COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE ON TRANSPORTATION AND PUBLIC UTILITIES Room 400, City Hall Philadelphia, Pennsylvania Tuesday, June 8, 2010 9:20 a.m. PRESENT: COUNCILMAN WILLIAM K. GREENLEE, CHAIR COUNCIL PRESIDENT ANNA C. VERNA COUNCILMAN DARRELL CLARKE COUNCILMAN JACK KELLY COUNCILMAN BRIAN J. O'NEILL BILL 100368 - An ordinance authorizing the City of Philadelphia to enter into purchase obligations for the delivery of electric supply for use by facilities owned and leased by the City, including agreements that obligate payments for delivery of electric supply in the fiscal years 2011, 2012, 2013 and 2014, subject to certain terms and conditions. - - - 2
Good morning, everyone. This is the Committee on Transportation and Public Utilities. Councilman Jones, unfortunately, for a family matter will not be able to be here. I'll be chairing the Committee. And we have a quorum, together with Councilman O'Neill and Councilman Kelly and Council President Verna is also here. Ms. Bricklin, would you please read the title of the bill before us today, please.
Bill No. 100368, an ordinance authorizing the City of Philadelphia to enter into purchase obligations for the delivery of electric supply for use by facilities owned and leased by the City, including agreements that obligate payments for delivery of electric supply in the fiscal years 2011, 2012, 2013 and 2014, subject to certain terms and conditions.
Thank you. 3 6/8/10 - TRANSPORTATION - BILL 100368 (Witnesses approached witness table.)
Ms. Cutler, Mr. Davis, welcome. Please identify yourself for the record and proceed with your testimony. DEPUTY
Good morning. My name is Rina Cutler, Deputy Mayor for Transportation and Utilities.
Good morning. I'm Barry Davis. I'm with the City's Law Department.
Do you have copies of your testimony, Ms. Cutler? DEPUTY
No. 22 Wait; we do. I have one more. I thought Shoshana had copies.
That's okay. Go ahead. Proceed. We'll get 4 6/8/10 - TRANSPORTATION - BILL 100368 copies made. Thank you. DEPUTY
Good morning, Councilman Greenlee and members of the Committee. I'm here in support of Bill 100368, which authorizes the purchase of electricity for the City for its facilities for delivery during Fiscal Years 2011 through 2014. Beginning January 1st, 2011, Philadelphia's electricity market will significantly change. The electricity rate caps, which have made the electricity supplied by PECO Energy the least expensive option for the City, will expire on December 31st, 2010. 55 percent off the approved PECO tariff. That discount will also end on December 30th, 2011 -- 5 6/8/10 - TRANSPORTATION - BILL 100368 2010. Starting in January of 2011, the PECO region will have a competitive de-regulated energy supply. Customers will choose their electricity supplier, and PECO will continue to manage the electricity transmission and distribution system. PECO will also provide electricity supply under state law as the Provider of Last Resort. The City government's electricity costs are significant. The cost for all City funds - General Fund, Aviation Fund and Water Fund - were approximately $61 million in Fiscal Year 2009. The cost of the General Fund for 2009 was 33 million, with 14 million of that going to street lighting and traffic signals. The electricity supply portion of the total bill in 2011 is expected to be about two-thirds of the total electricity cost. The remaining third of costs is made up of PECO distribution 6 6/8/10 - TRANSPORTATION - BILL 100368 charges, capacity charges that ensure there is adequate supply during periods of high demand, transmission costs, ancillary costs and the energy supplier's margin. The PECO Provider of Last Resort prices have not yet been finalized, but they are expected to result in some level of overall increase in electricity costs to customers. PECO is also requesting a tariff increase for the transmission and distribution portion of the electricity bill. In addition, as noted above, the PECO discount will no longer be in effect. In order to manage the potential for rising costs, it is essential that the City make the best choices for purchasing electricity supply. The City can purchase electricity supply at prices that will be lower than the PECO Price of Last Resort price. To do this, the City must act now while electricity prices are low. For example, we could purchase a megawatt of 7 6/8/10 - TRANSPORTATION - BILL 100368 electricity for delivery in Fiscal Year '13 today for about $55. Last year that same purchase would have cost us $70. Current prices represent six-year lows. These current electricity prices reflect the lower demand associated with the economic downturn, and prices could begin rising quickly as recovery occurs. The proposed ordinance would authorize the City to make agreements for delivery of electricity during the next four fiscal years through a state-regulated Licensed Service Provider. The Licensed Service Provider would be selected through a competitive process and would act as the City's agent in making purchases in the regional electricity marketplace. While this approach will not lower the City's electric bill, the approach will protect the City from a rapid escalation in electricity prices over the next several years. For decades, the City was certain of what electric prices would be in the future 8 6/8/10 - TRANSPORTATION - BILL 100368 because of the regulated marketplace. That era is ending, but this approach will substantially contribute to budget certainty for the price we pay for electricity. The City has engaged a highly qualified consultant, which has successfully assisted other municipalities and institutions with electricity purchasing in de-regulated markets. Upon approval of the ordinance, the City will formalize an Electricity Supply Advisory Committee through a Mayor's Executive Order. The City Council Committee Chairs for Transportation and Utilities, Public Works and the Environment, or their representatives, will be members of the Committee.
The Electricity Supply Advisory Committee will review the Electricity Purchasing Plan, which will be approved by the Procurement Commissioner and implemented by the City, working with its consultant and the 9 6/8/10 - TRANSPORTATION - BILL 100368 Licensed Service Provider. All City Council members will be provided with copies of the approved Electricity Purchase Plan and quarterly reports on electricity purchases. City Council has recently passed an ordinance creating an Energy Authority. As Council recognized, the major advantage of an authority is the ability to enter into long-term agreements for alternative energy projects, such as solar or wind power or long-term Energy Service Company, ESCO, agreements to upgrade City buildings with energy-efficient features. The purchases made with this authorization provided by this ordinance will serve as an important complement to the Authority's efforts. The purchases can take care of the City's everyday energy needs, while the Authority pursues opportunities for innovation. At the request of PECO, the Administration supports a technical 10 6/8/10 - TRANSPORTATION - BILL 100368 amendment that replaces the "PECO Energy electric distribution territory" with "Philadelphia Region" in the second "whereas" clause. Thank you for the opportunity to testify today. I respectfully request that the bill be reported out of Committee and that the rules of Council be suspended to allow first reading at the next session of Council. Barry and I will be happy to answer any questions you may have.
Yes. Thank you. Ms. Cutler, I support this and with the suspension. So these questions are not related to trying to defeat it, but some things I want to get on the record, and I hope I frame it properly. If you don't understand where I'm going, I'll try to clarify it. 11 6/8/10 - TRANSPORTATION - BILL 100368 I understand a lot about this area. Over the years before we had the de-reg, we were in a situation like this throughout the Commonwealth before. Then it ended. Now it's back. It's mainly because of rates. And there were consultants all over the place dealing with municipalities and universities and everybody else trying to aggregate, I think was the term that was used. What I want to ask of the Administration today is, is there a recognition, as oftentimes these are fractions of pennies that we get involved with with the different rates, that PECO doesn't operate out of another state or even another county, it operates in Philadelphia, has a major presence both from an employment standpoint, wage tax, the like, but also a major presence in the community in terms of its civic engagement and its civic contributions? So when we get to these marginal areas -- and I'm not talking about huge 12 6/8/10 - TRANSPORTATION - BILL 100368 fluctuations between PECO's price and somebody we've never heard of, we don't even know where they operate out of, but they're cheaper, but it's very small. Is there a policy that we will sit down with PECO and make sure that we're talking, whether we eventually choose them or not? It won't be, Why didn't you come to see us, we're Philadelphia and we've been serving you all these years and maybe we can make you understand that you're actually doing better with PECO even though there's a fractional difference, or, in fact, sitting down with them may bring the price down. Is there any kind of discussion going on internally in the Administration that we don't want to ruin or in any way harm our relationship with PECO, which couldn't be more positive from a City standpoint, as a result of this? That's all. And still do right by the taxpayers and ratepayers and the City. 13 6/8/10 - TRANSPORTATION - BILL 100368 DEPUTY
I guess I would like to also then go on the record, Councilman, and say that probably as the primary liaison with PECO for the Administration, I think we have a very good relationship, and we are speaking on a very regular basis on a variety of issues that have to do with what the Rate of Last Resort would be, what the rate case might look like going forward as they have filed for a variety of pieces. So I do think the relationship is good, and in no way would I ever stop speaking to PECO in terms of how the cost and purchase of electricity for the City is going to impact both parties. And I do think -- I agree wholeheartedly, I think they've been a great neighbor and a great corporate sponsor for a variety of issues. So this desire to be able to go out into the marketplace and get the best price for the City over the next four years in no way negates that. Ultimately, it may come down to pennies, 14 6/8/10 - TRANSPORTATION - BILL 100368 but my suspicion is it will not, that the market will, currently being as low as it is, will be very responsive to the request for our ability to be able to purchase for the next four years. I mean, I think the one other piece I have -- and then I will certainly turn it over to Barry also to be able to comment -- part of why we're introducing this now instead of later in the year is because as rate caps start to come off in January, there will be so many entities getting into the market, that we thought it was in our best interest -- and it appears to be -- to come into the market now in advance of the rate caps coming off at the end of December. And so we actually -- and we will track it and it will be part of the report we send to Councilpeople, which is, this is what we bought it at, this is currently what the price is. And so we will be able to calculate the savings in fact over the next four years. 15 6/8/10 - TRANSPORTATION - BILL 100368 So while I would certainly never rule out PECO as a provider, they're going to have to sharpen their pencils if they want to keep the City's business.
You mentioned it may come down to pennies, and I understand that. That's kind of where I was going. What's driving my questions is, I want to make sure we're not penny wise and dollar foolish in the end. The other concern I have -- and this is, again, more policy from the Administration -- is, the consultant obviously is top shelf or he or she wouldn't be operating around the country like this, because it's best practices that people learn about and hire people like that, but I also guess -- and you can confirm for me -- that the person is not a Philadelphian; is that -- DEPUTY
So, again, it's Part 1, the Administration fully understands the importance of PECO to this City. Secondly, is somebody sensitizing, educating our consultant on that same fact? DEPUTY
So this isn't just another company that's out there as they're looking through penny differences, if it comes down to that, and we can use pennies for any small margin that may not be as small as we think in the big picture. And I don't know if our consultants are here today or not, but you understand -- I see some heads nodding, but something on the record would be helpful.
Councilman, I want to make sure that we fully understand here how the Provider of Last Resort tariff that PECO provides works. PECO now is a very different 17 6/8/10 - TRANSPORTATION - BILL 100368 company than it was prior to the merger with Exelon. So PECO is no longer itself a generating company. Of course, there's a relationship with Exelon that continues. When the state passed Act 129, which was a bill passed last fall -- or, actually, in 2008 that created an obligation for utility companies, in anticipating of the rate caps coming off, to dedicate a significant amount of their revenue to energy-efficiency projects, they also created the framework for how it would be that companies would buy power to provide to their customers who didn't go out and shop for power, and they created a very structured type of purchasing requirement. So when PECO goes out to the marketplace now to provide -- to get the power that would be used by folks who haven't shopped, they have to follow a procurement process that's probably almost as strict as the City's procurement process in terms of 18 6/8/10 - TRANSPORTATION - BILL 100368 the bids that they receive. And so they don't get the opportunity to hand that over to Exelon. It's all bid in a very open sort of way. And one of the reasons why the pricing for the POLR, Provider of Last Resort, rate, as it's called, POLR, the reason those prices have come in higher than what you would expect in the marketplace right now is that those prices reflect a certain amount of risk associated with the companies that have bid into that pool. That risk is that PECO doesn't actually know how much power they're going to use. So they've gone out and they've asked these generators to give them a price for a block of power, if you will. So each one of these generators that's bidding in is providing a certain amount of power. That price is not -- it's not a firm price on PECO's end, so if PECO doesn't have the customers signed up, those electric generators are not going to be able to 19 6/8/10 - TRANSPORTATION - BILL 100368 provide -- are not going to get the opportunity to provide that power. So there's a risk associated with the price there, and that's all part of this procurement process. And I guess my point is that I think if you were to talk to PECO -- and Mr. McBride from PECO is here in the audience today.
-- you would find that they would not at all be disappointed that the City is going out into the marketplace, that this is really what they anticipate that particularly large customers will do in order to get the best prices. And so it's just the way that this marketplace works and it's the way PECO is going to be adapting their business model. So I don't think we're going to get to the point where there's a couple of cents separating the interests of PECO 20 6/8/10 - TRANSPORTATION - BILL 100368 and the interests of the City. And I'm sure if we do get to that point, we will all know about it. But I think going forward, PECO understands that the City is going to be in the marketplace, along with all their other large customers. In fact, PECO has been running many public outreach seminars, both to large customers and small customers, preparing them for this change, and if you were at those outreach sessions, you would not hear PECO say, Buy from us, because they know that their price is likely not to be the best price for their large customers. And the profit motivation under the framework that was created for the Provider of Last Resort pricing isn't that rewarding for PECO, that it provides a big incentive for them to try to hold onto customers and have them come in under this Provider of Last Resort rate.
Okay. That's very helpful. You must have gone 21 6/8/10 - TRANSPORTATION - BILL 100368 to St. Joe's.
But I just feel good that we understand the importance of the relationship, and if PECO is not the number one in that category of being involved in the community, contributing to community, it's tied for first. So it's not like we got a borderline case here, and I think you've made it very clear that you understand that.
Thank you, Mr. Chairman. Good morning, Mr. Davis, Ms. Cutler. DEPUTY
First of all, I'm a Roman guy, so I don't know if 22 6/8/10 - TRANSPORTATION - BILL 100368 I can really agree with you, Mr. Davis, but --
Sir, I ride the bus with a lot of Roman kids every day to school. Does that count?
That's good. I agree with Councilman O'Neill as far as PECO is concerned. They've been a great partner with the City for many, many worthwhile projects, and this is something that we would really have to look at. But this bill is giving us the ability to look around, to shop around for a good supplier and a good price, perhaps to save the City money, we hope. Could you tell me, if a supplier is picked, how long would the contract be for; do you know?
The way that these prices -- these contracts would be structured is typically on a one-year basis for a certain amount of power. The 23 6/8/10 - TRANSPORTATION - BILL 100368 intention is that the City would buy blocks of power. That is, if you think about all the power we use and you think about it as sort of building blocks to cover all of the power requirements that the City has, we would be buying these blocks in each of the City's fiscal year. And one of the things that this bill 10 allows us to do is to look out to Fiscal Year 2013 and 2014 and look at the pricing that's available out in those years and make some good decisions about whether or not it's the right time to lock in that price. And so typically each one of those agreements would be for a year. So it would be a certain amount of power delivered to the City for a year.
The current price in the energy market is about $55 a megawatt hour. The price -- if you look at what the price has been over time, 24 6/8/10 - TRANSPORTATION - BILL 100368 you'll see a wild fluctuation starting as low as about $35 in year 2001 or 2. It rose to over $100 in 2008, which was just before the recession. So if you recall back in the summer of 2008, gas prices were probably at the highest we've ever seen them. They were in the $4 range. I know because I bought a Prius, but the -- not a great investment. But at that point, prices really peaked out and then subsequently have fallen, not precipitously at first but at this point are very close to where we think the bottom is. The other thing about electric prices is, they're very closely tied to natural gas prices. So if you look at the commodity market for natural gas, you'll see that over time there has been a very close association between rises in natural gas.
The natural gas 25 6/8/10 - TRANSPORTATION - BILL 100368 prices right now are very low.
With the de-regulation, do you expect, in just your opinion, these prices to continue to fall or do you expect them to...
Well, I think the prices right now are -- there's certainly no guarantee that they couldn't go lower. So the real question is, I think, if you're looking into the market and you want to buy smart, you don't put all your eggs in one basket. So if we had authorization today to go out into the market and buy, we certainly wouldn't buy 100 percent of what we need for any year. We would be buying pieces of what we need for each of those years and waiting to see what happens in the market. This is, as you know, it's like any market, it's subject to fluctuation, but I think we would try to buy a fair amount of power while the market is at the current pricing.
Thank you. 6/8/10 - TRANSPORTATION - BILL 100368 Thank you, Mr. Chairman.
Thank you, Councilman. Councilman Clarke is also here. Councilman, you had a question or a comment?
Yeah, I know. It's the company I keep. Thank you, Mr. Chair. Good morning. I just briefly want to say a couple of things. I had some minimal involvement throughout this process. I'd just like to say that in listening to the testimony and having a little bit of interaction with you all, first I would like to on the record just commend you, your team from the Administration, Barry from the Law Department and Ms. Cutler as it relates to your forward-thinking approach on 27 6/8/10 - TRANSPORTATION - BILL 100368 getting out in the market early on and locking in what we hope will be probably the lowest pricing as it relates to units on this particular issue. We were all concerned, which is why we introduced the Energy Authority bill, and once we did that, we found out that you guys had already started the process of preparing the City of Philadelphia to be involved in a meaningful way early on in the process, and I want to commend you publicly for your good work and making very prudent decisions on this. And I would like to also concur with Councilman O'Neill as he references the longstanding relationship and, we believe, future relationship with PECO. They have not only been a wonderful participant as it relates to providing energy to the City of Philadelphia and the citizens of the City of Philadelphia, but I think in some cases, most importantly, as a corporate partner, and we also anticipate both in their role as 28 6/8/10 - TRANSPORTATION - BILL 100368 dealing with distribution of power, that will probably continue, one based on statute and one most likely the most prudent decision. And the corporate partner, needed to be said, we always relish that opportunity to continue that relationship, but -- and there's always a "but" -- I think it's also important to understand that at the end of the day, both we as elected officials and individuals who are appointed, the most important aspect of all of this is to make sure that we make the best decisions for the citizens of the City of Philadelphia, be it commercial customers, be it institutional customers or be it residents. So I think that having the ability to make these decisions, as you say, not locking yourself in the entirety into any one thing to give you the flexibility, because we all don't know where this market is going to go. It probably won't -- as the de-regulation 29 6/8/10 - TRANSPORTATION - BILL 100368 kicks in, the prices probably won't go up as some of us thought or some other things, some of the advocates, and it probably won't go as low as some of us wish, but whatever happens, I think it's important for us to be best positioned to make the most prudent decisions. And if there is an opportunity for purchasing power from a supplier, we need to be in a position to do that, be it the Administration's team -- and I understand as a part of this ordinance, there's language with respect to the advisory group as a part of that? DEPUTY
Or be it as we move ahead with the Energy Authority, wherever that may go. I just want to say it's very important for us to be in a position. So at the end of the day, we obviously hope we continue our long relationship with PECO, but we also hope 30 6/8/10 - TRANSPORTATION - BILL 100368 that we're in a position to make the most prudent decision for our residents and our businesses and the City of Philadelphia and any other entity who would like to participate in some sort of aggregation strategy. So I just want to say that for the record.
Thank you for those brief comments. Any other questions or comments? (No response.)
Thank you both very much. Thank you for your testimony. DEPUTY
Is there anyone else here to testify on this bill? (No response.)
Seeing none, that will conclude the hearing on the Committee of Transportation and 31 6/8/10 - TRANSPORTATION - BILL 100368 Public Utilities. We will now go into our public meeting, and the Chair recognizes Councilman O'Neill.
Yes. First of all, Mr. Chair, I would like to move an amendment to Bill No. 100368 that Ms. Cutler testified on, and it is in the second "whereas" clause "PECO Energy electric distribution territory" is deleted and replaced by "Philadelphia Region." I'd like to move that amendment. (Duly seconded.)
It's been moved and seconded for adoption of the amendment. All in favor say aye. (Aye.)
Hearing none, the amendment is adopted. Once again, Councilman O'Neill.
Mr. Chair, 32 6/8/10 - TRANSPORTATION - BILL 100368 I'd like to move Bill No. 100368, as amended, and further move that the rules of Council be suspended so as to allow first reading at our next session of Council. (Duly seconded.)
It's been moved and seconded. All in favor please say aye. (Aye.)
Hearing none, Bill No. 100368, as amended, is reported out of this Committee with a favorable recommendation with a suspension of rules to allow for first reading at our next session of Council. Being no further business, this Committee stands adjourned. Thank you all very much. (Committee on Transportation and Public Utilities concluded at 9:50 a.m.) 33 CERTIFICATE I HEREBY CERTIFY that the proceedings, evidence and objections are contained fully and accurately in the stenographic notes taken by me upon the foregoing matter on June 8, 2010, and that this is a true and correct transcript of same. -------------------- MICHELE L. MURPHY RPR-Notary Public (The foregoing certification of this transcript does not apply to any reproduction of the same by any means, unless under the direct control and/or supervision of the certifying reporter.)