Committee Hearing, October 11, 2000

COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, 10/11/00 11:00 a.m. - - - BILL 000583 - Authorizing amendment of PFMC Agreement to provide for temporary change in amount of temporary financing that the City may provide to PGW. . . BILL No. 000590 - Making certain additional appropriations needed to meet unanticipated emergency created by a cash flow crisis at PGW. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN JANNIE BLACKWELL, V. Chair COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2 10/11/00 - WHOLE COMM. - BILLS 583, 590 I N D E X Joyce Wilkerson, Mayor's Chief of Staff . . . Tom Knudsen, Interim PGW CFO. . . . . . . . . 6 Barbara Bisgaier, Public Financial Management 16 7 Joseph Bogdonavage, PGW Director of . . . . . 23 Budget and Financial Forecasting 8 Councilwoman Marian Tasco . . . . . . . . . . 30 9 Janet Parrish, Senior Hearing Examiner. . . . 31 10 Gas Commission Janice Davis, Phila. Director of Finance. . . 41 3 10/11/00 - WHOLE COMM. - BILLS 583, 590 P R O C E E D I N G S

Good morning, everyone. I do apologize for the delay. This is a continued public hearing of the Committee of the Whole regarding Bill No.'s 583 and 590. Mr. McPherson, would you please read the titles of the bills.

Bill No. 583, an ordinance authorizing the amendment of the Philadelphia Facility Management Corporation Agreement to provide for a temporary change in the amount of temporary financing that the City may provide to the Philadelphia Gas Works, under certain terms and conditions. Bill No. 590, an ordinance amending an ordinance approved April 11, 2000 (Bill No. 18 000005) adopting the Operating Budget for Fiscal Year 2001 by making, in accordance with Section 20 2-301(a) of the Philadelphia Home Rule Charter, certain additional appropriations needed to meet the unanticipated emergency created by a cash flow crisis at the Philadelphia Gas Works.

I think we ought to have members of the Administration 4 10/11/00 - WHOLE COMM. - BILLS 583, 590 approach the witness table, please. (Administration witnesses come forward.)

Good morning. Again, I apologize for the delay. Miss Wilkerson, is there anything that you would like to add to your previous testimony?

Over the course of the last several days, we've been meeting with a number of Councilmembers and have touched on many of the points that I would normally make today. I think that I would like to emphasize that the scrutiny that the company has come under in the course of the last couple of weeks has actually been a real positive step forward, I think, as difficult as it's been some of the time. The company has made enormous strides over the course of the last several months. We're very proud of the fact that we've managed to rebuild substantial portions of the IT system, that we have 30,000 customers -- most of our customers are now in the system for the first time in over 15 months, that we've hired additional employees for the Call Center, trained employees for the Call 5 10/11/00 - WHOLE COMM. - BILLS 583, 590 Center, got the parts and labor plan working for the first time in a year. We've already enrolled over 60,000, realizing over $5 million in cash to the company. We've begun making numerous strides in trying to restore the credibility of the company and welcome the kind of involvement that the company now has as we move forward in trying to transition through regulation, and so have been encouraged by the challenging scrutiny that the company's received. I think this winter is going to be very difficult for the company. We are facing enormous challenges, in part due to factors beyond our control. We have a proposal pending in front of the PUC that would increase our GCR by over $97 million. It's going to create hardship for many. We're putting together programs now to try to alleviate some of that hardship. We also have pending in front of the PUC requests for based-rate relief, and while it's difficult to even ask for that, it's something that is critical if the company's going to succeed in the years going forward. 6 10/11/00 - WHOLE COMM. - BILLS 583, 590 And I just want to, you know, reiterate that we appreciate, you know, the kind of involvement that the company's had. I think it's that kind of involvement that is going to sustain the company in the coming years. Yesterday, as people know, the company received a decision from the PGC, approving the $45 million loan request. There were recommendations to City Council that it impose a number of restrictions. The Administration embraces virtually all of those restrictions. They require that the Administration create segregated funds, that there be restrictions on how the money is withdrawn. It would require that the Finance Director certify to any request to withdraw from the segregated account. It would require monthly reports back to City Council, to the Finance Director and also the Gas Commission. We support that, as well as a more regular reporting mechanism on the progress that the company's making on some of its management goals. The one condition that the company and the Administration find troubling is the requirement that would link the draw of the second 7 10/11/00 - WHOLE COMM. - BILLS 583, 590 25 million to a submission and approval of a five-year strategic management and operating plan. It's our position that in the months going forward, the company's financial condition is, at best, precarious and that that kind of linkage creates a difficult burden. We support the goal of trying to -- of developing a five-year plan. I think it will focus the activity and the resources of the company in moving forward. It's just at this time, when the company is as pressed as it and operating on the kind of shoe string that it is with so many contingencies, we feel that it will be difficult to have that, you know, level of flexibility removed, and would ask that those two requirements be uncoupled. I think that, you know, we have been asked to provide additional information with respect to other kinds of financing mechanisms, and we're prepared to -- you know, we've done some communicating with Councilmembers.

If there are individual questions about those alternative mechanisms, we're prepared to answer those questions. 8 10/11/00 - WHOLE COMM. - BILLS 583, 590

When do you think a five-year plan would be available?

The company currently has the outlines of a three-year strategic plan. We have been focusing on the period that would lead us into deregulation, and that does two things: it takes us up to the point at which the company's way of doing business may be altered fundamentally also; it also enables us to focus on the problems that challenge the company right now. When this current administration took over, we encountered a company that was at the point of collapse. We had no way of generating financial statements for the company. We were unable to bill between 30 and 50 thousand of our customers. We had no way of logging in customer requests for the parts and labor plan. And at the same time, we had people leaving the company at an unusually high rate. We have been focused on trying to stabilize a company that was in crisis and finds itself close to the point of collapse. And so if you look at the outline of what it is that we want to do with our strategic plan, we are focused on getting the customer 9 10/11/00 - WHOLE COMM. - BILLS 583, 590 service up to an acceptable level. We are focused on trying to restore baseline financial condition of the company, and chose to limit our horizon -- our management and planning horizon to three years. The company has generated five-year financial plans. Those, I believe, were submitted to the Gas Commission at the time the FY 2001 budget was committed. But, you know, we expect to have a full, you know, plan. You know, we have a draft -- we can have a draft of our three-year plan circulated by the end of November. The full plan could be available, you know, with accurate information by June. As you know, the PUC will entertain a base-rate case from the company. We'll be filing that no later than January 1, 2001, expect a decision in the base-rate case by approximately June, I believe -- is it June? By June 2001. It would be at that point that the company will really know what its financial condition is likely to be in the years moving forward. Before that, there is a lot of speculation in our numbers. 10 10/11/00 - WHOLE COMM. - BILLS 583, 590

Thank you. Are there any questions from members of the committee? Are there any questions from members of the committee? Oh, I'm sorry. Councilwoman Krajewski's light is not on. There we go. Councilwoman Krajewski.

Thank you. Joyce, can you just state for the record where you came up with the amount of $45 million?

Pull that mike lower, the neck of your microphone. Just pull it down.

Mr. DiCicco's very good at this.

Just pull it down.

Yes, thank you. Can you just state for the record where the amount of 45 million originated?

Yes. My name is Tom Knudsen. I am Interim Chief Financial Officer for 11 10/11/00 - WHOLE COMM. - BILLS 583, 590 PGW. To respond to your question, Councilwoman, we have done any number of proforma projections of company operations. And under what we consider the most dire circumstances, the 45 million is an amount that meets our needs and gives us a slight cushion in the two critical periods of the coming fiscal period. So that 45 was a number that we determined based upon analysis.

So it could be more or less?

Well, it all depends on what the cost of gas -- what the gas markets will require of us. But we have assumed, you know, a fairly pessimistic point of view in our projections, and the 45 million addresses those needs.

What exactly will the 45 million be used for? Will it be gas, will it be payroll or what?

Yes, it will be used to meet our purchases --

Excuse me. Is 12 10/11/00 - WHOLE COMM. - BILLS 583, 590 there any limit as to the loan?

As to the use of the loan for particular purposes, I don't believe there is. But basically, we would use the loan to purchase gas. That's what we need it for.

Strictly for gas.

Well, I don't want to say strictly for gas because cash is cash, and we may have a need that overlaps with our gas purchases, but that is principally the reason why we are here, is the need to finance our gas purchases.

Well, the big question is, how will the loan be paid back?

I'm sorry?

How will this loan be paid back?

The loan will be paid back from the receipts from customers who we will be billing for the gas that they will be receiving at the higher -- at these higher costs. The problem that we have is that we must purchase the gas before we can bill and collect from our customers. So the loan will be 13 10/11/00 - WHOLE COMM. - BILLS 583, 590 paid back immediately -- or more accurately, we will be putting the funds back into this reserve or escrow account that we will be creating as we go forward.

I think there's also one other piece that we have in all of our documentation. The company has to get out of the commercial paper market for a five-day period in -- or show the capacity to get out of the commercial paper market for a five-day period in June. We will be drawing down funds from the loan in order to meet that test. But we anticipate that any use of the funds will go through the process that was recommended by the Gas Commission so that the company would have to file a certificate that would articulate the basis for the request. And that would have to be approved by the Finance Director before the funds would be made available to the company.

You know, PGW's argument that it needs the 45 million right now in case an emergency rises when Council is out of session, what kind of emergency would cost 14 10/11/00 - WHOLE COMM. - BILLS 583, 590 $20 million in weeks in the amount of time that Council is out of session?

It isn't that it 5 necessarily would be 20 million, but the restriction right now is that we would get 25 million prior to the filing of a five-year plan and $20 million after it was judged acceptable by the Gas Commission. At the present time, we will have a substantial need for funds in January. We have two requirements in January: one, we must pay our December gas bill; and, two, we have a very large $25 million payment that is due as a debt service payment. We pay interest and principle on our debt in January. The issue, then, is to what extent, if we were to experience substantial run-up in the cost of gas in the November and December time frames. We might not have -- or the $25 million might not be sufficient to meet that need. So it isn't that we necessarily would need the full 45, but we may need well in excess of 25, maybe 30, maybe $35 million. That would be the circumstance and the uncertainty that we're 15 10/11/00 - WHOLE COMM. - BILLS 583, 590 dealing with.

I just have one more question. If the City waives the $18 payment, how would this affect your request for rate increases? Will PGW then request less of an increase, or will the company still be requesting the same amount?

It's our intention to request the same amount. We view the $18 as a contingency, as a -- (Interruption; sound system failure.)

Excuse me, excuse me, please. The stenographer could not hear you.

We consider the $18 million as a contingency provision only. We are asking for the full amount that we need to operate the company in our filings before the PUC.

Thank you.

You're welcome. The Chair recognizes Councilman Ortiz.

I -- I don't have -- I just have a gut feeling about all of this, that 16 10/11/00 - WHOLE COMM. - BILLS 583, 590 $45 million, this is taxpayers' money. And there are really no assurances that it's going to get paid back. When a bank gives a loan, there are usually penalties that are included in the loan repayment plan, that if you don't meet the scheduled payment, you will get penalized. The ratepayer here gets a huge rate increase, the taxpayer has to give up $45 million, so the taxpayer's getting it from every side, without any reassurances. And we all -- I think everybody on this floor here understands that PGW has been mismanaged and needs some money. I just have not yet been convinced that City Council and the taxpayers have to be the source of the bailout. I just have not been convinced because I have not been presented with any documentation that will give me the reassurances that we should be the bailout banking resource for PGW. I have not seen anything yet, I have not been told anything that is convincing that we're not just putting good money down a black hole. I think we're in a situation in which nothing has changed from the 17 10/11/00 - WHOLE COMM. - BILLS 583, 590 last time you were before us. And at this time, I just do not know, I have not been convinced why should we enter into the loan business. I leave that to First Union and Mellon and those other banking institutions. A plan has not been presented that is convincing, a management plan has not been presented, a priority, a repayment plan, nothing has been presented to this Council to give this Council and the taxpayers of the City any confidence that any action we take here is going to have any effect upon changing the culture of PGW and any effect in bringing better service to the rate payers of the City. So I -- I wait to be convinced during the next hour or so, Madam President, but right now, I am not convinced at all that we should be the banking resource for $45 million.

Councilman, may I respond to your point with two statements or two comments. One is that we have gone to the banks, or PGW has gone to the banks historically. They had a $100 million -- or we had a $100 million 18 10/11/00 - WHOLE COMM. - BILLS 583, 590 line of credit. As few as three years ago or four years ago, we had only 0 to $15 million in that account; in other words, we had $85 million to draw upon and operate the company. The problem is that over the last three years, three and a half years, we've experienced substantially warmer-than-normal winters, and we have financed the deficits of the company with borrowings from the short-term debt instrument that we had available to us. So we find ourselves essentially out of the banks at this point, without recourse, for a variety of reasons of which we've --

Are you saying bank are refusing to lend you money?

We don't have recourse to the banks right now.

I didn't ask that question. Are you saying that banks are right now denying you loans? (Witness comes forward.)

I'm Barbara Bisgaier from Public Financial Management.

Speak into the 19 10/11/00 - WHOLE COMM. - BILLS 583, 590 microphone.

I don't have to look at you?

That's all right.

Sorry. The principal lender to the bank right now is Morgan Guarantee Trust Company, and they will not extend further loans to the company without some other assurance that it could be paid back.

So the bank wants assurances that it could be paid back. The City doesn't want any assurances that it can be paid back, we just take it on faith.

No. 16

And we can give $45 million without really no assurance that it can be paid back.

Well, the bank has already loaned $100 million. (Unintelligible, parties talking over each other.)

I'd just like the (unintelligible) that the bank use that they don't want to lend any money because there's no 20 10/11/00 - WHOLE COMM. - BILLS 583, 590 assurances that it can be paid back. This is the taxpayers of the City of Philadelphia who are loaning $45 million, not City Council. It is the taxpayers of Philadelphia who are going to get hit with a huge rate increase. And the banks are asking for assurance and you cannot give the bank assurances, but we've got to take your word.

I think that -- if I can respond. First of all, I don't think that we're simply asking you go take our word. We are trying to work with the City Council, with the Gas Commission, with the Controller's office, and also with the Administration to set up a mechanism that limits the disbursement of the funds, you know. As a first point, the company does not have the option of simply coming to, you know, and tapping into the $45 million every time it wants. There is a process set up that would require that a reason be articulated, that it satisfy the Director of Finance, that there is in fact a legitimate need for the funds, and there will have to be a representation about how the funds will be 21 10/11/00 - WHOLE COMM. - BILLS 583, 590 repaid. We have circulated to members of City Council cash flows that make fairly pessimistic assumptions about what's likely to happen. We assume an interim rate increase, I believe, of $25 million. We assume the cost of gas going up to $160 million higher than what it is currently. And we also have cash flows that assume warmer-than-normal winter. And under all of those scenarios, we indicate that the company will be paid back, you know, depending on exactly what scenario you look at. Sometimes the company is, you know, shows balances at the end of the year, but there is no 16 scenario that we've run that show the City or the taxpayers being left high and dry. And we, you know, pursuant to the requests that have been made, we've also gone to lending institutions and asked, are there any conditions under which you would loan money to the company? We've been told yes, there are conditions, but they require that the City guarantee the debt. You know, the condition of the company 22 10/11/00 - WHOLE COMM. - BILLS 583, 590 is dire and unfortunate. We find ourselves in a position of not having a lot of alternatives. What we are going through now is the result of years of improper management of the company. It's not a situation anybody wants to find themselves in.

Are you finished, Councilman?

Yes.

Thank you. We were having some trouble with our screen. All Councilmembers that want to be recognized, please press your button again so that we will know who wants to be recognized. Thank you. Councilman Goode.

Thank you, Madam President. Under Bill 583, it's my understanding that we are amending the Philadelphia Facilities Management Corporation agreement to -- for them to borrow up to $45 million. That is a changing amount from 20 million, I believe?

Mm-hmm. 23 10/11/00 - WHOLE COMM. - BILLS 583, 590

What is the process in the past for allowing for that financing of up to million? Was there a requirement for a 5 five-year financial plan, was there a loan 6 proposal? What sort of mechanism was used to 7 provide accountability, or is used under the 8 current agreement? 9 (Witness comes forward.) 10

Good 11 morning. Kindly identify yourself for the 12 record. 13

I'm Joseph 14 Bogdonavage. I'm the Director of the Gas Works. 15 Councilman, to respond to your 16 question, I'm not real clear on all of the 17 particulars, but in the early '80s, the Gas 18 Commission, along with the Director of Finance, 19 was able to loan, with a City Council resolution, 20 the $20 million loan to the Gas Works, which, again, was in lieu of some working capital problems that we had in the early '80s.

And what sort of financial documentation was submitted to Council? Was there a loan financing proposal, was there a 24 10/11/00 - WHOLE COMM. - BILLS 583, 590 five-year financial plan? What sort of documentation was submitted in order to enable Council to make a decision on up to $20 million?

I don't know the particulars at hand, but I think it was basically a City Council resolution.

Okay. So in other words, in the past, it's reasonable to say that City Council went along with the financial need expressed by the Gas Works.

That's correct.

And it's reasonable to say that if we were to approve $25 million today as an initial advance in financing, that we would be approving that without a five-year financial plan, we'd be approving that without a loan proposal, we'd be approving that essentially without any requirements that you can state that's needed to approve that $25 million.

The mechanism that we would anticipate would have the company articulating a need for the money. The Finance Director would review to verify that there is that need, you know, would review the cash flow 25 10/11/00 - WHOLE COMM. - BILLS 583, 590 situation to determine whether or not, you know, what the likelihood of repayment is. So, you know, we would anticipate setting up a mechanism that would have more checks and balances than previously.

So exactly City Council, that is, recommending that we have a mechanism for the second million but not for 10 the first 25. 11

No. I think there is 12 broad support for checks on the disbursement of 13 the entire amount. In talking with people, you 14 know, from the Administration, in talking with the 15 City Controller and most of the Councilmembers 16 here, nobody is in favor of simply writing a check 17 in the amount of 45 million to the Philadelphia 18 Gas Works. 19 I think that all of the money -- you 20 know, everybody wants to see all of the money disbursed pursuant to a very intentional and thoughtful process that would require that the financial officer of the Gas Works submit a certificate for review by the Finance Director, you know, and that, you know, tat she would have 10/11/00 - WHOLE COMM. - BILLS 583, 590 to be satisfied with the proposed use of the funds, would review the repayment proposal. We have been asked to provide reports back on a monthly basis so that members of City Council, the Gas Commission, the Controller, and the City can all track, you know what's going on not just the $45 million loan but with the City finances overall so that at any point, you know, funds are disbursed, you know, folk have their eyes wide open and understand the transaction and the context for it.

I understanding the discussions have taken place, I understand the $45 million is definitely needed, I understand that there probably is an overwhelming majority of Council that's ready to support $45 million. What I'm saying is that under the current agreement, we're already allowed to advance the 20 million --

Mm-hmm.

-- without any of the financing mechanism in place other than City Council resolution. In the past, it seems this Council prepared to do at least 25 million, 27 10/11/00 - WHOLE COMM. - BILLS 583, 590 without any new financial mechanism today.

Mm-hmm.

But it wants to require a new financing mechanism proposal, a five-year financial plan for the additional million. 8

That's correct. 9

What would be your 10 recommendation in terms of what is needed for the 11 25/20 or 45 million? 12

I think it is 13 appropriate to have oversight of the disbursement 14 of funds. I think it's appropriate for the 15 company to have to articulate a specific reasoning 16 for the funding. I think it's appropriate for the 17 Finance Director to control the disbursement of 18 the funds. 19 I think, you know, as difficult as some 20 of the, you know, some of the discourse and the scrutiny is, I think it is appropriate for the City to pay close attention to what's going on with the company and to ask the difficult questions. I think that, you know, we got, you know, into the situation we are in because there 28 10/11/00 - WHOLE COMM. - BILLS 583, 590 hasn't, you know, in part, because, you know, the oversight hasn't been what it ought to be, you know, and when you call for the oversight, you know, you got to deal with the, you know, with the fact that it makes life more difficult. But I think in the long run, we will be a better operated company. In the long run, the City will have more confidence in how the company is operated. And in the long run, some of these controls, you know, will inure to the benefit of all sides. I think that the challenge and the question is, you know at, what point are there so many hurdles imposed that you really do limit the company's ability to respond flexibly and aggressively at a time when the market is less predictable than it's ever, you know, been in the last years, at a time when the company has less 20 resources to draw upon perhaps than ever before, at a time when the company is being stretched. Last week, we were testifying in Harrisburg, the Gas Commission, City Council; at the same time, we're trying to fix the computer system, you know, work on the Call Center operations. That's just 29 10/11/00 - WHOLE COMM. - BILLS 583, 590 the reality of running PGW, you know, because of the state in which we encountered it. So I think that reporting and monitoring and supervision is good and constructive. I think that there's a point at which you jeopardize the company's ability to function and respond in a very unpredictable environment.

So this bill 11 actually just amends the amount that we can finance, and the request is for 45 million. Is it your understanding that Council, through informal conversation, is going to approve that 45 million? Or is it based upon the financial documentation submitted to Council?

That would be my hope. You know, the Administration's request is for the approval of the 45. The Gas Commission has approved it. My understanding is that there's some support for the loan to the company, that there is concern about the kind of control over the disbursement of the funds and about the reporting that takes place.

Madam President, can 30 10/11/00 - WHOLE COMM. - BILLS 583, 590 I ask a request of the Gas Commission? Or should I wait till after people question the Administration?

Councilwoman, are you agreeable?

Yes.

I just want to know where the 25/20 figure came rather than doing 30/15 or a 35/10. What is the rationale behind the 25/20?

The hearing examiner came up with the recommendation. Janet Parrish is the Hearing Examiner for the Gas Commission who took the testimony and made the recommendation to the Commission, which the Commission adopted. And a point of information for the Councilmember. The agreement requires that the request for money to City Council or from the City alone has to be approved by the Gas Commission. So when they loaned the $20 million last time, we don't know what the conditions were or --

My question is really, why a 25/20 rather than 30/15 or 35/10? 31 10/11/00 - WHOLE COMM. - BILLS 583, 590

I'm going back to your first --

It's a simple question: where did the number come from?

All right. Janet Parrish come forward to the table. (Witness comes forward.)

Please identify yourself for the record.

I'm Janet Parrish, Senior Hearing Examiner for the Philadelphia Gas Commission. Councilman, to respond to your question, the million came directly from PGW's 16 cash flow scenarios, which we had requested that 17 they run in order to prepare ourselves to review 18 the request. And in their worst-case scenarios, 19 what was shown that $25 million was the amount 20 that would be needed in the month of January 21 2001. As Mr. Knudsen has previously indicated, a 22 large debt service payment of about $25 million is 23 due on January 1, 2001. They would need 24 negligible amounts, if anything, in the months of 25 November based on their own scenario. 32 10/11/00 - WHOLE COMM. - BILLS 583, 590 So that's the basis for the $25 million figure. It was something that appeared to us would be a prudent amount that would get the company through the initial period. And the 45 million, according to their own scenarios, is not required until June 2001, at which time the commercial paper must be paid down, as was indicated.

So is it your opinion that they need $25 million and an additional million when? 13

$25 million as of January 14 2001, or, as I stated in my recommendation, no 15 later than December 31 of this year, and 16 $45 million in the month of June 2001. 17 And that is based on -- let me just add 18 if I may a worst-case scenario. A worst-case 19 scenario means they only receive $25 million of 20 the 52 million they've requested from the PUC in interim base rate relief. It assumes a worst-case scenario on increased gas costs that's an increase of $167 million in the gas cost rate, not the 97 million which the company has actually filed for to date. And it also assumes a 10 percent 33 10/11/00 - WHOLE COMM. - BILLS 583, 590 warmer-than-normal winter. So those were some pretty key assumptions that we thought gave us pretty much of an outside margin on what the company's needs would be.

So is it your opinion that they need million by December 31st 9 or January and 20 million by June, that they do 10 not need 45 million -- 11

No, they need 45 million 12 in June. In other words, what they've indicated 13 to us is once they draw down the $25 million in 14 January, that that amount of money would 15 subsequently be repaid to the fund over the next 16 several months as the cash flow started to turn 17 positive. And Mr. Bogdonavage, I think, can 18 confirm that. 19 So by the time you got to June, you 20 would be again in the position of having the 21 45 million in the restricted account available to 22 be drawn down. 23

So if we're 24 providing 25 million by December 31st, we really 25 don't need any other authorization to provide the 34 10/11/00 - WHOLE COMM. - BILLS 583, 590 20 million under the current agreement; is that correct?

The only thing that would have to happen is you'd have to have the five-year plan filed and approved as --

That's not a part of the current agreement.

I'm not sure I understand what you mean by "the current agreement."

If we were to approve the million that is needed by December 13 31st, another 20 million could be authorized under 14 the current agreement without -- 15

Right. I suppose 16 theoretically, you could authorize it separately, 17 but that's a little different -- 18

I'm here to discuss 19 a bill. 20

Right. 21

Not back room 22 maneuvering and discussions taking place among a 23 number of different people and separate different 24 processes that have taken place. I'm here asking 25 a technical question about the bill. 35 10/11/00 - WHOLE COMM. - BILLS 583, 590 The bill here really is just actually upping the amount of money to $45 million, but there is some proposal on the table to do and 5 20. Under the current agreement, we are 6 authorized just by City Council resolution to do 7 20. If we're going to do 25 today, is there 8 really anything else needed under the current 9 agreement to do an additional 20 at any point 10 other than a City Council agreement? 11

Point of order, 12 Madam President. 13

The Chair 14 recognizes Councilwoman Tasco. 15

I tried to answer 16 your question. 17 Even on the 20 million that Council 18 would approve by resolution, the request has to be 19 made through the Gas Commission. The Gas 20 Commission, during that course of discussion, 21 could still put restrictions on the 20 million. 22 It doesn't stop you from adding restrictions to 23 it. Just because you have the ability to loan the 24 PGW the money from the City, the request has to go 25 through the Gas Commission. 36 10/11/00 - WHOLE COMM. - BILLS 583, 590

But there are not current restrictions under the current agreement.

The --

The restriction is million. 7

The restriction is 8 only -- 9

The restriction is 10 on the dollar amount. 11 (Inaudible, parties talking over each 12 other.) 13

The restriction is 14 on the dollar amount. It doesn't mean that we 15 couldn't have amended it to -- 16

We could, but I'm 17 saying, under the current agreement, the only 18 restriction is dollar amount. 19

And prior approval of the 20 Finance Director.

And prior approval of the Gas Commission.

And the Gas Commission, that's correct.

Thank you very much. 37 10/11/00 - WHOLE COMM. - BILLS 583, 590

Thank you. The Chair recognizes Councilman Nutter.

Thank you, Madam Chair. I wanted to go through a couple of items. There was discussion when we were together last week about alternative funding proposals, and I'd like to at least get on the record some finality to at least one of the ideas. Last week, we ended up in some discussion after we had recessed, and I wanted to get the final details on the alternative idea, which was increasing the commercial paper program cap amount and having the City provide its full faith and credit to give greater reassurance, whether to the Morgan Guarantee or to any other bank. And I'd just like to basically put a period at the end of that sentence and have you put on the record what you found out, what you came up with, what some of the pluses and minuses are, and what your final recommendation is with regard to that particular proposal.

Councilman, we had a preliminary discussion with Morgan Guarantee Bank 38 10/11/00 - WHOLE COMM. - BILLS 583, 590 about their willingness to extend the amount of their letter of credit by approximately $50 million, which they were willing to do. If the City guaranteed it, that would allow the increase in the commercial paper program that PGW currently operates. When we reviewed that concept with the Law Department, they have informed us that because PGW is part of -- is the City and there's not a distinction between PGW and the City, the City cannot guarantee, and I'm speaking for the Law Department here, so forgive me for not being totally technical about it, but the City cannot guarantee its own debt, and the commercial paper would be considered debt of the City in that scenario. Without the formal action of Council to incur a general obligation liability, and it's the preliminary opinion of the Law Department that that would rise to the level of a ballot question before that guarantee could be placed on the commercial paper. So while it's technically doable, it's certainly not timely doable.

And what would such 39 10/11/00 - WHOLE COMM. - BILLS 583, 590 a question say?

"Shall the voters authorize the City to enter into a general obligation pledge for $50 million of a loan taken out by PGW?"

Well, phrased that way, chances are probably. . .

Small?

Other than that, how did you like the (inaudible). All right, so you have a -- basically what you've gone through is, you approach the banks, they said, yes, under these certain conditions, the City could do that, and now we've run into this new fairly significant hurdle of, Oh, and by the way, you have to get a ballot question approved by the voters in order to provide the support.

That's correct.

Okay. And what did Morgan Guarantee have to hang its hat on for the upwards of $97 million that's outstanding the debt? Suppose the company doesn't pay, what to they get, what happens? 40 10/11/00 - WHOLE COMM. - BILLS 583, 590

If the company doesn't pay Morgan, Morgan becomes a secured creditor of the company, and they're entitled to be repaid on a schedule that's been already bargained ahead of time with them out of the revenues of PGW. The only source of repayment to Morgan is PGW revenues.

And so under that payment schedule or that kind of workout schedule, they're not willing, short of a City guarantee, to extend any more commercial paper to PGW?

That's correct.

Thank you. Tell me a little bit about the repayment schedule for the 45. It was not crystal-clear to me as to -- the amendment in the bill, the section of the management agreement that's being amended talks about, Provided further, however, that during the period June 30, 1981 through June 30, 1983, and now the new language, and the period September 1, 2000 through August 31, 2002, such advances may exceed $20 million in an amount that shall not exceed $45 million in amount. 41 10/11/00 - WHOLE COMM. - BILLS 583, 590 Does that mean that whatever loans are made, you have the $45 million, and whenever they're drawn down, that the final repayment of any drawn-down loan has to be by August 31, 2001? Or does it mean that you get to draw down during that time period and you get to repay for any two years' amount of time from the day of the draw-down? Don't everybody jump to the microphone at once.

We're anticipating, Councilman, that it would be drawn down during the period to August 31st, with the repayment 15 months from the point of the draw-down. 16

I'm sorry, Madam 17 Finance Director, I was slightly distracted by 18 another party. Could you give me the beginning 19 again? 20

We're anticipating that the 21 draw-down will be until the August 31st date, but 22 the repayment would be 24 months from the date of 23 draw-down. 24

Well, couldn't that then take you past August 31, 2002, depending on 42 10/11/00 - WHOLE COMM. - BILLS 583, 590 when the first, second, third, fifth draw-down was made? I mean, I thought I heard you saying basically two things. You expect it to be August 31, 2000 m, but it is two years from when you draw it down. I mean, it sounds like you want to have it --

Yes, there's a 24-month clock on each initial draw on each time there is a draw.

I understand. So let's say they take the million that they need 13 for January in January 3 million of 01. You get 14 two years, and it takes you to January of '03. 15

Yes. 16

Is that correct? 17

Yes, sir. 18

And if we took 19 another -- if we took the balance sometime in '02, 20 June, you get to pay that back in June of '04, right?

Yes.

All right? This was -- I mean, I know a lot of things have possibly changed since we were last together. The 43 10/11/00 - WHOLE COMM. - BILLS 583, 590 concept as presented was, it's a two-year payback. We've now, by this very simplistic example, gone into a four-year payback. Which is it?

It is a 24-month draw-down. In your example where there would be a draw sometime in '02, I think at that point, given what we have -- the mechanisms we have for reviewing the company's position, if it requires -- if they did not require a draw in that long a period, I would have to question their need at that point for that draw and those circumstances, because we are addressing a short-term problem of the company; we are not here to address a two-year problem of the company. So if the company is still making draws in '02, then we have not gotten the kinds of rate relief, and there are other issues that the company will be dealing with at that point.

Well, what is your anticipated draw-down schedule?

We're anticipating that by June of '91, the company would have drawn the full 45 million from the City. 44 10/11/00 - WHOLE COMM. - BILLS 583, 590

Which means that no 3 matter when it's drawn or how many times -- or two transactions, five transactions, under that scenario, you expect that all payback would be by June of '03.

Yes, we do.

Okay. So, I mean, to kind of keep it all in a tighter box, does it maybe make some sense to set in this ordinance a final date by which either all funds must be paid back or all funds must be borrowed and to get -- I mean, I understand your position on, Well, if they're doing that and if they haven't drawn down, if that doesn't make any sense, blah-blah-blah -- (to the stenographer) and I don't know how you're going to take that last statement down. But, I mean, does it make sense to make the box either smaller, tighter, more firm so that certain things have to happen in a defined period of time and the paybacks have to be within a defined period of time and any draws have to be within a defined period of time, as opposed to, you know, something that could extend for a four-year period? 45 10/11/00 - WHOLE COMM. - BILLS 583, 590

Councilman, I don't think that that would be a bad way of tightening it, to put a final draw date, as long as we adhere to what their scheduled draw-down is, and if it's a June 2001, then have a date certain, a June 2003 as the final pay date.

So you would -- in this broader discussion, you would give some consideration to that, you might have some language to go with that, and we could go with that as --

Yes, sir.

Thank you. Let me go back to the earlier question. The concept -- and I don't continue to push for this because of any particular pride in authorship or anything, I'm still learning. My only experience with ballot questions usually involve capital expenditures, which usually involve 30-year repayment schedules. We put our -- I mean, we have -- just the other week, we had the wonderful opportunity to talk about, you know, a small recreation center down at Broad and Patterson. And so the voters 46 10/11/00 - WHOLE COMM. - BILLS 583, 590 will be faced with $162 million ballot question. We've done these questions from time to time. I have no familiarity with a general obligation short-term debt being a ballot question.

If we borrowed under that scenario, there is something else that would be triggered. In that instance, it would become working capital instead of a capital borrowing, and we couldn't borrow on a tax-exempt basis for working capital. It would then come out of the realm of capital, as you explained, and it would be an operating loan. And operating loans don't usually qualify for tax exemption. So in that scenario --

But I thought we weren't making the loan, just providing the guarantee. PGW's getting the loan.

But it would become our loan because we could not guarantee our own debt. At least that's the explanation we've gotten from the Law Department.

Councilman, I'd like to have the Law Department give you something more 47 10/11/00 - WHOLE COMM. - BILLS 583, 590 formal in writing that addresses in detail, you know, the rationale, you know, and refers you to the appropriate statutory requirements so that we can track it through.

Okay, all right. With regard to -- I read in the testimony from last week's Gas Commission hearing, certain statements were made with regard to who will be in control of $45 million, $25 million, some significant sum of money in the short term here and this draw-down issue. I thought I heard in the briefing yesterday, and possibly even in some testimony this morning, that the Finance Director would have some approval role in this process, but in the testimony at last week's Gas Commission hearing, the record was made clear that the company -- I'm sorry, Councilman Cohen -- that PGW management would soley be in control of the draw-down of the money, that the account would be a PGW account, and that the City's primary role in that would be to get the interest from that account, in that it wasn't a financial opportunity or bonanza for the company. 48 10/11/00 - WHOLE COMM. - BILLS 583, 590 It was further explained on the record last week that PGW management -- I'm sorry, the board would not be involved, I'm assuming making reference to the PFMC board, would not be involved in the decision-making process either. And lastly, what is the mechanism for the Finance Director to have that particular role in the bill, as laid out before us? Can you provide clarification, Madam Finance Director?

The Gas Commission's recommendation has been that there be a review and signoff by the Finance Director, and we embrace that recommendation. And so we would maintain --

Well, let me just -- that was the Gas Commission recommendation yesterday. Let's talk about last week first. I mean, I'd like to walk it through chronologically. Last week your testimony was that this money would be under the sole jurisdiction of PGW management, not the board, not anyone else, and they would draw it down and use it how they best saw fit, and the City would be the beneficiary of the interest; is that correct?

That's correct. 49 10/11/00 - WHOLE COMM. - BILLS 583, 590

Okay. So under that scenario, the Finance Director had no role in that; is that correct?

That's correct.

Yesterday, the Gas Commission made its recommendation. Your testimony today is, you embrace that recommendation. My question is, what is there before us that implements and ensures that level of recommendation and that level of involvement by either the Finance Director or any other parties? Because I don't see anything in front of us today that says anybody is doing anything other than extending the time period and authorizing the $45 million.

A document has been prepared amending the bill that I've just learned hasn't been distributed to include that --

Is it still wet? What do they have, PC's in the back of the room? Madam Finance Director, you know, it's Wednesday, it's the middle of the week, I'm usually pretty nice by midweek. Why don't I pass 50 10/11/00 - WHOLE COMM. - BILLS 583, 590 because you obviously have some people who want to talk to you about the document that you keep waving, and you can kind of figure that out and get back to us.

Thank you, sir.

You're welcome.

Thank you. Are you finished, Councilman?

Yes.

Thank you. The Chair recognizes Councilman Clarke.

Thank you, Madam Chair. I have a question. I need some clarity on this draw-down process. I don't know who could speak to that.

We'll both try of the.

Both? Okay. Assuming that there's $45 million in the account, how does that draw-down process happen. Is it invoiced, is it as needed? I mean, what has to happen, explain that to me if you can, please.

According to our 51 10/11/00 - WHOLE COMM. - BILLS 583, 590 understanding of both what we need and as well as the Gas Commission's recommendations, I would certify -- let's assume this is the 15th of December and we needed $20 million to get over the January requirement. I would certify to the Finance Director that $20 million was necessary. It would be required for specific disbursements, and I would submit it to her. She would then, in turn, review that, probably we would discuss the matter, and she would, in turn, certify that it was required. At that point, the anticipation is that she would then forward the funds to this escrow account, this independent --

To what? I'm sorry.

To an account in the -- that is in PGW's name, and that those funds would then be available to management, this $20 million advance from the City to this account would then be available to management to use as is required to meet these disbursements, as indicated.

To what level of detail is that request? Is it a line item for 52 10/11/00 - WHOLE COMM. - BILLS 583, 590 salaries, for various operating expenses? Is it, like, we need $20 million for --

I think we don't anticipate that it would be a line item kind of review; that it would identify categories of expenditures that we would anticipate as needed. But, presumably, it would be fairly specific but not to the line item detail.

You say that you would anticipate --

Well, for example, right now, I would anticipate a certification saying these funds would be used for salaries, for debt service payment, and for gas costs payments. I mean, it would be that kind of a level of detail that we would anticipate.

There was question about the interest accrued on the account. Does that, in fact, go to the City?

The interest would accrue to the City.

Okay. I have a question on the low-income customers. My understanding, in talking to several people, there 53 10/11/00 - WHOLE COMM. - BILLS 583, 590 was an issue about eligible customers that, we were reaching approximately 40 percent of them. We have had to in the past, under LIHEAP, had to extend the period for applications. I understand under the gas company's CRP Program, we're only reaching around 40 percent of income-eligible customers. What is it that PGW plans to do to increase that percentage? 'Cause substantially, I mean, both for the customer and for the company, 'cause I'm assuming if you get this money out, the people with the ability to pay into the company would benefit both parties.

Yes, we --

What are you going to do differently?

Councilman, we've very sensitive that -- in fact, this morning, we presented to the Chief of Staff the company's program for LIHEAP outreach, that we are asking the Mayor's Office to join us with in a kind of concerted effort that has not been undertaken in the City, I would anticipate, in some period of time. 54 10/11/00 - WHOLE COMM. - BILLS 583, 590

Excuse me, excuse me, Madam President? Madam President? I'm having difficulty hearing. I think the volume --

I'm sorry. May I have everyone's attention?

Thank you.

We're having a very difficult time hearing what's being said, so if people are having private conversations, maybe they could move out of the room to do that. Thank you.

Thank you. I'm sorry. Could you describe that again.

Yes. We are anticipating a very aggressive outreach campaign, and it's multimedia, that would involve our employees being in various places throughout the City in a way they haven't been in the past. We are intent on enrolling the maximum number of people that we can reach. Your point about 40 percent, what that statistic is is that we have never been able to get more than 40 percent of those eligible to enroll in the program up until now. It is our 55 10/11/00 - WHOLE COMM. - BILLS 583, 590 intention to extend that percentage as far as we can this year.

What do you plan on doing to do that?

I'm sorry?

What are you going to do to increase that percentage, specifically?

Well, as I say, specifically, we will have a multimedia approach that will be in the newspapers, probably radio. We will meet with various clergy groups, community groups; we have a program already in place to do that. We'll build upon our experience in the past in this regard. We'll have assemblies in churches in mosques, and in synagogues. Whatever we can do in the affected communities specifically, we will be doing this fall, and we have a 60-day period.

Who's "we"?

First of all, it the company and its employees, and we are structuring that program right now, and we have asked the Mayor's Office to participate with us in this, and all of those discussions have just started as of, 56 10/11/00 - WHOLE COMM. - BILLS 583, 590 in fact, this morning, when I gave Miss Wilkerson our proposal for how to proceed with this program.

Can that proposal be shared with anyone else other than the Mayor's Office?

It certainly can be, yes.

Who from the company is responsible for overseeing that?

We have an executive whose expertise is in low-income and energy assistance programs, and she'll be heading up this program, and we have --

What's her name?

Christina Coltro. And we have a number of staff that we are pulling from other functions to give to her for the next 60 to 90 days as we move through this LIHEAP sign-up period.

Is there -- do you have projections? Assuming that you have these incremental increases in -- participants in these various programs, what from a fiscal perspective that would do to the company and its fiscal health? If we're able to access LIHEAP 57 10/11/00 - WHOLE COMM. - BILLS 583, 590 substantially and these other programs that will ultimately fund the company in some way, shape or form or the other?

Yes, last year, we --

Can you have, in terms of projections, can you give us a sense of -- and you may not be able to do that now, but --

Well, I think we can certainly talk in terms of orders of numbers. Last year, as a routine matter, we collected about 8 to $9 million in terms of the LIHEAP cash program, which is the fall program. And then last spring, I specifically undertook a very intense effort when the federal government made additional funds available to go after those very aggressively and we were able to garner another; $5 million. We have a -- we capture a good piece of the amount of money that's available for these programs in the State of Pennsylvania, and we will continue to do so.

Thank you.

And, also, the federal government has just made $400 million available 58 10/11/00 - WHOLE COMM. - BILLS 583, 590 now. I understand Pennsylvania has been allocated about 60 million of that, so we'll be looking for our share of that.

Can you provide specific information in terms of eligible customers to be able to participate in this fund. I know it may be marginal, but if it's $10 million that we can have an additional contribution to that to the company, I think that we would like to know that as we deliberate this process.

We can give you our present statistics and projections.

Thank you.

Thank you. The Chair recognizes Councilman Kenney.

Thank you, Madam Chair. There have been a number of things that have been suggested by myself and others relative to finding a more innovative way of providing the $45 million to the company rather than taking it from the fund balance. One of them obviously that has been batted around is the waiver of the $18 million City payment. That would do two 59 10/11/00 - WHOLE COMM. - BILLS 583, 590 things. Number one, it would get or keep cash in PGW's hands, as opposed to having it paid to the City. And at the same time, in my mind, it seemed a reasonable way to reduce the $45 million request by 18. That's one issue. The second was in lieu of just forbearing the amount of money was to look at the possibility from an accounting perspective and from a value perspective to accept some amount of existing PGW receivables in an effort to again to continue to try to whittle down the 45 million. The Finance Director has been kind in responding to that request and to a request that I made about a notion of swap of GO bonds, outstanding GO bonds, in an effort again to continue to whittle away. The response that the Finance Director gave me was appreciated. However, it attempted to respond to me as if I was asking for one of these solutions or recommendations to fund the entire $45 million request, which is not what I had in mind. And then, thirdly, there was also a suggestion of a forward purchase, which is a sale 60 10/11/00 - WHOLE COMM. - BILLS 583, 590 of what currently the City holds in fixed-rate instruments to be traded for or purchased by someone else and replaced with variable-rate instruments, which would also raise anywhere from maybe from 5, 6, 7, $8 million. Why are we not attempting to whittle down through these various ways the amount of money being requested from the fund balance? And before you answer, I'll tell you why. This fund balance has been talked about in a number of different areas that has grave concern for me. Number one is the $45 million removal of the fund balance to PGW. Second is a $20 million request that we have not seen yet for the School District coming from the fund balance and other areas of need, which are all reasonable needs, coming from the fund balance. I mean for -- I apologize for stealing this particular verbiage, but I'll steal from the Vice President of the United States. I think the fund balance should be put in a lock box, as opposed to being considered for every possibility where there is need. I don't necessarily believe we have enough in the fund balance yet of a 61 10/11/00 - WHOLE COMM. - BILLS 583, 590 surplus to give us the comfort level we need one, two, three, five years in the event the economy goes south on us, something tragic happens, we have some major problems. I mean, I don't think a surplus is a surplus unless it's about a half a billion dollars. And we keep on reverting back to the fund balance as a way to solve problems that have existed for many, many years and are now coming to bear. Why have we not been able to look at these various scenarios to try to reduce the $45 million down to 40 or 35 or 30 or 25?

To the first item, accepting PGW receivables for the million. PGW 16 does not generate sufficient cash flow until the 17 end of the year for the 18 million to come into 18 play. So even were we to accept the receivables, which are an option, even if we were to accept the receivables, it would not reduce the amount of advance that they need because their needs sort of precede the generation of the cash in the company.

But that's not $45 million worth of need at this moment.

It's -- 62 10/11/00 - WHOLE COMM. - BILLS 583, 590

I mean, right now, we're talking about 25.

It's and a combined 45 5 in June, and that's about the time that they repay 6 or they give us the 18. So we would reach that 7 point at just about the same time. 8 It is something that we can entertain. 9 It is a way to minimize our total exposure. It 10 does come with some difficulty in determining how 11 much of their receivables we take in payment and a 12 few other things, but it is an option. 13

Excuse me, just one 14 question on that regard. Does not the taking of 15 receivables of bad debt expense from the company 16 improve the company's financial position if we 17 were to accept some of their bad debt and reduce 18 the amount of their bad debt? 19

That doesn't prove because 20 we're assuming that we would be taking paper that 21 would have less than face value. So we would, in 22 essence, be reducing their bad debt exposure. 23

So the receivable 24 swap -- or the receivable arrangement would keep 25 cash in the hands of PGW, keep our books balanced 63 10/11/00 - WHOLE COMM. - BILLS 583, 590 from an accounting perspective, and also improve the position of the company vis-a-vis its bad debt.

Yes.

So, again, I --

And that -- again, that is an option.

Well, why isn't the option being pursued here today prior to the request for a $45 million loan?

And, again, I think it's a timing thing because of when they need their cash, and I'm assuming you need it at the beginning of June, and we normally take delivery right before the very end of June.

I think the additional consideration, Councilman, is what the Finance Director referred to as the difficulty in quantifying what paper we give the-- you know, what paper would be transferred, what that would be worth. All of that will require a great deal of analysis that we haven't undertaken yet.

But we just not that long ago took a large amount of lien paper 64 10/11/00 - WHOLE COMM. - BILLS 583, 590 that had not been collected for years and years and years, that had problem in valuating the asset that we were selling, but people seem to want to step to the plate and buy some of our real-estate tax liens that were 15, years old. 7

We are in the position 8 right now of doing something similar and that is, 9 one of the problems with the computer system over 10 the last year is that we had not gotten until very 11 recently, the last week or two, a full grasp on 12 our accounts receivable, and we are now in a 13 position of taking the oldest paper and 14 essentially distributing it -- we will be in a 15 short while able to distribute that and get 16 something back for that, but that's the very 17 oldest paper that we have. 18

What about the 19 issue of the swap and what it could raise, not to 20 fully fund the request of 45 million but perhaps to whittle away, eat the $10 million off of the request and give some relief to the fund balance?

Those items look directly to the City's tool box, if you will, our financing tool box. If the City were strapped for cash at 65 10/11/00 - WHOLE COMM. - BILLS 583, 590 this point, those would be options. At this point, those are expensive ways to bring more cash into the City that have a potential downside in the future, should the City then really need to engage in creative financing to fund our way out of what could be a cash crunch for the City. If we were going to do something like that, it would be preferable to wait till such time as we had that need than to pull the trigger now, when the need doesn't exist.

And while I accept that answer and I think it's thoughtful, does not the $45 million taken out of the fund balance, with a possibility -- maybe not a distinct possibility, but a possibility of it not being repaid, is not putting the City in a similar situation?

It's a risk that the City is taking, and should we get into the life of the loan and see that PGW is unable to repay us, at that point, the swap, the forward, would be things that the City might use at that point. But to incur the expense and the downside risk at this point is premature. 66 10/11/00 - WHOLE COMM. - BILLS 583, 590

I mean I appreciate your answer, but I am not willing at this point to take that risk with $45 million. I will not support this request. In the event that this request is approved, I would support Councilmember Tasco's amendments for some oversight because, again, as I've said before, this situation that we are in now is a cumulative effect of abuse after abuse after abuse from administration after administration after administration. And, again, the last place I think we should be going for to solve this problem is the pocket of some housecoat, of some old lady's housecoat in Philadelphia or the pocket of a working family who's trying to put their two kids through college. It's just to me unconscionable and obnoxious that we're even in this situation, and this information had been known for years, and no one in any administration has brought this thing forward. Let me go to one other issue as far as controversy. What's your thoughts and deliberations and analyses relative to the 20 percent discount program and what we can do to 67 10/11/00 - WHOLE COMM. - BILLS 583, 590 make it a more fair situation for working families throughout the City? I mean, I understand that the Water Department has a means test for its discount program, it has an extensive poor person's program, and I recognize that we're trying to expand the LIHEAP Program and get more people involved in it. But is it fair for some -- was it ever fair to institute a program of a percent 11 discount regardless of means? And is it fair to 12 working families in the City to have them pay for 13 some political largesse of 30 years ago to this 14 day? And what could we do and how much would we 15 save by instituting a reasonable means test? 16

The Administration 17 supports in theory means-testing the senior 18 citizens discount. That is -- you know, as a 19 result of the deregulation legislation and the 20 July 1st trigger date for its implementation, that is a decision that has to be made by City Council through ordinance in order to make any kind of modification in the senior citizen discount. I think there are concerns that because it's not means-tested, individuals who don't need 68 10/11/00 - WHOLE COMM. - BILLS 583, 590 the support are receiving the support. We don't know exactly how much, you know, we give away by not means-testing the program but, you know, the Administration, I think, in part of trying to straighten out some of the long-term problems that the company would support means-testing the senior citizens discount. I know the gas company uses a 200 percent of the poverty index as the measure, and I don't know whether that would also be the point of that but, you know, we would urge that the company adopt that and means-testing is something that we think is appropriate.

Even if the means test was artificially high, even if the means test represented the average income of working families in Philadelphia, I think that would be a fairer situation than we have today. And considering the company's dire financial and cash situation, would that not be something that should be pursued over the next year or two, as opposed to kind of waiting? What's the timetable on coming to Council with some recommendations from the Administration on making this a fairer program? 69 10/11/00 - WHOLE COMM. - BILLS 583, 590

We don't have a specific timetable for that. It is something we support in concept. I --

How much money a year is not realized by the percent across-the- 7 board discount? 8

Approximately 12 to 9 $13 million. 10

And that's the 11 universe of people taking it? 12

That's correct. 13

Within that 14 universe of people, there are some that would be 15 eligible for the LIHEAP Program that are not 16 taking advantage of it now? 17

That's correct as well. 18

And there's also a 19 cohort of people in there that are probably 20 earning above what the average working family in the City makes, they're also taking advantage of it?

That's correct.

Is that a priority? I mean, it seems a $13 million number 70 10/11/00 - WHOLE COMM. - BILLS 583, 590 in a company with these kind of problems would be something that's being pursued vigorously.

I think there are a number of considerations. One, we don't have a good handle on exactly what we're talking about dollar-wise, how many people would fall above. And then there's, you know, the count -- it is a judgment call. Is now the time to, you know, the time we're looking at rate increases, you know, to raise the political issue, you know, to come to City Council asking City Council to get rid of, you know, any part of the senior citizens' discount.

Political issues are always hard and --

That's right and I believe that --

But the thing, again, that's frustrating is political issues are exactly what put us in the condition that we are in today, talking about $45 million out of the general fund, talking about all kinds of other things that we need to do. I mean, if people had had the courage to take the political issues in 71 10/11/00 - WHOLE COMM. - BILLS 583, 590 the past, for the last three decades, this company may be flush with money and be able to absorb the amazing cost of gas purchases throughout this -- which has created this international crisis of gas, as opposed to coming back again to, I guess, the dumb guy who pays his bills. I mean, that's what happens. I mean, if you're poor and you don't pay your bills, fine, we'll take care of you. If you're wealthy, we'll give you a discount, but if you're middle class and struggling, we're just going to raise your rates, and that's how we solve our problems. You don't need to comment. Thank you.

Thank you. The Chair recognizes Councilman O'Neill.

Thank you, Madam President. Before I ask the question I was going to start with, on the senior citizen discount, just for the record, I would like to make some historical reference clear. When the Water Department put in the means-testing in 1983, the 72 10/11/00 - WHOLE COMM. - BILLS 583, 590 discount for senior citizens was, I believe, 67 percent; it was a discount and then it 4 missed two rate increases, so it was effectively 5 67 percent. 6 So, even though it was water and the 7 bills are smaller, what the commissioner did at 8 that time was, he grandfathered in everyone who 9 was already on the program and started it for new 10 people coming of age to get the program. And the 11 Water Department has increased that means-testing 12 a few times, I believe, in the last 17 years. 13 But the simplest way to do this would 14 be to grandfather those that are here -- it 15 doesn't give you the $13 million in savings, but I 16 think it's the fairest way to deal with those 17 people that have been getting it, and also to look 18 at the Water Department's program so that we don't 19 have people wandering around, whether they got it, 20 they don't have it, why it's higher or lower than 21 the Water Department, just a City agency, it's a 22 City utility. 23 And the last thing is, if the seniors 24 have to declare their income to get it, we 25 certainly could deal fairly easily with the LIHEAP 73 10/11/00 - WHOLE COMM. - BILLS 583, 590 issue for those that declare an income that would make them eligible. And that could be factored also into the savings up front as to what that would be. But getting to the question that I was going to ask, two different statements I heard today really kind of shook me up a little bit, and I've heard them before, but it wasn't with a $45 million in front of me. One is that this administration took over a company that was at the point of collapse, and I think that's a tough situation to have to walk into, with all of the other thing going on in the City. And the other statement was that for the last three and a half years, we've been financing -- PGW has been financing a deficit with bank loans. And I say it's troubling because during that time, the three and a half years or so leading up to this collapse scenario, as we're being asked today as Councilmembers to make judgments that are, I think, beyond our level of expertise to some extent, we've had a Gas Commission in place, we've had a consumer advocate in place, we've had a fiscally responsible, I 74 10/11/00 - WHOLE COMM. - BILLS 583, 590 think everyone would agree Rendell Administration with its Finance Director riding herd over this company in place, and the City Controller, who's fairly fiscally conservative as well, sitting on the board and being the controller of this City. So with all of that going on, we find ourselves in this situation. And that's why I'm looking at this not as a question of and 20 or 10 45 all at once, but that there's not a third 11 scenario, which is we don't do anything. 12 And when I say we don't do anything, I 13 really think we are bailing out -- see I left out 14 one group after the controller, and that is banks 15 and financial institutions that have been feeding 16 this company financially while all of this is 17 going on that we're hearing about -- this 18 collapsed scenario, these bar links to meet 19 working capital needs, those kind of things. 20 We've got the finest financial institutions in the 21 world -- Morgan Guarantee and the rest of them -- 22 lending money, when we kind of think they're the 23 most responsible financial people out there, and 24 it makes you wonder if that's the case. 25 So who are we bailing out here? Are we 75 10/11/00 - WHOLE COMM. - BILLS 583, 590 bailing out the company? And if we're bailing out the company, are we really bailing out financial institutions who are at risk, that don't seem to want to risk anymore?

And are we lending money that we're going to have to lend more money later to protect our interest because of this loan, that doesn't exist before this loan, when banks are unwilling right now to protect their interests, which is much greater than $45 million? It's hundreds of millions in the long-term borrowing and nearly a hundred in the short term that they seem unwilling to protect their interests on. And, you know, I look at -- not that reelection is important to any of us, but two and a half years from now, this may be, rather than stadiums or anything else, what we might have to explain to voters, 'cause I know what that ballot question would probably result in: it would make the charter seem like a small victory for the opponents. If a ballot question on this kind of transaction went before the voters, it would be so overwhelmingly defeated. And so my question, for starters, is: 76 10/11/00 - WHOLE COMM. - BILLS 583, 590 Does PGW have a structural deficit? And I don't know how I understand the structural deficit 'cause we went through it with the City when we were at about a quarter billion of structural deficit. Without any PUC rate increases, without this loan, does PGW have a structural deficit right now?

Yes.

And how much is it approximately? I know you can't put an exact dollar figure, but give me a range of what that deficit is.

If we can increase our prices, I would say the structural deficit for fiscal 2001 is 15 to $20 million.

15 to 20?

Yes.

Okay.

That assumes a normal weather scenario.

Warm weather scenario, okay. 'Cause that was another question. If we have a cold winter, it would help PGW?

There's no question. 77 10/11/00 - WHOLE COMM. - BILLS 583, 590

Okay. And you're assuming you get full relief for what you're asking from the PUC in the to $20 million -- 5

No, that's assuming no 6 relief. 7

I'm sorry. Full 8 relief gets you past the 15 to 20 and into some 9 level of comfort above that? 10

That's correct. 11

Okay. Now, I have 12 a terrible time dealing with the Morgan Guarantees 13 of the world, and one of the reasons is that I sat 14 here when the City was on its back financially 15 about ten years ago and needed a short-term loan to get over a hump before we could get the full relief from PICA and what we were trying to do with Harrisburg. And we asked the local bank, one of whom is now First Union -- it was CoreStates -- and we needed a short-term loan and we had done all of our banking with them, we had the full faith and credit of the City backing up the request. Because of our dire straits, they said yes, but it was a 27 percent loan. Hard to forget. And we were at their mercy, and they 78 10/11/00 - WHOLE COMM. - BILLS 583, 590 treated us just like that. And I just wonder if we aren't treating Morgan Guarantee a lot better than maybe Morgan Guarantee would -- and I use them not just as the only bank, but would be treating us. They have $97 million exposed, they don't have a rate increased that's involved in that $97 million obligation of ours and commitment of theirs. Why wouldn't they enter into the additional security of a rate increase, which brings several million dollars into the coffers, if they were willing without the rate increase to engage in what looked like a risk-free loan if they have the security of PGW revenues to guarantee the current 97 million. And I'm really grappling with this. I don't want to be not only bailing out a bank, but maybe bailing them out several times. Because once I'm in, I'm in. And then I start protecting my own investment. And where do we stop? And what if somebody wants to buys this company in a year, and the first thing they'll say -- 'cause I would -- is, Well, to consider buying this, I want the City to do X, Y and Z, and X, Y and Z will include forgiving the outstanding debt of PGW. 79 10/11/00 - WHOLE COMM. - BILLS 583, 590 Please. Why wouldn't they -- it seemed like, if I understood the answer earlier to Councilman Nutter, they've become a secured creditor, Morgan. They will have not some that has to be sold to PGW, like a building or a facility, to get their money, but they have an up-front agreement to certain revenue streams. Why can't, to protect their only 97 million, if the PUC increase is upon us, why wouldn't they just increase the security that they already have by an additional amount and lend the additional money that's needed? And I have trouble grappling with that. 'Cause it seems to me they're the ones in trouble. The -- I just hate to see rate payers or taxpayers bailing out banks and large, giant financial institutions. They made the judgments that got us here; they could have prevented any one of these loans from happening.

Well, I'm not sure, Councilman, that they would share your view.

I'm sure they wouldn't.

They made a loan to PGW 80 10/11/00 - WHOLE COMM. - BILLS 583, 590 effectively a year and a half ago, the $100 million. And they did that based on a promise that PGW would repay that loan in June of 2001 out of the revenues of the Gas Works, and that was the risk that they were willing to take, that the Gas Works generated sufficient revenues. There are extensive legal covenants and so on that protect that investment. If they were facing a situation where they knew PGW could not repay or there was a substantial risk that they could not repay that loan, they would be, from their own perspective, not ours, but from their perspective, remiss in lending more money. They are -- the bank is regulated by the controller of the currency, who looks at every loan they make and requires them to set aside reserves against the loan, depending on the likelihood that the loan will repay. If they had a situation where they were making an additional loan to bail out somebody who had not been able to pay them back or was at high risk of not being able to pay them back, that would be a very costly reserving requirement for 81 10/11/00 - WHOLE COMM. - BILLS 583, 590 them, and they would be most unwilling to do that. They're frankly concerned right now, as you know, about getting the $100 million back.

But why aren't they in there with a restructuring, where we don't have to worry about whether reports are going to be made later, whether we're going to start getting information that we were promised years ago for the Gas Commission or whoever we are out there that's been frustrated. They could be restructuring this and making those demands and having all kinds of security in the flow of money. If it's so bad -- and this is really where I'm really winding up here today. If this is such a substantial risk of not being repaid, that Morgan Guarantee or any other large bank refuses to make a loan at any interest rate with any amount of security, why are we? I mean, we're not -- this isn't our business and we certainly don't have the kind of systems and expertise that they would have. And they're the ones that are at risk if there is -- I'm not sure they're at risk; you mentioned that they have a pretty good -- could you detail that a 82 10/11/00 - WHOLE COMM. - BILLS 583, 590 little more. What is their security?

They have an interest in the stream of revenues that PGW produces, just as the long-term bondholders do. They are in a subordinate position to the long-term bondholders. So if there's a limited amount of money, first the bondholders get paid their principal and interest, and to the extent that there's money left at that point, Morgan gets paid, and the City gets paid after those two groups have been paid.

Does anybody get paid before the long-term and the short-term lenders?

The way the --

Like the people that sell us gas and so forth.

Yes. The bond ordinance 21 allows PGW to pay its operating expenses first. Bondholders are willing to wait to get paid till the operating expenses are paid to ensure themselves that a viable entity is up and running. Obviously, if got paid first and PGW 83 10/11/00 - WHOLE COMM. - BILLS 583, 590 couldn't buy gas, there would be no revenues. So PGW is allowed to buy gas and pay the cost of operating the company first. Then it pays the bondholders, then it pays the loan to Morgan.

Well, is it -- it seems to me that the -- and, again, I'm not sure I'm totally clear on this, but it seems to me what PGW doesn't have enough money possibly to pay is the financial institutions, because bondholders are financial institutions in the institutional level that we deal in and banks like Morgan. So we were hearing a couple weeks back, worried whether we were going to be able to pay the suppliers of our gas and our employees. And it seems to me there are two different levels of numbers here. One is while this borrowing has gotten crazy in the last couple of years, from 5, 600 million, 700 million to almost a billion, somebody has been guaranteeing to bondholders that everything's cool back at PGW and you should, you know, buy these bonds. And, apparently, it wasn't. I mean, we're hearing that this isn't 84 10/11/00 - WHOLE COMM. - BILLS 583, 590 something that started last month or two months ago. It's been going on a downhill slide for some time. And it seems to be that they should bear some responsibility in this. And we absolve them of all responsibility and start adding our own, when we've had no level of oversight in this, we haven't been the financial experts certifying that everything's cool at PGW. And yet now we're going to walk into something where we create our own monster and let their monster out of their cage and put it in ours. I'm just not willing to do that, and I can't seem to find a more rational approach. And I know it sounds radical, but to me, the more I think about it, it sounds rational rather than radical. For instance, a bank would be in there if they had some risk, looking at what kind of belt-tightening is going on at PGW at the highest level. I mean, a company that's ready to go out of business possibly starts streamlining like crazy. Can someone from the executive staff-- and I'm talking about just at the executive level; I'm not even talking about in the company. What kind 85 10/11/00 - WHOLE COMM. - BILLS 583, 590 of streamlining, belt-tightening has been going on? And I'll use an example. If you had 5 cars and you've got 2 now, that's, you know, 6 90 percent of your vehicles have been cut out 7 during this severe -- if you've got a membership 8 in an association that's very expensive, you know, 9 we've gotten out of that. I mean, it may be 10 several things, but I don't know if there's -- 11 there's got to be some documentation where there's 12 been meetings of executive staff that have said, 13 Before we come into City Council or Morgan, 14 whoever gives us the money -- 'cause I hope we're 15 not a guaranteed guarantee at this point, we're 16 still thinking about it -- this is what we're 17 doing, and we're doing it at the highest level of 18 the company. 19 So maybe you could start there. 20

I --

'Cause I just find this very troubling. I'm sorry. I went to bed last night thinking it was to 45, and today I'm 24 wondering if 0 wasn't the best number. 25

Let me respond in two 86 10/11/00 - WHOLE COMM. - BILLS 583, 590 ways. One is, every gas distribution company on the East Coast and most likely across the country right now is having difficulty with this same issue. We know that the financial markets are looking more and more critically at gas distribution companies and that every owner has got to come up with the means to finance this inventory problem, which is to say that the gas that you have to buy before you can bill and collect from customers. Everyone is looking at this problem, and they are doing one of two things: they are either selling equity to raise the necessary funding, or they are borrowing to raise the necessary funding. The only reason that we are here is that we are not in a position to borrow because we had to use the flexibility and the instruments that we had to finance the deficits that are weather-related for the last three years. In other words, the customers have gotten a substantial break as a result of the weather, as a result of other circumstances at the company. My own position is that we should have 87 10/11/00 - WHOLE COMM. - BILLS 583, 590 raised rates first in '95 and certainly no later than 1998. Those were my recommendations when I was on the other side of the dock, and they continue to be my view. So we are where we are, and owners are stepping up across the country to do what we are asking essentially the City administration and you all to do today. That being said, in terms of your immediate question about cutting costs, we have cut every discretionary account that we can lay our hands on right now. There is no traveling, we have no club dues. We have cut out all credit card use. Any possibility of spending money that is just not for core purposes has been eliminated. And there is really nothing more we can do in that regard. I can't say there's nothing more we can do. We have committed to reducing our costs by up to $22 million over the next months, and we 22 have started down that by renegotiating contracts, 23 by not hiring people who have left as a result of 24 attrition. All of these measures are being taken 88 10/11/00 - WHOLE COMM. - BILLS 583, 590 to force the company into higher levels of efficiency. We can't do it overnight. We have started the process, and the process is continuing. So in terms of what senior management can do and the board can do, you know, senior management has very clear directives from PFMC to deliver well within the guidelines that PFMC mandated, which was this to $24 million cost 11 reduction over a two-year period, so that's where 12 we started and that's where we're continuing right 13 now. 14

Are you still a 15 member of the American Gas Association, PGW? 16

We are and we're 17 considering not being. At one point in the past, 18 the company suspended its membership and we're 19 looking to do that again. 20

When was the last dues payment?

When was it?

Roughly.

They're paid quarterly.

Quarterly? 89 10/11/00 - WHOLE COMM. - BILLS 583, 590

Yeah.

And the annual dues is over 200,000?

240,000.

240,000.

Yeah.

Okay. I would hope that that would get suspended.

We're looking -- still want to get the benefits of what the American Gas Association has to offer without paying the full freight. That's what we've done in the past.

That's not going broke. But when you're going broke, these kinds of dues things --

That's correct.

This should be gone already, but that's my own opinion. What I have trouble with is two things. One is weather-related. All of our problems are weather-related. The last three winters have been mild, and some of them have been mild for a lot of other companies that are not ready to go belly-up. 90 10/11/00 - WHOLE COMM. - BILLS 583, 590 And I have because one thing I know is happening with this company that nobody's talking about -- my gut tells me it's been going on for years, particularly the last three or four, and there's an end in sight because we can't borrow any more, and that is that we have been taking huge capital borrowings and doing things that other companies are doing with operating funds. Now, I'm not saying we broke any laws; I'm just saying that in the regular course of business, if we were the Water Department, we wouldn't be doing it. And so what happens is, not only do we run into different weather that might be happening, but there will still be bond issues that can go on this year. We're not going to have a 100 or $200 million borrowing to increase capital funding that's going to go for what a lot of people would describe as "normal operating maintenance expenses." And maybe that's why Morgan won't look at any more loans, or anybody else. And if that's the case, then we're really being foolish as we sit here, bailing out the banks. 91 10/11/00 - WHOLE COMM. - BILLS 583, 590 And I think the revenue stream is going to be different for a couple of reasons, and one of them is going to be no more big capital borrowings. On that sheet that I received today is just scary in terms of what we borrow, don't have anything to show for in the capital -- because we had testimony months ago where we had the capital budget, that our infrastructure's terrible, we haven't been keeping it up, and that's what capital money's for, unless you're moving over and doing the old operating thing, and I don't want to put the Commissioner on the spot because the Water Department is very strict about what they use capital dollars for as opposed to operating, even though they could use them. And I -- my gut tells me that is going to hurt us and haunt us more as we go into the next couple of years than anything out there. And weather -- you're in the weather business and good weather, bad weather, the one-third increase, if we have a cold winter, could become a 50 percent increase for the average gas payer. It will help PGW, it will be terrific; it will pay the loan back faster and all that and then see if the 92 10/11/00 - WHOLE COMM. - BILLS 583, 590 winter is cold the following year. I think this black hole is so deep that it's the reason that the Morgans and the First Unions one touch it, even with security. And I'm not sure we should, either. Thank you.

Thank you. The Chair recognizes Councilman Rizzo.

Thank you, Madam President. I also have much difficulty with this request based on the fact that I've been talking to other gas utility companies. And what surprises me is the lack of interest or the lack of wanting to involve themselves in any type of a relationship with PGW, doing purchases of fuel, of gas, even a management contract. And it continually surfaces, when I talk to other utility companies, the lack of a recovery plan, the lack of a business plan. And I hear today that we really don't have one. Maybe one's on the way, maybe there's one on the drawing board. I wouldn't lend my best friend 20 bucks 93 10/11/00 - WHOLE COMM. - BILLS 583, 590 if I didn't have an idea what they needed the money for. And you're asking us to --

Councilman?

Yes?

I don't know if anybody else can hear you, but do you mind repeating because I think we're having difficulty hearing you. I'm sorry.

I would love that opportunity, Madam Chair.

Our old system seemed to be working much better than our new system.

And this isn't running on natural gas.

True.

I'm not, either. The point that I'm trying to make, and I'll repeat it, is the fact that I've had conversations with other utility companies, and they just cannot believe that this company -- and the perception, and I've been told in a private conversation, a briefing, that it is a perception, but I don't believe it's a perception, that this 94 10/11/00 - WHOLE COMM. - BILLS 583, 590 company has no plan, they're asking for $45 million, and we will be back in the same situation maybe not a year from now, but maybe two years from now, because I'm not confident that we really have a plan in place on the drawing board that will show the recovery of this company. I just heard that they've restricted travel, and then in the same breath, I hear that they are considering not supporting the American Gas Association. Well, how do you belong to the American Gas Association when no one's allowed to travel? So we've spent $240,000 on a membership where we're not participating? That's great management. Thank you, Madam Chair.

Well --

You're welcome. The Chair recognizes Councilman DiCicco. All right, the Chair recognizes Councilman Cohen.

Thank you, Madam President. 95 10/11/00 - WHOLE COMM. - BILLS 583, 590 First, to the Finance Director probably. The $20 million that is currently authorized, has that been repaid by the Gas Works? Have they borrowed the money? And if they borrowed it, when did they borrow it? And did they repay it? And if so, when?

I understand that was borrowed in 1984.

In 19-when?

'84, and it has been paid a long time ago, probably in that same year.

I didn't get what you said after you said they borrowed in 1984, I did not get the rest of your comment.

It was probably paid within that same year or closely thereafter, but it has been paid for quite some time.

So that they have an outstanding ability to borrow $20 million now, under the old contract?

With a resolution of City Council, yes.

And have they sought to have such a resolution adopted by City 96 10/11/00 - WHOLE COMM. - BILLS 583, 590 Council? I know of none, but --

No, they haven't.

Could I ask the representative of the City's Gas Works why they have not asked that, if that's been available?

I believe that we tried to take a longer view of what it is that the company is going to need. We were able to look ahead two years and understand that, you know, we needed to borrow money in January, we need money for June. We were trying to forecast a bit and create some flexibility for the company. And I think that's why we've chosen the approach of amending the ordinance to increase the amount and go for two-year borrowings as opposed to the one-year borrowing that I think you're referring to.

And is the Administration proposal a replacement for what exists now?

No, it -- there are different provisions. I think one is a one-year borrowing. There's a second piece that we're attempting to amend that permits two-year 97 10/11/00 - WHOLE COMM. - BILLS 583, 590 borrowings, and I think the third piece is the commercial paper provisions.

Well, with respect to borrowing from the City --

Mm-hmm.

-- what would be the result if we passed either the City, the Mayor's proposal, or the Gas Commission's proposal? What would that do to the current $20 million borrowing authority that's been given to the Gas Works to borrow from the City based soley on a resolution 13 of Council?

That remains unchanged.

Well, I don't understand. Does that mean it adds to the 45 million or that when the million is 18 borrowed, does that eliminate that 20 million? 19 Are we talking about 65 million potentially that 20 can be borrowed from the City or 45 million? 21

The aggregate would be 22 65. 23

It would be 65. So 24 you're asking -- you haven't used the 20 million 25 and -- 98 10/11/00 - WHOLE COMM. - BILLS 583, 590

We were looking for a two-year borrowing in order to -- I mean, part of what we're trying to do is stabilize at least some components of the company's operation. We know today that the company's going to have cash-flow needs over the next two years, and rather than -- you know, we also know that we have a need to restructure rates. We're trying to put in place certain components so we can begin stabilizing the operation of the company so that we're not reeling from crisis to crisis. It is extraordinarily difficult to operate the company when we're always in a crisis mode. We were trying to set up a mechanism, you know, where the company would have access to --

I don't know what you're talking about when you're talking about a company because the City of Philadelphia is really the --

I'm sorry, the Gas Works.

Well, isn't it the City of Philadelphia when we talk about the Water Department? Would you, say call the Water 99 10/11/00 - WHOLE COMM. - BILLS 583, 590 Department a separate company?

No, you're correct.

What's the purpose of emphasizing a company? It's all owned by the City, the City has responsibility, it has. . .

You're correct. It is simply a collection of assets, it's not an independent company with any kind of corporate integrity.

If for some reason the so-called company goes kaput, doesn't the City of Philadelphia have a responsibility to see that its citizens have heat in their homes?

I think you're right.

So it's a City responsibility. And so you're basically saying, let's increase the current $20 million to an allowable borrowing limit of 65 million, even in the face of the Gas Commission's recommendation that under the worst of all cases, the most that's additionally going to be needed by the Gas Works is $5 million through the end of this year.

The company is not interested in accessing, you know, the 100 10/11/00 - WHOLE COMM. - BILLS 583, 590 $20 million; the company is interested in a two-year loan, setting up a two-year loan mechanism. You know, it has no current plans to request the one-year loan.

Well, would the City be prepared to amend the agreement to eliminate the $20 million loan authorization?

That is not a part of our financing plan at this point.

You mean the present plan is to seek $45 million in additional borrowing ability from the City of Philadelphia?

That's right, in the form of a two-year loan. That is what the company's interested in.

Has any study been made as to when it was that the Gas Works, or the Gas Department, went into financial insolvency in a sense, in the commercial sense of losing money? How long has that been going on?

Councilman, we -- the issue started in 1997 and has rolled forward since then.

And up until 1997 -- 101 10/11/00 - WHOLE COMM. - BILLS 583, 590

The company was meeting all obligations and had most of its $100 million credit line available to it. The reason the credit line disappeared -- and let me reemphasize that -- is that we had several years, three years, of warmer-than-normal weather that required operating funds. And management at that time, rather than seeking rate relief, which was absolutely essential, in my view 'cause I testified on the other side of the dock for it at that point, did not occur. So the only option that management did have was to use the short-term position and draw that line of credit down.

Well, would it be possible to establish how much money was lost in the normal commercial sense by the Gas Works in 1997, in 1998, in 1999, and in the year 2000? Have there been such figures?

Upwards of $70 million.

What was that?

Upwards of $70 million.

Cumulatively in the four years? 102 10/11/00 - WHOLE COMM. - BILLS 583, 590

Due to -- for '98, '99 and fiscal 2000 and part of '97, we lost somewhere around $70 million, largely a function of warmer- than-normal weather. We could not recover from our customers. Because of the way we structure our rates and our charges, we could not recover from them enough money to keep the company going and not experience deficits.

During that period of time, when the $70 million loss was recorded, how much did the Gas Works pay to the City of Philadelphia in these $18 million installments?

It would have paid 3 years of $18 million. That's 54.

All right. Now, using old math, I would say 3 times is 54? 18

Correct.

And if you subtract 54 from 70, the loss in those years totally is $16 million, exclusive -- or averaging million a year, exclusive of what was paid to the City?

To your point, yes, that's correct.

It doesn't sound to 103 10/11/00 - WHOLE COMM. - BILLS 583, 590 me like a terrible shape to be in with the explanation you gave of these terribly warm -- I'm using the word "terribly" in an economic sense because I think the people like the warm weather, but for the gas company, it represents a crisis.

That's correct.

But it does not seem to me that the litany of all the terrible things that happened to the Gas Works was really that bad. It seems to me the worst loss was the payment of $54 million to the City. And if we had not paid it, it would not have been a crisis situation at all; it would have been something that called for a little additional remedy. Doesn't that make sense?

To your point --

I'm not trying to embarrass you because I know that you don't have any right to disagree with the Mayor, so I'm not asking you to disagree with the Mayor. (Laughter.)

No, this is historic --

You have to say what he authorizes you to say. 104 10/11/00 - WHOLE COMM. - BILLS 583, 590

This is historic information.

It still stands, doesn't it? The whole crisis is that in three terribly bad years, because of the weather, because of the all of the mismanagement problems we've had, because we failed to ask for rate increases when we should have done so, the company actually lost $16 million.

Were we not to have paid -- we have to be careful here. Were we not to have paid 3 years of $18 million, we would have $54 million of cash available to us now.

Right. And as a matter of fact, and now to Miss Davis, could you tell me what we say the City surplus is?

Our preliminary numbers put it in the 220, $230 million range at this point.

200 and --

220, 230 million at this point. Those are preliminary, subject to audit.

And back in 1969 or 1970, the payments by the Gas Works to the City were then $15 million. And Councilman Longstreth 105 10/11/00 - WHOLE COMM. - BILLS 583, 590 is the only one who's going to be in a position to have an opinion on this from personal knowledge. The City Council was in a caucus session trying to solve a $3 million deficit in the budget for the forthcoming year, and the then-Council President said, "Excuse me," to the members of the caucus, "I'll be back in a minute, I have to make a phone call." He came back two or three minutes later and said, "We've solved the problem. PGW has agreed to increase its annual contribution from million to $18 million." And 13 since that time, in the late '60s or early '70s -- 14 I don't know whether it was 1969 or 1970 -- the 15 payment was 18 million. It seems to me that the City has drained since 1970, that's 30 years ago -- 30 times 18 is kind of, as I add it up, isn't it $480 million?

Approximately.

Mm-hmm, yes.

And had the City not drained that money, the situation would be entirely different? And, you know, maybe that's a rhetorical kind of a question. But of that 106 10/11/00 - WHOLE COMM. - BILLS 583, 590 surplus, it seems to me clear that the surplus of the City is a paper surplus, a fictitious surplus obtained by taking $18 million a year steadily from the Gas Works, when that money should have remained with the Gas Works so it could have dealt with the infrastructure of the needs. I'm very concerned about the whole question of rate increases. I think what has happened is that the City has used the Gas Works as a means of balancing the City's budget and that now we have this problem because the Gas Works has just been a convenient target. And as long as the Gas Works kept on turning over $18 million a year, the City didn't care how it was operated or what its condition was. Would that appear to be a pretty fair statement?

Councilman I don't think I can respond to that. I think certainly, under all circumstances, PGW made its payment to the City, as it was required to do by ordinance.

Let me ask you, the enormous increases in oil and in natural gas throughout the country, has it caused the City of 107 10/11/00 - WHOLE COMM. - BILLS 583, 590 Philadelphia to seek specific assistance for a municipal utility from either the federal or the State government? Are we seeking additional funds for the operation? I'm not talking about increases in the, you know, to the consumers.

The answer to that is --

LIHEAP, I know that the State is going to increase some funding for the LIHEAP.

That's the federal program that's available to us.

Right.

To funnel funds to PGW from Washington on that, specifically for payment for these increased costs.

Have we asked for additional funding for the utilities in order to make it easier on the rate payers?

There has been no 21 specific application nor do I know of a mechanism for such to Washington, except through the Congressional delegation. We have not done that.

Would that seem to make sense? 108 10/11/00 - WHOLE COMM. - BILLS 583, 590

I don't --

Why should the State or the federal government be silent when our rate payers face the threat that Councilman Kenney spoke about maybe a half hour or so ago of?

Well, it's certainly something for us to consider.

On the rate increase request, there are two separate requests, one for increasing the --

One for the base rate.

And is that the --

That's the 52 million, and one for gas costs, which is presently at $97 million.

Now, the gas increases, you have nothing whatsoever to do with; is that right?

It is --

You don't influence in any way the gas increase?

No. Let me be very clear. The company has done -- and this is a compliment to the managers who are at PGW and have 109 10/11/00 - WHOLE COMM. - BILLS 583, 590 remained so over the years, they have done a wonderful job of purchasing gas, and they're recognized for having done so and they saved the customers of the City of Philadelphia approximately 35 to $40 million in the manner in which they purchase gas. But to your point --

In purchasing and storing it?

In purchasing it and in storing it and buying it at the right times, and we did better than --

And buying it?

We did better than any of the other local distribution companies in the State on that issue. Now, to your point, by and large, gas costs are a pass-through, and we do not make any money from that, and we don't have a lot of control over the national and international markets for the commodity.

That was the other request, the $52 million request that deals with the basic rates separate from the needs of the Gas 110 10/11/00 - WHOLE COMM. - BILLS 583, 590 Works other than as a result of the increased cost of the natural gas.

That is correct.

Now, is there any indication what the PUC plans to do with respect to the $97 million request?

We have no specific indication from the Public Utility Commission itself as to what it will do when it makes its judgments on both of these points on an interim basis on November 9th. We do have indication from the staff of the PUC that they are supportive of not only the 97 million but of something more than that.

And how about with respect to the $52 million?

They have taken view -- the staff itself has taken a view that we should only get at this time 27.5 of the 54.

Well, considering everything that the Gas Works has gone through and the litany of disaster, it does not seem to me to be basically as horrific a story as the headlines seem to indicate and as some of the testimony 111 10/11/00 - WHOLE COMM. - BILLS 583, 590 would seem to indicate.

Well, let me respond to that and maybe respond to some comments that some of the other Councilmen made. In June, we filed a five-year financial forecast that included $52 of base rate relief and $42 million of gas cost increases, which is what we had anticipated at that time. With the granting of those levels of rate relief, we were able to demonstrate in our projections with the $24 million of cost reduction that we would begin to pay down our short-term -- our $100 million short-term position somewhere in 2003 and that we would be generating a substantial amount of our own investment, which is what one wants to do in these situations. For long-term capital investments, we would be generating about half of that by 2004, 2005. That was the plan, that is the program. That was where we were going until two things happened. One, the gas costs escalated at rates that we hadn't anticipated in the April-May- June time frame. And consequently, it puts us at risk because we have to look at to writing off 112 10/11/00 - WHOLE COMM. - BILLS 583, 590 some portions of those gas costs over time, because people may not be able to pay them. And, secondly, we are less clear about what the regulatory environment in Harrisburg is going to allow us. So with those two concerns, we are less able to be definitive about our plan, but we clearly have a plan. It is now before the Gas Commission, it will be updated, and it will be addended and added to with the other considerations that the Commission wants. But from a financial point of view, it is very clear where we have to go and what we have to do, and a big part of that is to have the necessary rate relief from our customers that we have not gotten in ten years.

Well, I have great difficulty following that particular arithmetic. With respect to increased gas costs --

Yes.

-- the likelihood is, from everything we know, that those pass-through --

Dollar for dollar. 113 10/11/00 - WHOLE COMM. - BILLS 583, 590