do is to try to get PGW into a situation where it can reliably provide that 18 million but that that may not be possible in the short term. The third issue involves upcoming labor negotiations of PGW. What will the City attempt to achieve between now and May in its negotiations of a new collective bargaining agreement with the Gas 99 RESOLUTION NO. 000773 Workers Employees Union, an agreement which should lay the foundation for productivity and cost savings which are absolutely critical to the survival of a municipally-owned utility. This is a situation which, again, calls for a full political support of the political community, some kind of consensus as to what needs to be done. Too often, I think, in the past we've had situations where labor management decisions have ended not being made really in the interest of the long-term survival of PGW as a municipally-owned entity. A fourth issue concerns future PGW governance, management, and strategic planning. How should the City approach the need to obtain professional non-interim management for PGW, and through the development of a strategic plan, set a direction which takes the most important contingencies into account. That's not an easy thing to do.