So if I side step that and put a flexible pipe like any plumber knows how to do --
Well, if you illegally put a bypass on, I will not know that from outside the house.
Then there's a public safety issue, which is what I'm getting at. Do we try to find out? Like, "Hey, wait a second. You're going in that house; how are you heating it?" It may be labor intensive, but it's public safety. If there's 50 percent of the people who aren't paying their bills -- I'm 64 03/24/04 - FINANCE - BILL 040142 not going to take the economic part because that's been taken care of here for now. But public safety-wise, is there some reason or don't we have some kind of ethical responsibility to find out are these people dying in the houses, are they freezing? That's a concern. And the other concern is, are they going to blow the rest of the block up because some, for lack of a better word, half-ass plumber does the hook-up?
I'll answer the first part of that. I'd submit to you that people who have an illegal bypass, the chances of them letting us in the property willingly is probably nonexistent. Now, there are occasions where other things happen within the property that create access. Once we get access, of course, if we spot an illegal bypass, we shut the gas off.
If I call you and say, "This address, I have a strong suspicion that they have an illegal hook-up," do you follow up, coming from a City Councilman's office. 65 03/24/04 - FINANCE - BILL 040142
We have a meter investigation unit and we follow up on all tips.
I don't answer the door because I'm a scammer anyhow and I know how the little hook-ups are. I pretend -- whoever's at the door, it's not for me. What process do we go through? Do we check that off and go somewhere else?
Well, if I cannot get in the property and I have no indication that gas is being used in the property, at that point I have no recourse.
Do we go back and look at the records? Possibly it's a rental property and someone else owns it and 66 03/24/04 - FINANCE - BILL 040142 we call that someone to say, "You know, we really need to get in your property, Mr. Mariano, because we suspect one of your tenants hasn't been using any gas for three years and we want to know how it's heated. And since you do own the property and if it explodes and burns down the whole block, you may be liable." I suspect that landlord -- I'm not trying to jackpot you here. This is public safety-wise. I understand your job is sort of like being the captain of the Titanic. You're captain, but it's still the Titanic. So I don't play the jackpot thing.
I understand what you're saying. Certainly, if we can get access, we will. There are people that will game us, and we know that.
But where do we stop? We can go back for 10 minutes here, but if there's a strong suspicion that one of us tells you, there should be no stopping. If you have to stand outside at night and run in the door when somebody comes in, for lack of 67 03/24/04 - FINANCE - BILL 040142 better words, to see if there's gas being operated, that could save a lot of lives.
I would submit that our people are very experienced and very creative and they will look at any evidence that they can come up with through records, whether it be, in your example, a landlord. And in those circumstances, with a landlord, if the landlord gives us access to the property, certainly we'll get in there and we'll take care of that situation.
Point of information. Mr. White, when you have a customer, a residential customer that's been off for a year or two years, don't you think it's to the best interest of the utility to dig it up and shut it off so you know it can't be tampered with. I mean, there's the answer. Once you know that a customer's been off two, four, six, eight, ten months, I think you should invest in actually cutting off the service to the property to assure that a person -- if they haven't had gas for a year, it's unlikely 68 03/24/04 - FINANCE - BILL 040142 that they're going to ask you to put it back in 13, months. So to ensure that there's 4 no theft of service or tampering with 5 facilities, why don't you just cut the 6 service? 7
Well, Councilman, that 8 in point of fact is a Public Utility 9 Commission requirement, and where resources 10 limit us, obviously we have to prioritize 11 safety first. But certainly, we get into 12 situations where we are able to shut the 13 service off at the curb. Certain situations 14 do arise where a house where -- just to give you an example, last year we had a house that are very experienced personnel indicated that it was not inhabited, and in point of fact there was an individual in that house. And the gas was turned on by that individual and being used. So in turning the gas off, we actually put -- you know, there was an individual in the home that was actually without heat at that point. Albeit, they should not have had the gas on, but nevertheless we turned the gas off. 69 03/24/04 - FINANCE - BILL 040142
You'd be less in debt today if you shut it off at the curb.
We certainly would be. And in point of fact, we do have a requirement to terminate gas in vacant properties. And there are safety requirements and you are accurately pointing that out.
Well, there's Councilman Mariano's point. Thank you for that point of order.
Thank you. Councilman Clarke, would you wait a moment for Councilman DiCicco and then we'll call you? Thank you.
Thank you, Councilman Clark. Good afternoon, gentlemen. I stepped out of the room for a few minutes, so hopefully the question I'm about to ask has not already been asked. And if it has been, I'll wait to read the record. Concerning the collections, I 70 03/24/04 - FINANCE - BILL 040142 understand about 50 percent of the customers of PGW pay their bills, the other 50 percent are not paying.
It's not fair to characterize it that way. What we've said is that half of our customers have difficulty paying. They don't necessarily pay regularly, they don't necessarily pay faithfully.
What do other cities and municipalities -- what do they do that may be different than what we're doing? I'm certain other municipalities, especially large cities, places that have a large population of poor people are faced with similar problems. Are they doing something any different than we are? And what is it that makes it different and why can't we be doing the same thing? I think they're just in the same situation that we're in.
I think there's two answers to that question. The first is that 71 03/24/04 - FINANCE - BILL 040142 Philadelphia is somewhat unique -- Philadelphia Gas Works is somewhat unique in that we are both the City and the County and we do not have a large industrial base, a large commercial base, nor do we have any opportunity to grow the system beyond sort of the physical restraints that we're under such as other utilities do. Baltimore has the, not only the City of Philadelphia, but the environs. New York, much the same. Boston much the same. We're one of the few utilities that is really land locked in a sense. Where these utilities have both the opportunity for growth as well as having larger customers, this burden is shared with these other customers. It is allowed regulatory process to do that. We can't do that. And with a loss of industry, with a loss of large load with our inability to grow the system -- and I'll get a plug in here. I think PGW doesn't get a fair shake at bidding on some of the larger projects in town. We want to be at that table early. But be that as it may, PGW has a unique set of issues in 72 03/24/04 - FINANCE - BILL 040142 that regard. That's Point Point is, some of the cities and some of the states have supplementary programs that -- and I'll have to get you a list of those. For example, Pennsylvania and Massachusetts are the only cold weather states that don't contribute to the LIHEAP funding of some sort. Some of the cities have mechanisms to provide supplemental income for these purposes, to the customers who aren't paying. But I can get you better -- I'll provide you with a listing of some of these alternatives. But that's generally what's going on. I mean, most utilities are able to share the burden of their uncollectible. Now that being said, there is a rising concern, certainly in Pennsylvania right now, with the other local distribution companies, the other gas companies, that their percentages of uncollectible are rising. Now, they're nothing like our 8 or 10 or 12 percent. But where they were maybe a half percent or a percent, 10, 15 years ago, they're inching up to 2, 3 percent. Some of 73 03/24/04 - FINANCE - BILL 040142 them have gone to percent in the Pittsburgh area. So this is not necessarily a Philadelphia-only problem. And that's a theme that I'll come back to in the next hearing. This is a growing issue across the country and certainly across Pennsylvania right now.
My final question. When you compare the payments that are made for the utility of PGW for gas, compared to the other utilities that your customer base is entitled to and has access to, electric bills, cable TV, whatever, where do you fit in on that list in terms of who gets paid first?
We're at the bottom. Well, I think generally our sense of this is that it goes maybe phone, electric, cable, water, gas. And the difficulty, Councilman, is -- and we've had a lot of discussion about this inside the company -- that there's a culture that goes back not a few years but many, many, many years that somehow gas is a free good to some people in this town. And 74 03/24/04 - FINANCE - BILL 040142 we're in that position of now meeting that problem head-on because the bills have gotten so high that it can no longer be tolerated. It was tolerated for many, many years. It was clear that that was the problem. But now it's not tolerable.
Maybe you should somehow figure out how to become a subsidiary of Comcast and then the billing would be combined. (Laughter.)
Very interesting. So you're at the bottom of the list when it comes to payment, generally speaking?
That's our sense of what -- that's what we get anecdotally when we're trying to determine what some of these priorities are in some of our survey work. That's the kind of sense that we're getting. This isn't a scientific determination, but we're not far off.
Thank you. Thank you, Madam Chair, and thank 75 03/24/04 - FINANCE - BILL 040142 you, Councilman Clark.
Let me ask a couple of questions. I think I was walking in the room when you were talking national policy so I don't know to what degree you discussed the issue.
We haven't discussed it. We were sort of saving it for the second session.
Yes, we're still on the Capital Project and the senior discount. As soon as this testimony is completed, we'll recess for Councilman Nutter's Transportation and Public Utilities 76 03/24/04 - FINANCE - BILL 040142 Committee.
I'm going to have to leave City Hall shortly. I can't ask those questions now, Madam Chair?
Thank you. First of all, I just want to get some clarity. While I've heard you discuss various issues in terms of what needed to be done to make this a more healthier company, not even suggesting that in any way, shape or form it can be a profitable company. You talked about increasing collections. And the conversations the other day with you, you talked about conservation efforts. But at the end of day -- and I believe to some degree we're essentially playing a shell game. We're moving money around, we're moving priorities around. But at the end of the day, I just think that the affordability of gas is to the point where people just simply can't pay. Are there deadbeats; absolutely. Do people have their priorities skewed; absolutely. But at 77 03/24/04 - FINANCE - BILL 040142 the end of the day, there are truly people out there who just cannot afford to pay. I don't believe that you have 130,000 shut-off notices and at least half of those people, probably more, just can't pay regardless of their priorities. Would you agree with that?
And I think if you look at the correlation on a national level and international level, an increased cost of gas versus the increase in shut-off notices, you'll see a direct link, I would assume.
In our conversation yesterday, we talked about -- excuse me for getting a little frustrated with the whole issue in the meeting yesterday, because at some point you just get tired of hearing the same old thing year after year, and understanding that on a national level there probably needs to be some readjustment 78 03/24/04 - FINANCE - BILL 040142 on our policies. And you talked about the fact that a number of caches of natural gas are drying up as we speak. As a result of that, people are essentially getting as much out of the public as they can while they still have that natural commodity left. One of the things that I want to get on the record today is from an Administration's perspective and policy and understanding that the City's position as it relates to our ability to regulate rates and have some jurisdiction over the company has been diminished with the takeover to PUC. I guess what I want to know is what are we doing, first of all, you or us, as a company to, first of all, educate people? Because I think we agree -- we talked about that yesterday, that the average citizen believes that when the gas bill goes up, their perception is it's just simply the government and PGW gouging people and they don't really view it from a national perspective that there's a policy that obviously needs to be changed. 79 03/24/04 - FINANCE - BILL 040142 What we're doing today and prior to today and probably subsequent to today, we're going to be talking about moving pieces of the pie. But at the end of the day, this commodity is going off the roof and something needs to be done. What is the company going to do, what should the government do to effect national policy? I just don't believe we can continue along this path. What are we doing? I mean, I know we hire lobbyists for casino gaming, we hire lobbyists for other issues related to our ability to get some relief on a state and federal level. What are we doing on this issue?
I think there's a couple of things that are more local. The Energy Association of Pennsylvania, it represents gas companies and electrics, has taken the position that there ought to be more in-state drilling for natural gas. There are relatively substantial reserves of gas still 80 03/24/04 - FINANCE - BILL 040142 in Pennsylvania. And the question is how you do that and so forth. So that has been a proposal of the Energy Association, or bringing that to public attention that this is an option.
Walk me through this process. I'm assuming that the federal level, they set national policy.
Do they regulate the State's ability or the utility's ability within the state to get natural resources, to drill for gas? Or is that done on a federal level? If the State of Pennsylvania decided, all the municipalities decided that it would be to our best interest --
There would be no 20 restriction on anybody drilling for gas in Pennsylvania. It's really a question of state regulation or priorities. For example, some of it is state land and will you drill on state land, so that has to be a change of public policy, allow drilling to occur in 81 03/24/04 - FINANCE - BILL 040142 certain areas that are off bounds right now. But there would be no restraint on drilling that I know of in the state once the state authorities were to allow that to happen. And that's a conversation that the Energy Association is trying to encourage right now. At the federal level, there are clearly policies that are articulated and formulated that affect us. And what Councilman Clarke and I are discussing is a conversation we had in his office yesterday. There are two contravening public policies or counter-indicated public policies. One is a policy that is constraining the supply of gas, the drilling for gas, the increasing the amount of gas available for customers. And on the other side, there's a policy that says, "We want to use natural gas for all new electric generation." Every generating plant, electric plant that's come on line since, I think, 1998 has been natural gas driven. Well, that has created an enormous difficulty for us. And what it does 82 03/24/04 - FINANCE - BILL 040142 is it's raised the price of gas across the board. So without supply and with more demand, the price of gas has gone up. And that's why we're living right now with the situation as it is. Now, will this go on for a couple years? Yes. Will it adjust down? We hope so.
So is our ability to impact on the national policy solely this particular -- what was the name of the state organization?
The Energy Association. No. There are other groups that are very actively involved in this. The American Gas Association, and in capacity as CEO, I was invited to join that Board, are very active in attempting to bring these problems to the attention of federal legislators, both the House and Senate, and have been relatively successful at it. I think the great tragedy right now is that the energy bill, which has been under development for several years, looks like it will not go forward and therefore some of 83 03/24/04 - FINANCE - BILL 040142 issues have been set back for a while.
Are you coordinating your efforts with the citizens of the state and the nation? Are you guys just kind of going along or are you educating the public to get them on board? I mean, at the end of day, this is a presidential year. We're talking about a federal policy. And my concern that the average citizen is not educated enough to understand the implications of the federal policy as it relates to our ability locally to provide affordable energy to people. And if we don't have our people engaged in the process, I think it will be much more difficult to make an impact on those decisions.
To answer your question specifically, both the major national organizations that are involved with this question, the American Gas Association and the American Public Gas Association, both of which we have roles in and have exerted whatever influence we had to make these things happen, 84 03/24/04 - FINANCE - BILL 040142 both of them are actively engaged in both the education process and the lobbying process. Within the state, the Energy Association of Pennsylvania has been very responsive to this set of problems, as has the Public Utility Commission. They understand the problem that supply shortage has created for many of the utilities, and PGW in the extreme. Our problems are not different from other utilities. We just have more of them, more of the same issues.
Can you do me a favor? Can you provide, through the Chair, the pertinent agencies or groups that are engaged in this lobbying effort? I'd like to get involved and at least have some of my constituents involved in the process.
Thank you. Madam Chair, thank you. Thank you for accommodating my need to ask those questions now.
Thank you 85 03/24/04 - FINANCE - BILL 040142 very much. Councilman O'Neill and then Councilman Cohen. And Councilman Kenney you have a question too?
Mr. Knudsen, you mentioned at the briefing that just a few years ago you had distributors or so that 12 you used to buy gas from? 13
Actually during the 20 course of a year, we may buy from over 40 or 50 different suppliers. We look for a significant amount of our supply for the winter operating season, which is typically December through March where you have your cold temperatures and heating demand. We had 86 03/24/04 - FINANCE - BILL 040142 a significant drop-off in the number of suppliers that were interested in serving markets like PGW's. You know, there's a variety of reasons for that. But certainly, we're doing everything we can to stimulate additional interest in dealing with PGW. To date, we believe it has impacted us in a negative way, but it could very easily impact us if the number of suppliers were to drop to a smaller level. Right now there's still plenty of competition.
Is that because nobody's buying gas any cheaper than you?
Is anybody selling gas any cheaper than your more limited number of suppliers? To me, it would seem that a lot of people are avoiding you, it's almost red lining because they think we have financial problems or something like that.
Well, obviously, there are risk assessments of PGW and people have 87 03/24/04 - FINANCE - BILL 040142 limitations on how much they will sell to PGW, and it's usually a dollar amount. The problem we have run into is not PGW, per se. It's the fact that when the price went from $2.50 to $6, the amount of volume you could buy under, say, a $10 million risk level had now been reduced by more than 50 percent. So the amount of suppliers that were willing to sell you the same volume of supply aren't out there. They have a limited level of risk. And this also was exacerbated by post-Enron. So you've got a couple of things impacting here. You've got the post-Enron debacle, then you've got the increase in price which reduces the amount of volume you can buy for a particular level of risk. A company, for instance, may have a $25 million risk profile with PGW. They would sell us $25 million at any one time --
Sure. Just as many large companies have risk departments, they will assess what the assurance of payment and 88 03/24/04 - FINANCE - BILL 040142 return on their investment would be. With PGW and other large utilities like Keyspan, PSE&G, South Jersey, there's a certain level that each individual supplier, a Hess, a Shell, a Texaco, may indicate as being a prudent purchasing level. Now, obviously, they look at PGW's financial condition when they set that. Certainly, with the combination of PGW's financial condition, the combination of prices going up, they're going to be able to sell less volume at a prescribed level of risk. For us, it may be 10 million; for PSE&G, it may be 50 million. Obviously, PSE&G can buy a lot more volume with that 50 million of access to that particular company. That doesn't necessarily mean that we'll buy from that company. They still have to provide it at the cheapest price. And we're doing lease cost purchasing, so we're buying the gas as cheaply as we can.
Right, but not necessarily with the same market availability as maybe some of the ones you just mentioned, some of the other companies. 89 03/24/04 - FINANCE - BILL 040142
That's correct. But that, Councilman, has always been there. PSE&G has 1.5 million customers. We have 500,000 customers. There's an economy of scale there and so forth.
But their debt might not be as serious as ours and some other things like you mentioned today, the collection factor isn't as serious.
And I'm not beating on you, I'm just stating a fact I think that part of the reason gas is as expensive for us may be because we're PGW and you have all those other things going on. Councilman Goode referred to the private factor; you, to the social responsibility and the like.
Councilman, I would point out that we file our gas cost recovery rate annually and on a quarterly basis, and we've historically been in the top 50 percent of the state. Right now, when we filed our last quarterly update, other than one of the 90 03/24/04 - FINANCE - BILL 040142 very small companies in the state which is always considered an outlier, we were the third lowest priced, from the gas supply standpoint, in the state. Now, obviously, that changes from quarterly filing to quarterly filing, but we have not historically been below the 50 percent rate. We have been historically a good company from a purchasing standpoint even with some of these challenges that we have.
I understand. LIHEAP, a couple years ago when you were in here particularly with the loan in 2001, we were hitting on these issues, it became clear through your testimony that you were frustrated that a lot of people who were LIHEAP eligible weren't applying for it and there hadn't up to then been a policy of requiring or forcing or somehow getting people, however you did it, who are in the problem category, unable to pay, difficulty paying but clearly LIHEAP eligible, there were people who fit the LIHEAP profile were having other people pay for their gas because of the 91 03/24/04 - FINANCE - BILL 040142 gas billing works at PGW and yet could have been having the federal government pay for their gas instead. Are you still having -- I know you said in your testimony that you're a national model. But are you still having trouble getting LIHEAP eligible people to comply who fit into that other half? Could you explain?
We do a good job of getting subscribers to LIHEAP. The problem that we run into is not that we have enough subscribers, it's the problem that there's only so much money. And this is a whole other argument and problem for us right now. I'll be very candid. We feel we don't -- how should I say this?
Could you answer the first question now? Do you get everyone within that 50 percent category that's eligible for LIHEAP to apply for it?
I think we have 60,000 92 03/24/04 - FINANCE - BILL 040142 subscribers.
Out of how many? That's all I'm looking for. Out of how many that are eligible? That's what I'm trying to get.
Two-thirds would be about right. I'm sorry, I didn't understand the question.
Fine. Councilman Goode mentioned along a line of questioning about UGI comparison and private companies in general. Is it true that we have only begun very recently reporting people's credit who don't pay their bills to us? You wouldn't believe how many people 93 03/24/04 - FINANCE - BILL 040142 assume that's an automatic like other bills you don't pay. Could you explain that?
The issue for us was that once the computer system went bad in 1999-2000, we didn't have sufficiently accurate information that we could report the information to a credit agency. We are beyond that now, and we are in the process of reporting people to credit agencies now.
The last thing on the private company. You have 200 million or roughly one-third of your collectibles out with private companies, you said?
Do private companies have an advantage in that, whether it's socially responsible or not, an advantage that they place liens on the real estate where possible? There's no liens placed?
You do place 94 03/24/04 - FINANCE - BILL 040142 liens on properties?
Oh, absolutely. We're very active with that. We're 250, 300 a week of liening. We're very active with that
Tell me, how much does LIHEAP help pay in terms of dollars?
Councilman, in terms of the program, it depends on what the federal government and the state government allocate toward us. Over the last five years, for example, the amount of LIHEAP has varied from maybe 15 million to million normally. And 22 that really big year in 2001, we got 33 million. But by and large, it's about 15 to $20 million. In that event, people get about $300 per family of LIHEAP relief. 95 03/24/04 - FINANCE - BILL 040142
Do you have any statistics with respect to what it is you actually get?
And you think your $300 on the average is a fair estimate of LIHEAP receipts?
Yes, I think that's a fair estimate for what the individual family receives, that's correct.
And what would that be arithmetically if you multiply that by 50,000 families? You indicated you thought there were about 50,000 families.
That's about $15 million, that's right, a little bit more than that.
So it would be a relatively small sum? 96 03/24/04 - FINANCE - BILL 040142
Let me go to another area. I happen to live in the area that was affected sharply by the fire at Ogontz and Olney. At some point, we learn bits and pieces as to what was happening when the flames sort of got out of control and they quieted down and we felt good and then they got out of control again. And we were told that the fire is being fed by gas. And we said in our naivety we said, "Well, why doesn't somebody turn the gas off?" And we were told, well, at the time this was installed, there was no way of turning it off and it's just a constant flow of gas into this area which was feeding the fire because it's such an old item. And ultimately it took a number of hours, and then they said, well, they did find a way to shut off the gas; otherwise, there was no way of controlling the fire. Was that true, the report we had that we have such old equipment in which gas flows to a main center or some kind of center 97 03/24/04 - FINANCE - BILL 040142 from which various houses get their gas and that the center receiving the gas from another source just gets it constantly and can't be turned off? Is that an accurate description of some equipment? Can you tell me, if it is so, about how old is that equipment and what's the problem throughout the City on that? Because that's a kind of frightening thing because we knew the fireman were fighting against the flames very hard for a number of hours and there was no progress.
Well, actually, Councilman, if I may, that was not an accurate statement. First of all, the pipe that was ruptured was a 20-inch cast iron main. That is the type of piping that we are most concerned about. It was hit by a backhoe operator. The valves that were able to turn that gas off were quite a distance away. So what you actually saw was the fact that you have a 20-inch diameter pipe was performing as a reservoir, and the gas that was coming out of the points from the two points where it was shut down was actually burning for quite some 98 03/24/04 - FINANCE - BILL 040142 time. I was in constant contact with Fire Commissioner Hairston. And at no time -- while the flames were burning, that was probably the safest position that we could be in. And then as we extinguished the fire, we extinguished it once we had reduced the pressure in the line down to a point where there was no risk to the public. So the reason it lasted as long as it did primarily was the fact that you had a lot of gas from the point where it was shut off at both ends and it was still burning that gas off.
Do you think there's a risk throughout the rest of the City because of their use of the same kind of piping arrangement?
Well, we have 1700 miles of cast iron. And we have what we call a high pressure and a low pressure system. That pipe that was hit was part of our high pressure system. There aren't typically customers on high pressure lines. The high pressure lines actually feed the lower pressure customer 99 03/24/04 - FINANCE - BILL 040142 lines. And in this case, that's why you didn't lose service in your home. We were able to continue to feed the low pressure lines by the fact that we have an integrated network of piping. So we were able to cordon off, so to speak, that one particular area of piping to ensure public safety and to ensure that we didn't lose gas service to you in your home.
To make sure I understand you, could you give me a conclusion? Are you saying that that kind of piping is safe and people ought not to be concerned?
I would say people are not to be concerned because PGW is managing the system and removing the pipe that has the greatest risk. And we remove 18 miles a year of pipe. When you assume there's about 500 feet in a block, we're removing about 80 blocks a year of the riskiest main in the City of Philadelphia and replacing that with new main that has very little chance of any type of accident. 100 03/24/04 - FINANCE - BILL 040142
All right, good. I may have to come back to you to make sure I understand it. I'm not absolutely clear. But you say that the problem was the accumulation of gas, not because there was no way of shutting it off, but it was safer to let it be used up by burning?
There were other reasons why we let it burn as long as we did. We had to make sure that the electric company didn't have facilities. We didn't want to put the firemen at risk. And Commissioner Hairston and I were in constant contact with the electric company. So there was some other things going on that precipitated the term of the fire or the length of time that the fire burned. But certainly, it was a safe situation.
We were very impressed by how all the city agencies acted, and to the extent the Gas Works was involved in it, it did a good job. That gives me a good opportunity to then give you the other side. 101 03/24/04 - FINANCE - BILL 040142 Seems to me over the last few years I've gotten more complaints about lack of interest, coldness of replies to people calling in for service, whether they had a contract or didn't have a contract didn't matter. They'd be told kind of sharply that nobody can come out for two or three days. I know one weekend I couldn't believe it. I called in, I couldn't get a soul at the gas company who knew anything about anything. And I don't know, it's probably several years since Mr. Knudsen and I ever talked because I can never get through to him no matter what. I leave a message; I don't get a response. Or if I call him, I don't get a response. I had always had gotten responses before. And that seems to be very close to the kind of cold, detached way many members of your staff seem to be responding. There was a time when the Gas Works was thought of more kindly by people. It could be maybe the money they owe. I don't know. But the feeling between users of PGW and PGW is not good. So I'm just wondering if some of that coolness can change 102 03/24/04 - FINANCE - BILL 040142 and if you can do something about helping to educate your workers to be more sympathetic, to understand that if it's an older couple in their 70s or 80s to be told on a Tuesday that nobody can come out until Friday to check the fact that the light has gone out and people don't know what to do with it and it's cold out, that would be very helpful. You can respond to that if you want because I'm going to go on. That's all I'm going to deal with on that subject.
With regard to the issue of courtesy, there's a standing order that people will be courteous on our phones.
Could I urge you to repeat that to your people because we get so many complaints about that, as if the people there are just so insensitive and unsympathetic. I don't know what group they are that get called, they're working on the phones. But people, when they're calling you, they're looking to your company to help them. And since I mentioned company, isn't it a fact that PGW is kind of an artificially 103 03/24/04 - FINANCE - BILL 040142 contrived company? Aren't you really in fact a collection of buildings and somewhat different from other agencies?
And in that connection, do you know how your rate of collection compare with, say, with the Water Department?
Does the Water Department have, say, 50 percent of people who don't pay regularly? Don't they bill us monthly? I'm pretty sure before my wife took over the responsibilities for payment, I think we get a monthly bill.
Do you know what their problem is? Do they have the same kind of problem?
They have a problem similar to ours, but it's not as extreme. Their bills are much smaller than ours.
They are much 104 03/24/04 - FINANCE - BILL 040142 smaller.
Their bills are more affordable in terms of the size of the utility.
Well, take the City of Philadelphia. There was some statement I think Mayor Street made recently, maybe it was in his budget address, that historically the rate of collection in Philadelphia by the government, by the City government, had been running at 92 percent but that during the recent period it had dropped to something like 87 and a half or 88 and a half. And I wondered whether if you were not considered a separate company, could that be a part of the problem why your rates are lower? Because if the City has the rate of collection and their bills can be as high as yours, real estate taxes can be very high and there's been a lot of unhappiness about the real estate rates, there's been a lot of dissatisfaction. I'm wondering why the difference in the collection rate of PGW from that of the City and maybe it would be better if we dispense 105 03/24/04 - FINANCE - BILL 040142 with the formality of bond -- maybe that can be worked out in other ways so the City can take over the bond responsibility of the Gas Works. Maybe if the payments were going to Philadelphia, they would be better off. Because I don't understand why there would be that difference in the collection figure. You're 50 percent would be matched -- I don't know, it's not quite the same as what the Mayor said. He didn't define whether there are late payers or not, but he said the rate of collection was 88 and a half percent. Would it be possible for you work out an analogy to what your figure would be if you used the same standards that the City of Philadelphia used in its real estate or tax collection generally? Because I think you're right that those amounts would be much more appropriate than the Water Department because the City bills can be very high, even higher than the Gas Works.
Councilman, there's a piece of confusion here that I'd like to clear up. We have 50 percent of our customers that 106 03/24/04 - FINANCE - BILL 040142 have trouble paying their bill. But we historically collect about 92 percent, similar to the City. And we have dropped as low as 87 percent or 87 cents on the dollar as a result of this climb up in gas costs. So some of the same numbers that you're repeating with respect to the City mirror very closely Philadelphia Gas Works' situation. At 92 percent, we have our nose just out of the water and we're surviving. At 87 percent, we're losing considerably. We lose about $8 million for every percent below 92. So if you're at 87 percent, we're $40 million below where we need to be.
Well, that's very encouraging if you're at the same level. I thought that maybe that was one of the problems and maybe we could straighten it out by having everybody know that it's really City of Philadelphia. But you're saying it's not and you lose about 8 million for each percentage below 92?
Yes, sir, we lose about $8 million for every percentage point. 107 03/24/04 - FINANCE - BILL 040142
I'd like to compare that and get the City's reaction. Now, you're not going to pay the $18 million this year, right, to the City?
Well, let me 12 commend you for that. I always thought that 13 was an improper payment made. I thought the 14 City was exercising its power to compel the 15 Gas Works. I don't know of any other agency 16 that has to pay that amount. I know the Mayor 17 feels very strongly about it, but at least 18 this year he's accepted the notion, I think, that he's not going to get it. Maybe that's for budget purposes only. We may see a different Mayor Street on that issue than what he announced. All right. Thank you very much. I'm hoping that after I talk to the City I'll agree with you that you've cleared up the 108 03/24/04 - FINANCE - BILL 040142 mystery as to why your rates seem to be low when in fact it's not low, the rate of collection. Thank you very much.
Thank you. Councilman Kenney. Thanks for your patience.
Thank you, Madam Chairperson. Gentlemen, the first thing I want to say before I start the questions, I think you're both doing the best job you possibly can under the constraints that you are put under, both from the PUC and state regulations and customers and other things in the City. I think you're honest people. I think you've changed that attitude or perception over there from the last crew that we had, and I just want to commend you on doing your best. Although I don't think necessarily your best is going to be enough. I want to just move for a moment to the LNG plant, the liquid natural gas plant. Is there somewhere in the Capital Budget here, it's not delineated, that would indicate the 109 03/24/04 - FINANCE - BILL 040142 amount of money you're intending to invest in the LNG plant in 2004 and going forward?
Well, primarily we have a very old 30-plus-year-old plant that we utilize to take gas off of the pipelines which is in a gas state, gaseous state like air, and we turn it into liquid. Well, that plant requires a certain amount of maintenance and ongoing repair. Most of this is to, in fact, keep that older plant up and running while at the current time we're testing a new plant that we're trying to bring up to replace the old plant.
The new plant has been 110 03/24/04 - FINANCE - BILL 040142 built. It was never intended and it was actually contracted for under prior management. I don't want to say we're dealing with the hand we're dealt here, but we are. And we're trying to get that plant online, and then there will also be some supplemental requirements above and beyond that to replace the old plant.
What's the total capital need for either the upgrade or replacement of the old plant, of the old LNG plant? If it was Christmas and you were getting a gift, what would be the number you would need to get that thing fully operational?
First of all, we're taking the old plant out of service because it's just too old and too risky to have it in service.
The new one that we built was a $20 million plant. That's what we call the Phase I plant. It replaces 111 03/24/04 - FINANCE - BILL 040142 approximately 50 to 70 percent of the existing plant that we have today. To make up the difference, you're probably looking at another $15 million plant. So all tolled we're talking about somewhere in the neighborhood of 35, maybe upwards of 35 to as much as $40 million. Twenty million has already been spent, sir.
What we're doing now is planning on investigating about 6 million to keep it online?
We have to run this plant in concert with the other plant until we build the third replacement.
Explain the benefit to a fully operational, a full capacity LNG plant to this utility. What does it do and what does it save? It gives us the ability, I assume, to store gas in a liquid form while pricing issues are being --
The pricing issue is one thing. The most important thing is we do not have to reserve very expensive pipeline capacity on either Texas Eastern Pipeline or 112 03/24/04 - FINANCE - BILL 040142 Transcontinental Pipeline. They're the two pipelines that service us from the Louisiana Texas Basin. Most of your supply comes from on and offshore Texas and Louisiana. That pipe to replace that LNG plant, we spend another $70 million a year in what we call pipeline demand charges. They're the fixed charges that they charge you. Unlike how we charge our customers, we charge our customers for the gas they use on a volumometric basis or when it goes through the meter. The pipelines charge us a fixed cost.
Hypothetically, what would be the savings or benefits financially to this company if we had a modern or fully operational, not tied together with baling wire and duct tape, my favorite tool? If we had one of those plants, what would that be as a result of savings or benefit to the company financially?
If I may, there's two parts to that answer. The first part is the existing 30-year-old plant has been saving us 60, $70 million a year. The new plant that 113 03/24/04 - FINANCE - BILL 040142 we're building is a much more efficient plant and will operate with less, what we call, fuel requirements. There are large engines that have to be run with the old plant that aren't necessary in the new plant. So there would be a savings, an ongoing operating savings of a few million dollars a year, probably 4 to 5 million. So you're going to continue to the 70 million a year and an incremental savings 4 to $5 million a year.
The company is paying for that capital expenditure? We have the money to do this?
Yes. As a matter of fact, we've already spent that money and that plant is in, hopefully, the final stages of testing. But as I indicated earlier -- I don't know whether you were here, Councilman -- Air Products, the designer and builder of that facility is having a little difficulty getting that facility tested at contractual levels. So we're working with them to accomplish that.
And what are the 114 03/24/04 - FINANCE - BILL 040142 reasons for that?
It appears that there were some design difficulties, design problems. They re-piped certain -- or certain components of it had been changed, and we're still not operating where we believe we have to be. And there are specific strict contractual requirements that they must meet. And we will not take ownership of that plant or we won't convert that plant into our operating plant until such time that it is completed.
Every time a discussion of a potential sale is raised, the issue of the company's debt is a primary obstacle, I would assume, to any kind of discussion. Do you in any way from your experience see a way to either restructure to get some type of legislative relief or some type of rating agency cooperation to take the dead issue off the table? Not off the table as far as owing it, but as far as being able to potentially transfer the company or to sell the company? 115 03/24/04 - FINANCE - BILL 040142
It's a good question. The debt is a part of the problem. PGW has been looked at by several folk. And there are three issues. One is the debt. How do you defease a billion one of total debt? How do you restructure that? There's a second problem which is the fact that the demographics and economics of the City are what they are and we have 250,000 customers struggling to make regular payments. Nobody wants to buy that problem.
Not to interrupt you, but aren't they the same customer base?
Many of them are, that's correct. As we were talking earlier, we're at the bottom of the stack in terms of who gets paid. But also Craig is reminding that PECO has a much larger service territory. Their write-off -- and I was talking with the president of PECO recently -- it's about a percent and a half. Ours is 10 or 12. So that's their ability to spread their costs around. The third issue is as difficult and 116 03/24/04 - FINANCE - BILL 040142 that is that there are certain post-retirement benefits, healthcare benefits that have been promised to employees in the past that anybody looking to buy the company must address. Either the City would have to take that obligation back on themselves or there would have to be some accommodation for somebody buying.
No, no. Well, it's a complicated situation. People who retired and they had been promised an indemnity program, they are still on the indemnity and we're working to move them on to a cheaper program.
I think I'll have to get you that. It's not a big number. Most of the retirees are on Blue Cross Plus programs, one sort or another, or on HMOs. But that benefit has never been funded, unlike the pension where we have been funding it all the way along. This post-retirement benefit has 117 03/24/04 - FINANCE - BILL 040142 not been, so that represents a major liability that would have to be addressed in any sale. So it's those combination of factors that makes us a very difficult --
While it is difficult and complicated, would you in your estimation think that it was impossible?
I don't know that anything is impossible. It would be a very creative solution. I don't know of anybody out there -- and I'm pretty familiar with the utility industry -- who wants to take on this set of factors.
Let me go to the other side of the scenario, and that is -- and I was very clear in your testimony -- relative to PGW's inability to expand outside of the City limits. That's probably not going to change. Our customer base is probably going to get older and poorer. And if we don't pursue this very difficult process of trying to sell the company, which I don't think ultimately benefits the City other than that the Gas Works would be a stable company with a 118 03/24/04 - FINANCE - BILL 040142 much larger amount of resources, both capital and other economic resources, that the customer of the City of Philadelphia in the end would be better served and probably served at a relatively competitive price. I guess the question is, if you can't expand and grow and your bills keep getting more uncollectible even though you're going to make your best effort to do it, there's nothing else to face but bankruptcy. I don't see any other option other than, again, the City taking on more responsibility. The City's facing a $225 million hole in its budget and more going forward. At some point in time, the money runs out, the customer base isn't paying or can't pay, and you can't expand your customer base outside the City, I don't see a scenario that is a positive scenario other than trying to limp this along until it eventually dies.
And it's not your fault. I think you're doing the best you can.
But I think there are 119 03/24/04 - FINANCE - BILL 040142 several answers. One is that the economics of the City change such that you do have growth, you do have income that's being created and people can pay these bills. Putting that aside for the time being --
Well, no. I'm saying that would be one resolution is that real incomes would rise. One of the pieces of the testimony that is in the second session talks about the fact that if gas costs drop, our experience is that people do pay because it's more affordable. Their real incomes are very different. To answer your question, I think the answer lies -- there's a two-part answer. One is I think economic growth has to be part of the solution. And I also think there probably should be a public policy discussion as to exactly what the social requirements on the paying customers of PGW should appropriately be. And that's really what the discussion is 120 03/24/04 - FINANCE - BILL 040142 about.
And that's my last question because I know we're going into the next hearing. And I'm not trying to put you on the spot, but you've made the suggestion and that's why I have to ask you. What in God's name do I as an elected official say to people who pay their bills faithfully, would rather go without than to not pay their gas bill -- I mean, I had grandparents who would send me around the check cashing agency with the exact amount of money and the money for the money order to pay that bill first before they went to the movies or went to dinner or did anything else or bought new clothes. What do I say to that group of people who you've got to charge $90 now because they paid their bills on time to take care or supplement people who either can't or won't? When people say this to me -- and you have to understand, the level of anger out there about this proposal, even though it's $90, which is for some people substantial, I don't know how to respond to them because -- I 121 03/24/04 - FINANCE - BILL 040142 just don't know what to say to them.
Most people are saying, "I won't pay the surcharge."
I understand people are now talking about just refusing to pay the surcharge. And it really is frustrating. And I know it's frustrating for you, I know you're doing your best, but what do you tell that middle class family who says, "You know what, maybe it's time to just really seriously look at getting out of here." And I'm telling you, they're doing it, they're talking about it. They've been thinking about it for awhile, but things like this push them over the edge.
There's no question -- and let me address this very specifically. Our proposal doesn't necessarily lock in $90 a customer. This is a flexible rate. And if to the extent that we collect money from our customers, we don't exercise flexible clause. I think part of the answer is that we don't know exactly what the proportions are between 122 03/24/04 - FINANCE - BILL 040142 those who can pay and don't, and those who can't pay. We don't know precisely what that is. But certainly in the short term I think an answer is that the public policy of Philadelphia, and that's the Administration and this Body and the administrative agencies, make it very clear that there is no tolerance for not paying this bill, that you stand to jeopardize the entire City in this instance. So that's a different conversation, though. And I know it's not an easy conversation, but it's the one that has to occur. And that's what this anger is about. And we're fully cognizant and, believe me, I was the last one to want to propose anything in this regard. But I have a fiduciary responsibility that says come this summer and we have to make payments, where is the cash going to come from? So this was my solution.
I had raised this issue once with you before relative to being on a budget, requiring a mandatory budget. Because I understand some of our problems have to do with the issue of cash 123 03/24/04 - FINANCE - BILL 040142 flow at certain times of the year. And I know it's much easier for someone to pay $50 a month on a monthly basis steady than to get hit with a $400 -- is it required? (Inaudible.)
Okay, I'm sorry. I waited. I used to be over there, but now I'm over here and I'm waiting and I just want to get it all in if I can. Councilwoman Tasco, I will let you go to the next hearing. Thank you.
Mr. Knudsen, if the requested capital budget of $65 million is approved, when do you anticipate that you will have to enter the capital markets?
What is the rating agency's take on PGW's fiscal 124 03/24/04 - FINANCE - BILL 040142 health?