COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE ON FINANCE and COMMITTEE ON TRANSPORTATION AND PUBLIC UTILITIES - - - - Room 696, City Hall Philadelphia, Pennsylvania Wednesday, March 24, 2004 2:10 p.m. - - - - BILL 040153 - An Ordinance approving the Fiscal Year 2004 Capital Budget providing for expenditures for the capital purposes of the Philadelphia Gas Works... RESOLUTION 040149 - Resolution authorizing City Council's Committee on Transportation and Public Utilities to hold public hearings to investigate the proposed gas cost rate increase to be effective September 1, 2004... RESOLUTION 040216 - Resolution authorizing City Council's Committee on Transportation and Public Utilities to investigate and hold hearings on the Petition of the Philadelphia Gas Works to the Pennsylvania Public Utilities Commission... - - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2 PRESENT: COUNCILWOMAN JANNIE BLACKWELL, Chair COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL CLARKE COUNCILMAN DAVID COHEN COUNCILMAN W. WILSON GOODE COUNCILMAN JAMES KENNEY COUNCILMAN RICHARD MARIANO COUNCILMAN MICHAEL NUTTER COUNCILMAN BRIAN O'NEILL COUNCILMAN JUAN RAMOS COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO COUNCIL PRESIDENT VERNA - - - - I N D E X BILL 040153 CRAIG WHITE............................. 5 THOMAS KNUDSEN.......................... 8 RESOLUTIONS 040149, 040216 THOMAS KNUDSEN......................... 142 PHILIP BERTOCCI........................ 176 3 03/24/04 - FINANCE - BILL 040142
Good afternoon. Thank you for your patience. We would now like to begin our Finance Committee with regard to PGW. We have a quorum present. To my left is Councilman W. Wilson Goode; to his left, Councilman Brian O'Neill; to his left, Councilwoman Marian Tasco; to my right, Councilman Rick Mariano; also a member of our Committee Councilman Frank DiCicco is standing on the side. So we have a quorum. We will begin our testimony. Before I call on the Clerk to read the title of the bill, I would like you to note that in addition to PGW's Capital Budget, this Committee is also scheduled to hear testimony on Resolution No. 040229 sponsored by Councilman Brian O'Neill which deals with the senior citizen discount. Soon after we finish taking testimony, the Committee will recess to allow testimony to be taken on the two resolutions listed before the Committee on Transportation and Public Utilities. Once that is finished, the Committee on Finance will reconvene for the purpose of reporting 4 03/24/04 - FINANCE - BILL 040142 out the bill. We will now call on the Clerk to read the title of Bill No. 040153 concerning the Philadelphia Gas Works Capital Program.
Bill No. 040153, an ordinance approving the Fiscal Year 2004 Capital Budget providing for expenditures for the capital purposes of the Philadelphia Gas Works, including the supplying of funds to be obtained in connection therewith, and acknowledging receipt of the Forecast of the Capital Budget for Fiscal Years 2005 through 2009.
Thank you very much. We would ask those representing Philadelphia Gas Works to come forward and begin their testimony. We understand that we have prepared testimony from Craig White, acting CEO and Senior Vice President of Philadelphia Gas Works. The Clerk will also read the title of the resolution before you begin since we will hearing them consecutively. 5 03/24/04 - FINANCE - BILL 040142
Resolution 040229, a resolution calling upon the Committee on Finance to conduct hearings on the audit of the Senior Citizens Discount Program offered by the Philadelphia Gas Works.
Thank you very much. Thank you. Good evening, Gentlemen. Mr. White, Mr. Knudsen, we ask you to identify yourselves for the record and begin your testimony.
Good morning, Madam Chairwoman. My name is Craig white. I'm the acting Chief Operating Officer for Philadelphia Gas Works.
Good afternoon. My name is Tom Knudsen. I'm Chief Executive Officer of the Philadelphia Gas Works.
Madam Chairwoman, I'd first like to begin by thanking you for this opportunity to come before you today. I'd also like to take a moment and indicate that the Capital Budget which I'm here to discuss 6 03/24/04 - FINANCE - BILL 040142 was worked -- it's worked its way through the procedure, and I want to personally thank Chairwoman of the Philadelphia Gas Commission Tasco and the Gas Commission, along with the Gas Commission staff, which includes the Executive Director, Ms. Parrish and Hearing Examiner Tarlton Williams (ph). I have, as you know, submitted testimony for the record and I certainly am prepared to read it, summarize it, or if you prefer not do either and just accept questions at this point. I'm at your discretion.
Would the Members of the Committee like the testimony read or would you like -- perhaps a summary would be great and then we'll start with questions.
Very good. Thank you. As I indicated, I'm here in reference to the Capital Budget. PGW's Capital Budget is at a level of $65 million. That $65 million is primarily almost exclusively made up of costs that deal with supporting the core business. By the core 7 03/24/04 - FINANCE - BILL 040142 business, I mean our distribution function, our field services, and our gas processing. As you know, we have an extensive system of mains and services in the streets of Philadelphia. Much of that is cast iron which we have to replace under our Prudent Main Replacement Program. Secondarily, we have two gas plants, and the two gas plants have liquefaction facilities that are necessary to enable us to meet our requirements in both normal and in worst-case winter situations. The remaining 10 percent of the budget deals with smaller items in the areas of transportation, information technology, and some of the smaller areas of the company. But in summary, the majority of this budget, as I had indicated, reflects continued effort to support the core business. And in recognition, obviously, of our financial condition, we have looked for every opportunity to reduce costs and, of course, we worked hand-in-hand with the Gas Commission -- when I say hand-in-hand, the Gas Commission 8 03/24/04 - FINANCE - BILL 040142 oversaw the process. And we're here before you today post that process.
Thank you very much. Mr. Knudsen, would you like to make remarks or are you prepared to just take questions?
If you would, Madam Chairwoman, I'll just read it. It's a very brief piece of testimony, just so that the record is clear. With regard to the Senior Citizen Discount Audit, PGW recently sent letters to customers participating in the Senior Citizen Discount Program because an audit that we had conducted indicated that those customers were no longer alive or with us and were not the appropriate customers of record. It is important for a host of reasons that our records be correct. The letters we sent serve two purposes. Actually, we have sent some, and we have more to send. First, it is to inform the surviving household members who might be eligible for 9 03/24/04 - FINANCE - BILL 040142 the senior citizen discount that they could remain on the program if they only provided PGW with proper documentation for eligibility. The second purpose of the letter, obviously, was to ensure that those who are no 7 longer eligible or who are not eligible in that household, that they can no longer continue with the discount. In other words, they didn't meet the criteria of being 65 years of age or older. After the initial mailing of 4,000 accounts, which raised concerns amongst some of our senior citizens, we are now sending out only a thousand of these per week. Of the total 60,000 customers who qualify or had qualified for the senior citizen discount, we determined that 13,000 of them fit within this category of concern. We have set up a special procedure at the district offices to minimize the confusion going forward for those who are now and will be receiving the balances of these notices. We have proposed, as you know, that the -- there was an agreement amongst parties 10 03/24/04 - FINANCE - BILL 040142 that was presented to the Public Utility Commission and is now awaiting their decision to continue the Senior Citizen Program but under new eligibility requirements, effective September 1, 2003. For the current participants of that date, there is no change. If the senior citizen discount is applied for after September 1st, eligibility would begin from that date of application --
Would you pull your microphone a little closer? It's hard to hear you.
And most importantly, all new applicants must be 65 years of age, reside at the address receiving the discount, be responsible for the PGW bill, and have household income less than the 250 percent of the federal poverty standard for a two-person household, which is currently about $30,000. As I said, these changes now await the PUC approval. I am available for whatever 11 03/24/04 - FINANCE - BILL 040142 questions you might have, particularly on the question of the audit.
Thank you very much. With regard to the Capital Program, I have a few questions. Number 1, regarding the gas processing department, what is the status of the previously approved project to replace PGW's aging LNG plant? And with that question, there are a couple other questions. When will the new plant be operational? And will the delays result in higher cost for consumers? And finally, on the LNG plant, should we expect to see additional capital funding for this project?
Madam Chairwoman, I would like to answer that question. As far as the new LNG plant, we certainly expected it to be online before this point in time. The manufacturer of the facility Air Products, ran 12 03/24/04 - FINANCE - BILL 040142 into some design problems. They've made modifications. We're in the testing phase again as we speak. And at the present time, the plant has not been able to be run at the contractual performance specifications. We do not anticipate any additional requests for spending pertaining to that plant. The arrangements that we have made with the contractor require the contractor to pick up all the costs to complete the project and make it operational. We are optimistic that this plant will be operational in the very near future, but I must say with complete candor that we have been working for about six months now on completing the project with the manufacturer, and they are having difficulties. So I cannot give you any absolute assurances as to when the plant will be complete. What I can assure you of is that we are not spending the dollars and the ratepayers of Philadelphia Gas Works aren't contributing anymore dollars.
Thank you. Last year, PGW installed automatic 13 03/24/04 - FINANCE - BILL 040142 meter reading devices throughout the City. Have there been complaints from customers resulting from the new meters.
I would say to the contrary. We're better than 99 percent saturated as far as automatic meter reading devices are concerned. We only have 1800 homes that do not have a automatic meter reading device, and we have a program to complete that by September. So that answers the first part of the question. The second part of the question is whether we're getting complaints. Certainly, the facts that customers aren't getting estimated readings as they were prior to the automatic meter reader devices -- and just to give you an idea, better than 50 percent of all of our reads were estimated. Now, better than 99 percent are actual. So we're about to go into the phase of replacing units that wear out and replacing batteries in units as they expire over time.
Thank you. Before I ask my next question, the Chair notes 14 03/24/04 - FINANCE - BILL 040142 Vice Chair of the Committee, Councilwoman Blondell Reynolds Brown is here and also Frank Rizzo. We thank them. Councilman Michael Nutter is likewise here and will Chair the Transportation and Public Utilities hearing when we recess this one. My next question is, with respect to limited line item transfer authority, do we have your assurances that PGW will not use this line item transfer authority to fund new projects which should be presented as proposed amendments to the Capital Budget?
You must certainly do. In no instance will we overrun the budget. We are just talking about line item transfers within a category such as our distribution department. We may move dollars from four-inch main replacement to eight-inch main replacement. But all in all, the cost will stay within budget.
Great. What is the status of the weather normalization adjustment? How does this impact seniors and 15 03/24/04 - FINANCE - BILL 040142 people who are on a fixed income?
The current status of the weather normalization adjustment for this year, it's pretty much been a normal winter, so in a normal winter the customers are not going to be billed incrementally or they're not going to be receiving a credit. I think at the present time, we are probably at about $1.5 million worth of warmer than normal credits, but, of course, there's a band around that weather normalization that we only collect above and below a 2 percent band. So the winter is not yet over, but the numbers are very close this year. It's not like a few years ago when we had a winter that was 35 percent warmer than normal. We're actually experiencing a winter that's a little bit warmer than normal, but not much. So it will not have a significant impact, in my opinion, this year.
Thank you. When do you, or do you anticipate repaying the loan City Council made?
We're in the process 16 03/24/04 - FINANCE - BILL 040142 of -- and that will be discussion before the Transportation Utilities Committee -- of attempting to finance the company's operations. At the present time, it is not clear to me precisely when we'll be able to pay that. We are anticipating and budgeting, and if the appropriate actions are taken both at the PUC and on the part of our customers, most importantly on the part of our customers, if they pay their bills and particularly this summer as we go into fall, then we would be on schedule to pay the 40 million back in 2006, as anticipated. Obviously, we have some uncertainties about that right now, but that is the plan, is to pay it back in 2006.
Thank you. Can you let us know if it's PGW's plan to acquire land as part of its Capital Program?
The only land that we have interest in is the section of our Richmond plant facility in the Tioga section 24 that was formerly the Franklin Smelting facility. The piece of the Franklin Smelting 17 03/24/04 - FINANCE - BILL 040142 property that actually encroaches on our fence line is an area that we would like to acquire, and we have had discussions with PIDC in reference to that piece of property.
In light of the financial straights, is there still talk of, quote/unquote, selling PGW that you're aware of?
Councilwoman, there's no active conversation about selling PGW at this time.
Thank you, Madam Chair. Good afternoon, gentlemen. In response to Chairwoman 18 03/24/04 - FINANCE - BILL 040142 Blackwell's question regarding the City payment back to the City, your response was, "If appropriate action is taken by both the PUC and the customers." What is the desired appropriate action of the PUC?
That is the subject for the Transportation and Utilities Committee. I have proposed a type of regulatory treatment that in the event that we're not able -- and I don't take this position, by the way. I think we do have the ability and the opportunity to have our customers pay for their bills this summer. In the event that they were not able to pay the amount of money that we need to continue to operate the company, then the request to the PUC is for a flexible clause that would give us just that amount of money that we need to keep operating, and that is the action that I want the PUC to take. It may very well be -- and I'll emphasize this in the next proceeding as well -- that if we collect from our customers 19 03/24/04 - FINANCE - BILL 040142 in the manner that I think we can and that they must pay, then we will not exercise this clause, this flexible clause this year. But if they don't pay the way we need them to pay, then I had very little option but to propose such a mechanism.
Has PGW been down this road before of wanting to consider the option of what you call a flexible clause?
We haven't up 'til now. In each of the two prior proceedings where we've sought rate relief from the PUC, we sought a permanent increase in rates. For a whole host of reasons, I don't think that's the appropriate response, and I would be prepared to talk about specifically why I think a more flexible approach is more merited here.
Very well. I'll wait until the next hearing. Thank you.
Thank you. The Chair also notes that Councilman Ramos is here who is also a member of this Committee. 20 03/24/04 - FINANCE - BILL 040142 Councilwoman Tasco.
Good afternoon, Mr. White, and good afternoon, Mr. Knudsen. As you stated earlier, the Gas Commission did and does sit to hear the testimony relative to the Capital Budget as well as the Operating Budget. And certainly, there are many discussions that take place at that time that the Council does not have access to that information. So a number of the questions I will be asking will be questions, yes, we have asked, but I want this record to be clear here which will give us some idea about what the financial condition of PGW is, because we do all have some responsibility to try and figure out how we rectify the problems at PGW. So it's very important for the Councilmembers to have some knowledge of what you and the company encounters and what we've heard during our course of the deliberations with you before the Commission. We understand that maintaining the safety and reliability of the gas distribution 21 03/24/04 - FINANCE - BILL 040142 system is of paramount importance. At the same time, PGW's capital spending must fit within its present financial constraints. PGW contends to be completely dependent on long-term debt to fund capital improvements. There have been no 8 internally-generated funds for many years, and PGW's financial forecast show there will be no 10 internally-generated funds anytime soon. PGW contends to be burdened with $1 billion in long-term debt. PGW's debt service cost continue to be its third highest rating cost, second only to the cost of gas supply and labor expense. Rather than moving towards significant debt reduction, PGW is in a hole which is getting deeper every year. In June 2001, PGW issued $120 million of debt for its capital needs. In December 2002, PGW issued another $125 million in revenue bonds. In the Fiscal Year 2004 operating forecast, PGW projected it would issue another 125 million in December 2004 and then another 125 million in December 2006. 22 03/24/04 - FINANCE - BILL 040142 Now PGW is indicating that the December 2004 issue will have to be moved up to the late summer or early fall of the year. The question is, at this rate, is there any end in sight? And how will PGW ever make headway towards achieving its stated financial goals when it is taking on this much additional debt every year and a half or so?
Councilwoman Tasco, if I might, I'll respond to that. Within the last 12 to months, gas 14 prices have gone up substantially, in fact, 15 markedly. Some of our customers have seen a 50 percent increase in their bills. That being said, prior to the run-up last year or the beginning of the run-up in the prices last year, PGW was on target with its workout program to continue its obligations, both to meet the $45 million repayment in August of 2006 and to start paying down some of the outstanding long-term debt. It is only as a result of the buildup in gas costs over the last 12 or so months that are beyond the 23 03/24/04 - FINANCE - BILL 040142 control of the company, that are the function of market conditions, national market conditions that we find ourselves in the circumstance we are right now. It is my position that regardless of what has happened to the markets, people must pay their bills. So my response to you is that I think there has to be a requirement on the part of the Administration and maybe this Body, certainly some of the social service agencies, to require people to pay the money that is owed. Short of that, there is no 14 answer to this problem. We want to be as responsible as we need to be in dealing with people as equitably and fairly in as even-handed a manner as we can. But they must pay their bills. Otherwise, no company can survive.
Could you tell me what is PGW doing to ensure that the most risk-prone iron cast mains are being replaced first? And what steps is PGW taking to ensure that its current practices are effective and up to date? 24 03/24/04 - FINANCE - BILL 040142
Councilwoman, I'd like to answer that. As I had indicated in my written testimony, there are a number of things we look at in determining what is the riskiest or the riskier mains in the streets of Philadelphia. We have approximately 1700 miles out of our 3,000 miles of mains that are cast iron. We look at a number of things, not the least of which is the break rate of mains in a particular block and, of course, we fix a break after it occurs. But once a block has a certain number of breaks in it, one reaches the conclusion that that is a riskier situation and that, of course, rises to the top. We use a model, a projection model or a model that evaluates the risk profile. And what we have done is we've established a 18-mile program, which is a little more than percent or about percent a year of the cast iron, and we remove that. And that's the largest expenditure in our current Capital Budget. There's approximately 20-plus million dollars associated with the prudent main 25 03/24/04 - FINANCE - BILL 040142 replacement program, and then, of course, there's other utility work that we have to account for when our facilities are undermined. But certainly to be specific in reference to your question, we look for the riskiest blocks. We have a number of both historical and projection tools to ensure that we target the right blocks and we move forward with a capital program targeting those blocks.
One final question. Just give us an update on your fleet reduction. I know we've asked you over and over again in terms of reducing the PGW fleet. What are you doing to reduce its vehicle fleet cost and the size?
In the very recent past, we reduced the number of sedans in an agreement with the Philadelphia Gas Commission. We further have frozen the level of field service van requirements. In light of our financial condition, instead of requesting an $8 million Capital Budget for the replacement of vehicles that are beyond the point where you, using best practices, 03/24/04 - FINANCE - BILL 040142 would replace them, we've opted to continue to utilize those vehicles and continue to maintain them, and hence our budget has been reduced materially. As time has gone by, we have been able to come up with new strategies. At the request of the Commission to reduce the fleet, we are attempting and we are being successful at using vehicles on cross-functional or on a cross-departmental basis where collections may be working and field services are not at the same level of staffing at a particular time in a day, we will shift vehicles from one area to another. So we're looking for opportunities to keep the fleet at the size that it's at right now, which is much smaller than it was. And then, of course, we're looking for ways to maintain these vehicles in a more efficient way to keep the cost down.
Gentlemen, your 27 03/24/04 - FINANCE - BILL 040142 '03 Capital Budget, how much was that? This is '04, right, that we're doing today?
Yes. The '03 Capital Budget, I believe, after amendments, was in the same neighborhood as this Capital Budget.
And have you spent part of it, all of it? How much is remaining?
Well, in the course of a fiscal year, we spend very close to what we budget. But in many cases, it is budget dollars from the prior year that actually gets spent in the current year. So you've always got this stepping forward where some programs start and then for a variety of reasons -- I'll give you one example, Councilman. If we do a large project where multiple utilities have to get in and do the work, for instance, the Water Company has to get in and then we have to come back in at a later date, that may cross fiscal years so the actual spending that was approved in one year may occur in the next year. But certainly, we keep our overall 28 03/24/04 - FINANCE - BILL 040142 spending within the budget limits that are approved by City Council.
And your line item changes are brought back to the Finance Committee to the Capital Budget?
The line item authorization that we're talking about here is just line item transfers within a particular department within the company. And at this point, the line item authorization is pursuant to some discussion and agreement with the Philadelphia Gas Commission.
So you don't have to bring any line item changes back to City Council once the budget is passed?
In other words, we approve A, and you do B or C or some other item; you need the Commission approval but not City Council's?
I guess the way I would answer that, Councilman, is we're only transferring within the category. So we're 29 03/24/04 - FINANCE - BILL 040142 not starting a new program. It's not as if the Council authorizes PGW and their gas processing plant to purchasing a new natural gas heater to heat the gas, we're not going to take that money and then buy a boil-off compressor. We have to use the money for what it's intended for. The primary reason was for our distribution department where we can't anticipate exactly how we're going to spend money within that department. We don't know when we have a cast iron main break or even a break somewhere in the City, we're not sure that's going to be a six-inch, an eight-inch, a larger diameter. We have certain budgeted amounts in those categories, but invariably the amount that we budget may differ from the amount we actually replace. So we asked for the authority to move within those line items, and that was really the intent.
Yes. As I understand it, the City Council has provided that to the 30 03/24/04 - FINANCE - BILL 040142 Gas Commission.
This is the end of March '04. Council is getting ready to deliberate the City's Capital Budget for '05, which is our normal time frame. We'll have to pass it by the end of May, '05, starting July 1, '04. How come we are behind -- and this is not the first time. We're behind on the PGW Capital Budget by almost a year in terms of that fiscal year process that we do with the City.
I would say that it's a phenomena that's occurred over the last couple of years, and we have to return to a March 1st filing with the Gas Commission. We intend to do that next year. We went through a period of time where we did a consolidated budget where we tried to consolidated both the Operating and Capital Budgets. And the company was unable to meet certain targeted filing dates due to the fact that we're in the middle of the operating season and the complexities of the budget process. But we believe with the flexibility that we have with 31 03/24/04 - FINANCE - BILL 040142 the line item transfer capability and we believe that with the recognition that we enter the fiscal year with an approved budget, that we will be filing the '05 budget March 1st of next year, and we intend to submit this year -- I'm sorry. The upcoming budget, we intend to submit to the Gas Commission by May 1st.
The Chair notes that Councilman Cohen is here. Thank you. Councilman Nutter.
Thank you, Madam Chair. Mr. Knudsen, I wanted to ask you a couple questions, and then you made a 32 03/24/04 - FINANCE - BILL 040142 statement which I'll acknowledge I was talking while you were talking, but I heard something in that legislator's third ear that caught my attention. I wrote it down, I need to come back to it. Councilwoman Tasco went through a list of recent borrowings. What is the total outstanding debt of PGW at this point?
What's the breakdown of the billion one between short-term and long-term?
It's about 965 million long-term and about 125 or so million short-term.
From time to time, the issue arises with regard to asset 33 03/24/04 - FINANCE - BILL 040142 sales. That's been a topic of conversation from time to time with regard to the company, and it's been a recent topic of discussion -- not the general term "asset sales," I have not heard PGW say that in recent times. Have you had any discussion or -- for instance, the 21st Century Review Forum on behalf of the Mayor did a significant amount of work in a variety of places. Have you had any discussions with anyone in recent times about possible asset sale involving PGW?
I've had no 14 discussions in the last 18, 24 months about the sale of PGW.
When it was a current topic about two years ago at the time that the feasibility study was still underway and so forth.
You never 34 03/24/04 - FINANCE - BILL 040142 received a copy of the feasibility study?
It was conducted for and by the Finance Department. We were interviewed, but there was no real reason for me to see the study. No action was taken on it.
Okay. You mentioned the $45 million, again, I think the outstanding loan in the context of one of your responses to Councilwoman Tasco. When was that initial forwarding of funds or technically filing of funds?
January of 2001. If you recall, in the winter of 2000-2001, we had a substantial spike in the cost of gas. And because of the condition that the company was in at the time, we had no working capital, much as we are right now. And in that period the 45 million was advanced to us, it was then negotiated over a period of time for repayment in August of 2006. 35 03/24/04 - FINANCE - BILL 040142
So it's still the original $45 million still that's outstanding? Have you made any --
Well, understand it's in a fund where we make -- essentially, the money is segregated. And as we develop any kind of working capital, we pay down the note. The balance may go down to or or 11 $30 million. We use it as a revolving credit 12 kind of facility. But the nominal amount of 13 the loan we can borrow up to at any one time 14 is $45 million. 15
Do you ever 16 actually anticipate repaying that loan? 17
Well, as I said in my 18 earlier comment, until last spring or last 19 summer, I fully anticipated paying it. We had 20 a full workout plan and we were on that plan. 21 When the gas cost escalated last spring and 22 summer and have continued since then, it's put 23 that whole program at risk. My issue with the 24 circumstance right now is that I think our 25 customers need to pay. There's a lot of 36 03/24/04 - FINANCE - BILL 040142 people who can pay, if not all of the bill, most of the bill; if not all of the bill, some of the bill. But we need to get the cash in the door. If we are able to obtain the funding that we need to operate from our customers in return for the services that we provide, we can stay on course. We've lost a year, year and a half, but we can stay on course.
In response to one of the questions, I believe again, from Councilwoman Tasco -- and I don't know what the question was and I also don't know what the beginning of the answer was, but what I took down was -- maybe you'll recall -- "there was no answer to this problem." What question was that in response to?
What I said was that if people don't pay their bill -- Councilwoman Tasco was asking about the financial workout, how were we going to not incur all of this debt going forward. If people don't pay their bills, we've got a very basic problem; we 37 03/24/04 - FINANCE - BILL 040142 don't have a business. At some point we have to make sure that people who are responsible and incur these obligations pay for them. So that was when I made that statement. It was in the event that our customers absolutely would not pay or did not pay that there was no 8 real answer to this problem other than bankruptcy.
Well, I don't know that it can get to that position. Somewhere along the line we will have to shrink the company substantially and provide core services to the point where people pay enough that we can keep this system alive. But we're talking serious stuff here because I don't know where the funds will come for PGW. We are -- we provide a substantial service to this community in providing gas to a whole host of people who cannot afford it on some level.
Okay, we can pick that back up in the Transportation and 38 03/24/04 - FINANCE - BILL 040142 Public Utilities. Let me ask you about a replacement question. I don't know whether it was yourself or Mr. White. You said you have a 1 percent per year replacement program?
Yes. Our Capital Program pertaining to our cast iron main replacement, we do it in accordance with best practices, and best practices calls for companies with the sizable inventory that we have of cast iron to replace it at a minimum of at least 1 percent. And of course, you want to establish that 1 percent at a point in time so that the timing which you remove cast iron isn't infinite. So right now we're at around 1700 miles and we're replacing miles 18 a year. So we're a little over 1 percent being replaced a year.
What's the average -- what's the current average life of the system?
Well, some of this pipe is well beyond it's accounting useful life. But if it's undisturbed, cast iron will 39 03/24/04 - FINANCE - BILL 040142 last --
It's operating useful life if left undisturbed can go for many, many years. What we're doing, as we're targeting those sections of the pipe --
Some of the cast iron has probably been in the ground since 1850.
I wouldn't be able to answer that. I'd have to get back to you on that. I certainly can tell you that the pipe that is typically the older pipe that we would not have remove that we don't have as much of a problem with would be your larger diameter cast iron. There's less risk with large diameter because it can bear the weight of 40 03/24/04 - FINANCE - BILL 040142 pipe if it gets undermined. The smaller diameter pipe, of course, if it's undermined in any way, certainly, that's where you run into problems.
The Chair notes that -- Councilman Rizzo wants a follow question. And we also thank Councilman Kenney for being here. Councilman Rizzo.
Thank you, Madam Chair. Mr. White, you indicated that when I believe it was Councilwoman Blackwell asked about land acquisition that you're looking to purchase a piece of land from the Franklin Smelting property?
Are you aware that the slag pile at that site is a Superfund location?
Yes, sir. But that piece of land where the slag pile is, that's on the other side of -- I believe it's Venango 41 03/24/04 - FINANCE - BILL 040142 Street. We're talking about just the small piece of the Franklin Smelting property that encroaches in the area of the Philadelphia Gas Works.
No. But certainly that particular facility had significant issues over the course of time, but clean-up has occurred.
Well, I'd be interested because the Franklin Company's telling the federal government that they don't have the wherewithal to clean that site up, so I'd like to know who you're negotiating with because they're suggesting that these folks aren't even around to be responsible for that clean-up. So I would really like to find out because I would love to go after some of that money the minute that they're selling something. So could you help me with that?
Yes. My understanding is that Franklin Smelting isn't in the picture here at all. It's the PIDC, Philadelphia 42 03/24/04 - FINANCE - BILL 040142 Industrial Development Corporation, that owns the property. And the Philadelphia Industrial Development Corporation has an obligation to sell the property, as I understand it, at the best fair market price. And we are in the process of negotiating what we believe is an appropriate fair market price for a piece of property in the condition that that's in.
And it's not contiguous with the location where the present slag pile is tarped and fenced?
Thank you. Thank you, Madam Chair. I appreciate that. Is it an appropriate time to ask a quick question about the collection policy? Could I do that right now? Mr. Knudsen, could you explain the process that PGW follows? I believe the process that you follow, and correct me if I'm wrong, is different than other gas utility companies. How I understood, as an example, PECO Energy -- and I'm doing this from memory 43 03/24/04 - FINANCE - BILL 040142 now. That if a person doesn't pay their bill, that April 1 comes around, the service is terminated. The service is not restored even when winter approaches if they don't pay their bill. I understand that PGW will reestablish the service like I just described if the customer doesn't pay their bill when winter comes. Are you following the same policies that other gas utility companies, or do we do something different here?
Councilman, we follow the same policies that are provided for all utilities in Pennsylvania. It's known as Chapter 56 and it's the Rules of the Pennsylvania Public Utility Commission.
So if a person right now is turned off when the moratorium is over -- April 1, is it?
The whole summer goes by, they're off, their service is off. They haven't paid a dime. You put them back on? 44 03/24/04 - FINANCE - BILL 040142
No. The regulations or the process calls for our never turning them on if they do not approach the company for a payment arrangement, some way of paying down whatever the accrued bill is and maintain themselves currently going forward. Then we're in a position to turn them on according with the regulations. If they never make a payment, if they never approach us, they stay off for the entire winter.
Well, what I understand is maybe we do something a little different than you just described. I've been led to believe that there are customers that are shut off in April, that somehow without paying one dime are restored when the winter heating season is upon us. Are you telling me that if a person doesn't make any arrangement and isn't paying that they are not put back on?
That is the policy. They have to make some arrangement with the company for some kind of payment on some sort of going-forward basis or they don't get 45 03/24/04 - FINANCE - BILL 040142 turned off.
What if between April 1, October, November, they've made an arrangement but they haven't kept the arrangement?
There is the circumstance that people who may make an arrangement and break the arrangement in such a way that the process -- there are six steps to termination. They take a number of weeks. If they make an agreement and break the payment in a time frame that they can get to December 1st before we can turn them off, according to the rules and regulations, then they are on the system until the end of March. Yes, that circumstance can evolve.
I'll be honest. Many people that I've talked to from other utilities blame our policies like you just described as part of you digging yourself in deeper and deeper and deeper every year. You as an executive of this company, top executive, you don't think you could fix this by working on these policies that you 46 03/24/04 - FINANCE - BILL 040142 just described, the loopholes and the way people manipulate the system? Because when people know that the minute winter comes that they're going to be reinstated, you don't give them much of an incentive to pay their bill.
Councilman, we are more sensitive to the issue here. Let me say two things, the winter moratorium being the most troublesome of all of this. It is not a Pennsylvania-alone policy. Winter moratoriums apply basically in most cold weather states. So we're not alone in this. And I think the theory that gave rise to a moratorium was a good one. I mean, it basically said there were certain people who are going to get strapped financially or by circumstance and we need to make it that they can keep warm in their homes until they can get themselves back on their feet, presumably by the end of the winter. The difficulty is that those theories were first presented some decades ago. To answer your question about me as an executive, I am very instrumental in the Energy Association of Pennsylvania. We are 47 03/24/04 - FINANCE - BILL 040142 trying very hard to get some of these policies through the Association because no one utility really can effect this by themselves to bring to the attention of the powers that be that some of these processes and policies don't work anymore or they work to the detriment of the utility as an enterprise and to the detriment to many of the customers who pay their bills.
Am I hearing you say that these policies that allow people -- the scenario that I would like to hear -- and again, the people that you can't truly pay is one issue and people that play the system is another issue. What I would like to hear eventually happen is when a person is shut off on April 1st, that they better start thinking about paying the bill, proving the fact that they can't pay or prepare to move in with a friend or family member and the service not be restored. I also heard that there are situations where people bypass meters and get themselves back on with very little -- with 48 03/24/04 - FINANCE - BILL 040142 the automatic meter now -- very little observation by the utility and it's rare you even know when a person is stealing gas because you're not making many premise visits, et cetera, to identify that. So I don't know how much that contributes. I don't think that many people are stupid enough or sophisticated enough to bypass a meter because it's very dangerous to do. But it just amazes me that we have a policy that people have learned to play the game and we haven't been able to counter with something to prevent what we've been talking about for the last few minutes here. It just seems to me like there is a way to fix it if somebody truly wants to.
If I may, I'll respond on three points. The first is that we are poised to send out termination notices -- are you ready for this -- 130,000 customers starting April 1st over a number of weeks moving forward. In the last two years combined, we ended up shutting off, literally terminating service for close to 60,000 customers. In that two-year period, we've 49 03/24/04 - FINANCE - BILL 040142 also come to a point where 6,000 never went back on the system. So we're taking the necessary action, but there's a real issue, there's a humanitarian issue at some point as to how far we continue with this. But we are being very aggressive this year. We were aggressive last year, but even more so for a whole host of reasons, including the financial problems we're in, to redeploy forces within the company to collect the money; and if we can't collect the money, to shut people off; and if we can't get in their homes, to dig them up and do it from the street. We are very, very serious about saving this company. And the only way we can do that is to make it important to our customers who historically haven't paid to come forward and pay their bills.
Thank you, Madam Chair. I'll go further our next hearing. Thank you, Madam Chair.
Thank you. The Chair notes the presence of Darrell Clarke and of our Council President 50 03/24/04 - FINANCE - BILL 040142 Anna Verna. Let me ask you, Mr. Knudsen, when does the moratorium start? Is it December?
And I've been around long enough to know that I believe moratoriums some years ago was October. Now we're all the way to December. And let me say that the only solution for these kinds of problems is more employment. You have a minority of people in anything who try to, quote/unquote, hustle the system. But for the most part, as you know, people can't afford to pay. Anytime 50 percent of people are under some payment agreement are not paying, then it means that we have employment issues and people can't afford to pay. So I say that for the record so that the record will reflect not everybody is about trying to get money from people who don't have it. I don't want to hear about us having problems that we don't hear anymore, about people on fires or using kerosine heaters or otherwise having maladies that 51 03/24/04 - FINANCE - BILL 040142 occur or loss of life because people don't have gas. So I know this is a big issue. All of us certainly want to save PGW. But at the same token, we have to understand that it takes money to pay bills. And, as you admitted, our gas bills have gone up 50 percent. If my bill is high and I earn money, I know what it is for the next person who doesn't. So we have to be mindful of that as well. The Chair recognizes Councilman Goode and then Councilman Mariano.
At this hearing or at the next hearing, do you expect PFMC to testify? Or is anyone here present from PFMC?
I don't expect anyone to testify, and we have board member here, yes.
Would you say the Number challenge for PGW in terms of turning 52 1 03/24/04 - FINANCE - BILL 040142 it around or coming on better financial footing is collection efforts?
Do you think you're at all hindered by your structure in terms of those collections efforts, in other words, the fact that you are a quasi-governmental non-profit?
How many of your counterparts around the nation are structured similarly?
Well, there are about 600 municipal utilities of various sizes of which we're the largest. We're the only sizable utility in the State of Pennsylvania that's under the Pennsylvania Public Utility Commission.
Within the State of Pennsylvania? Well, there's really only two of any 53 03/24/04 - FINANCE - BILL 040142 size. Oh, I'm sorry. In the nation? No, there's 650. I can confirm about that number, but it's about that.
No, of the top 10 9 cities there are -- there are two in 10 Pennsylvania. Probably 8 or 10 that are reasonably sizable; Memphis, San Antonio, us, a few others.
No. I'm saying that the top 10 of the nation would include Memphis, Philadelphia, San Antonio, Colorado Springs. There are a number of larger cities that have municipal systems.
When was the last time PGW or its predecessors were in this type of financial operational crisis? 54 03/24/04 - FINANCE - BILL 040142
Well, the last time -- the most parallel time was in the fall and moving into the winter of 2000-2001.
I'm really speaking before that period. In the history of PGW, I'm really looping all of that within the four or five years as the same crisis.
Well, I don't think PGW -- well, there's two answers to this. One was that the rates for PGW were incredibly stable from about 1987 through 2003 or 2002. They averaged about $900 a family. The issue was that at certain points in the late 1990s when the company should have requested a rate increase, it didn't happen. And --
And that in 1897 is when the City decided to move into its arrangements with UGI. 55 03/24/04 - FINANCE - BILL 040142 Do you think at this point it was talked about selling PGW? The issue was raised years ago. The issue is being raised again and will continually be raised. At that point in 1897, the same issue was raised and there were no 8 buyers. But what did happen was it was placed under a private, I believe, for-profit management contract. Do you believe there's any benefit whatsoever of having a for-profit management contract, not necessarily a sale, but having for-profit managers in place?
I don't mean this to be self-serving. I don't think that that kind of arrangement would be particularly beneficial in the sense that the rules that we all live under, unless those are changed, any successor management would have to live with the customer service rules that exist. I think we're doing a very credible job of working with those.
I didn't raise it as a critique of your management capacity. 56 03/24/04 - FINANCE - BILL 040142 More so the fact that there is more incentive for a for-profit company if the Number 1 issue is actually collection efforts.
Councilman, the issue is a social issue. I don't know that private management of PGW could solve what is essentially a social problem. As the Chairwoman just said, most of our customers or a great many of them don't have adequate incomes to support the rates.
So you're suggesting that your collection efforts are not going to dramatically improve anytime soon?
No, I'm suggesting that our collection efforts will improve and I'm hoping to the point where we are back to a point of stability.
What will you do differently to improve your collection efforts? If you're suggesting that creating a for-profit incentive would not do it, what will you do differently? 57 03/24/04 - FINANCE - BILL 040142
Well, for example, when this problem surfaced for us last summer, I did what I would have done if I were a private manager. I sought out the advice of some of the best people who could advise us in collection practices. So we have for the last five months been revamping our entire operation to benchmark against the best that the industry has, align ourselves with best practices, and essentially gear ourselves so that when the moratorium comes off next week, we're ready to go. The folks that I have retained to advise us would have given the same advice whether I was a private manager or the fact that I'm public manager.
Short of a for-profit management contract, do you have for-profit collection efforts underway?
Yes. We are in the process right now of very actively writing off the accounts that we're not able to collect and placing them with collection agencies who are for-profit. And then to the extent they can't collect, we're in the position of 58 03/24/04 - FINANCE - BILL 040142 selling the receivable.
Well, it's hard to frame it because what's out with these agencies right now is really older paper. I think we have -- let me just check a second. We presently have about $200 million with private interests trying to get the money either from the customers -- basically trying to get it from the customers.
What percentage does that represent of your total collections.
Well, that represents maybe -- I'm trying to think about our gross receivable. It's probably about three months of operation. It's about a third of our receivable.
And so do you see any benefit to creating further profit incentive in terms of expanding your collection efforts?
Could I outsource more and do something -- 59 03/24/04 - FINANCE - BILL 040142
Could you outsource more and get more back if you create a for-profit incentive?
We're looking at that right now. It's a complicated question for us. But, yes, we're looking at some additional outsourcing. The difficulty is that we have done a very good job of training our folks to the point where they're doing as good in terms of contacting customers, making the phone calls productivity levels as some of the private companies that we're looking at, so it's not a simple answer. But we are looking at any time that we can find a higher level of productivity at a cheaper price, we're going for it.
But I can tell you, that was the response of a public manager rather than a private manager. I don't think a private manager is concerned about developing in-house capacity unless somehow it deals with profit motive. And right now what we're talking about is enhancing collection 60 03/24/04 - FINANCE - BILL 040142 efforts. And either you can enhance collection efforts by employing a for-profit incentive or you can't. And if those efforts are better served that way, then more of those efforts should be directed toward a for-profit incentive.
Let me answer this way. Right now, we are looking at every opportunity, not only in collections but in other areas of the company as well, we are gauging what we can do best in-house. And there are certain things that we do better than the industry, than you could outsource or you could have others do. But we're looking across the company right now at every opportunity we can to potential effect greater economies.
Are you satisfied that more should not be outsourced with a for-profit incentive?
I'm not satisfied with 61 03/24/04 - FINANCE - BILL 040142 that, and we are looking at additional opportunities, yes. I'm just simply saying it's not a simple process for us.
You're welcome. Councilman Mariano. After Councilman Mariano, Councilman Clarke and then Councilman Cohen.
Thank you, Madam Chair. Mr. Knudsen, a little bit on what Councilman Rizzo asked you and a little bit with Councilwoman Blackwell. Despite the economic problems, more like a public safety, if I understand the way you answered Councilman Rizzo, if someone gets their gas turned off and they never apply again, they don't come in and try to make some kind of payment program, it just stays off?
Does anybody for safety-wise ever go around that house like 62 03/24/04 - FINANCE - BILL 040142 maybe December or January figuring, if there's people in this house and it's obvious because the electric meter's probably turning so there's other utilities and the water bills, does anybody go around and say, "Well, how are they heating this house now? Are they doing it with coal all of a sudden? Are they doing it with fire?" Do we follow-up ever anymore? Or does it become a catch where you've got 11 to hire more people to do that? 12
Councilman, we don't 13 follow-up to see whether there's an alternate 14 use. We do do a winter survey as required by 15 the PUC of all people that are off. And we 16 try to see during that winter survey what 17 other forms of energy they may be using. But, 18 of course, during the year, if we've turned 19 someone off, we have the automatic meter 20 reading trucks that are still circling the 21 City or running through the City identifying 22 whether there's been self-turn-ons or things of that nature. So there's different ways to handle that as well.
Does the 63 03/24/04 - FINANCE - BILL 040142 automatic meter reading truck, that can tell if somebody --
Sure. If the meter index changes, we can determine that the actual gas --
If you come in a house and you do a turn-off inside, not out at the curb, you don't take the meter reader out?