00001 COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING BEFORE THE COMMITTEE OF THE WHOLE OF CITY COUNCIL - - - Room 400, City Hall Philadelphia, PA Wednesday, 10/22/97 2:20 p.m. - - - BILL NO. 970647, Ordinance authorizing Mayor to enter into amendment to Agreement authorized by ordinance approved 12/29/72, as amended, between City of Philadelphia and PFMC relating to operation and management of PGW, under certain terms and conditions, by authorizing PFMC, on behalf of City and PGW, to enter into electric supply business, under certain terms and conditions. - - - PRESENT: COUNCIL PRESIDENT JOHN F. STREET COUNCILWOMAN AUGUSTA A. CLARK COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DAVID COHEN COUNCILWOMAN ANNA CIBOTTA VERNA COUNCILMAN JAMES F. KENNEY COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILWOMAN HAPPY FERNANDEZ COUNCILWOMAN MARIAN B. TASCO COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK DICICCO COUNCILMAN BRIAN J. O'NEILL COUNCILMAN RICHARD T. MARIANO COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN FRANK RIZZO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 00002
The public hearing of the Committee of the Whole of City Council, scheduled for 9:00 a.m., Wednesday, October 22, 1997, is hereby postponed until 2 p.m., Wednesday, October 22, 1997. And that's to hear Bill 970647. This is due to a couple of deaths, and Council Members have to attend the funerals. Thank you. - - - (Public hearing of the Committee of the Whole of City Council begins at 3:20 p.m.) P R O C E E D I N G S
May I have your attention, please. At this time, we'd like to get started with our hearing. The first thing I'd like to do is express my apologies for the delay in the start of these hearings. As most of you know, former Council Member and Secretary of the Commonwealth and Former State Representative and Executive Director of P.H.A., John White, Jr.'s, wife died, and a memorial service was held for her this morning. And most of us have known John White for a long time, and we wanted an opportunity to pay our respects. 00003 In addition, Reverend Thomas Ritter, who is also a person very well known throughout the Philadelphia community, and virtually a friend of all of us, had the unfortunate responsibility of burying his wife this morning. He actually eulogized her. It was very, very interesting, and he was inspirational. So we thought it was in the best interests of all of us to delay the hearing so that we could pay our respects to these fine people. And we asked this hearing be delayed from 10:00 until 2:00. And we appreciate that because we know that it's a little bit of an inconvenience to maybe people here from out of town. This is a very, very important topic. It's unique in our experience, and we want to give it the full consideration that it deserves, and we will make sure to do that. I have a list that indicates a number of people who are signed up to testify today. I would like to announce that those people who wish to testify are Mr. Hawes and Bud Karachiwala -- I guess that's good enough -- Mr. Ben Hayllar. And I assume that our City Solicitor, Stephanie Franklin-Suber, 00004 will be testifying. I have Joseph Horan and Walt Pieczynski -- is that pretty good, Pieczynski? -- and Steve Hershey. Those are the people whose names are already on our list. If there are other people here who would like to testify, we obviously would like very much to hear you. You have an absolute right to testify, and we will hear from you. And I'd like for you to give your name to Vilma Diaz who's here. She will identify herself by raising her hand. So just give her your name and we'll put you on the list, and we'll make sure that you have an opportunity to be heard. So we thank you for coming. We would like to have as our first two witnesses our Finance Director and our City Solicitor, who we would like to have represent the Rendell Administration in all of this and explain fundamentally what the City's position is. We don't expect them to address any of the technical questions. Mr. Hayllar just said, "Good." We don't expect them to address any of the technical questions, but there are certain policy questions that I'm sure Council Members would like 00005 to ask of the Mayor's representatives. What I would like to do -- and I need Council Members to pay close attention -- but what I would like to do is address the legal questions, the broad policy questions to the City Solicitor and the Finance Director. If, during the course of giving their explanation for any of those things, they need the assistance of anyone else that's a part of this team that's here, then we welcome those comments. But then after we cover that territory, then what I'd like to do is sort of move into some of the technical part of how it is this all happens, in a way that consumers will understand and that contributes to the good things that it is believed will happen if we pursue this pilot project. Now, if there's any Council Members who do not understand that or who have any concern about that, I would appreciate it if you would just say so now, because there are some broad policy questions. We can have all of those and then kind of move into the specifics. I think it might facilitate, you know, our consideration of these issues. So if there are no comments from Members of Council, the Chair recognizes the Finance 00006 Director and the City Solicitor in the order that they choose to testify.
Thank you. I'm Ben Hayllar, Director of Finance. In the delay of the Council hearing, I was freed up from a two-week stint on jury duty. And, for that reason, my testimony was not provided earlier since I thought I would not be here. My purpose is to state the Administration's support for the Philadelphia Gas Works' entrance into the pilot project. The deregulation of electricity and natural gas is creating a new business environment for Pennsylvania utilities. The pilot project is a relatively low-cost way for utilities to learn about the provision of our power sources in a competitive and gives PGW specifically the opportunity to learn about the competitive world that will be hear when gas deregulation is introduced by the State. In the last two years, the Philadelphia Gas Works has done a tremendous job in improving service to its customers. The institution of these efficiencies came about just -- 00007
Mr. Hayllar, I'm sorry, I hate to interrupt you, but I neglected to read the title of the bill. I'm looking through my file. Does every Member of Council have the bill? This bill is Bill No. 970647. It was introduced October 16, 1997. And it's an ordinance 8 authorizing the Mayor to enter into an amendment to the agreement authorized by ordinance approved December 29, 1972, as amended between the City of Philadelphia and the Philadelphia Facilities Management Corporation relating to the operation of management of the Philadelphia Gas Works, under certain terms and conditions by authorizing the Philadelphia Facilities Management Corporation, on behalf of the City of Philadelphia and the Philadelphia Gas Works -- later on in this hearing, Tom Erickson will explain what the Philadelphia Gas Works is -- to enter into the electric supply business, under certain terms and conditions. I apologize for that interruption, Mr. Hayllar. Please continue.
I'll just pick up from where I was. If the Gas Works is able to master the intricacies of the deregulated environment in the 00008 same way they have been able to improve --
Do we have -- has Mr. Hayllar's testimony been circulated?
Okay, he explained that it wasn't, that he didn't have it.
Well, may we use it as a means of reproducing it for other members -- for Members of Council and members of our illustrious press, who -- or a member of the press who is here? Others, I'm sure, will join us when they hear this hearing is under progress.
You'll be delighted to know I'm about at the conclusion of my testimony. If the Gas Works is able to master the intricacies of the deregulated environment in the 00009 same way they've been able to improve their internal operations, our municipally-owned utility will be successful. The pilot program provides a forum in which to discover whether this is possible. For more lengthy testimony, I turn this over to the City Solicitor, Stephanie Franklin-Suber.
Good afternoon. The Chair recognizes Stephanie Franklin-Suber.
Good afternoon, Council President Street, distinguished members of City Council. I am Stephanie Franklin-Suber, City Solicitor for the City of Philadelphia. I am pleased to be here today to testify in connection with Bill No. 970647 and to offer amendments. My written testimony has been distributed to Members of Council. I understand there are extra copies available in the event you did not receive them in advance of the hearing. Attached to my formal written testimony is Exhibit A, which consists of the text of the proposed amendments to Bill No. 970647. Exhibit B is a black-lined copy of the management agreement, which shows the proposed changes in context. 00010 The bill currently pending before City Council will amend the existing 1972 agreement between the City of Philadelphia and the Philadelphia Facilities Management Corporation for the management and operation of the Philadelphia Gas Works on behalf of the City. The bill, together with the amendments I'm offering today, will allow PGW, acting through PFMC, to enter the electric business in order to participate in the PECO energy company's electric pilot program. The proposed amendments to the management agreement are relatively straightforward. They are not designed and they are not intended to address the spectrum of issues that might arise in connection with a full-scale review of the relationship between the City and PFMC. Instead, the bill simply provides for certain basic changes to the management agreement to expressly expand the scope of PFMC's management and operation of PGW's business activities, to include the electric business for the duration of the pilot program. The authorization for PGW, through PFMC, to engage in the electric business lapses after December 31, 1998 without further City Council 00011 authorization. The bill, together with the amendments I'm offering today, also provides for the ratification of the memorandum of understanding between PFMC and QST Energy Incorporated for the marketing and sale of electricity in the City of Philadelphia during the pilot program and the authorization of PFMC to enter into a definitive venture agreement with QST, consistent with the terms of the memorandum of understanding, with such changes as the City Solicitor deems necessary or appropriate, and with the approval of the President of City Council. My formal testimony this afternoon will cover briefly four general areas: First I'll briefly review the terms and conditions of the memorandum of understanding. Second, I'll briefly summarize the conclusions of the Law Department's preliminary analysis of various legal issues raised by the participation of PGW and the pilot program. Third, I will briefly touch on the potential impact on the general fund of PGW's participation in the pilot program. 00012 And, finally, I will review and summarize the proposed amendments to the management agreement. PFMC has entered into a memorandum of understanding with QST Energy Incorporated to supply electricity during the pilot program. QST is an Illinois company which has already been licensed by the Pennsylvania Utilities Commission to supply electric service, both during the pilot program and thereafter. Although PGW, acting through PFMC, has filed for a separate license with the PUC, it is my understanding that PGW intends to participate in the pilot program through the venture with QST, relying on QST's license. QST and PGW will jointly market electricity and related products as part of the pilot program. QST will provide competitively priced electric power and other sales and marketing resources necessary for the venture to participate in the pilot program. QST will provide electricity supply, logistics capabilities and electric knowledge derived from past electric pilot participations to PGW's customer base and contacts. 00013 PGW will use its multiple service centers, its potential energy stores.
PGW will provide telephone services, billing and collection services, as well as the local sales force in an advertising promotion and communications campaign. The parties will share equally in expenses, will contribute different initial amounts of personnel, equipment and tangible and intangible business assets and will share equally in the net profits of the venture. The memorandum of understanding is effective as of September 30, 1997. The parties contemplate the execution of a more definitive venture agreement, which will supercede the memorandum of understanding, and will have an initial term expiring at the end of the pilot program, on December 31, 1998. U. requires that the definitive venture agreement be executed by November 9th. PGW, however, anticipates the execution of this agreement by November 1st, the date that PFMC and QST begin to sell electricity to customers. In the event that either PFMC or QST want to terminate the relationship at the end of the 00014 pilot program, it must notify the other party in writing not less than 90 days prior to the end of the program. The parties may, but are not obligated to, continue the relationship beyond the pilot program. U. is subject to the approval, as necessary, of the Gas Commission, City Council, the Mayor and boards of PGW and QST. The Law Department has completed a preliminary analysis of various legal issues that arise as a result of the pilot program. The conclusions of our preliminary analysis may be summarized as follows: The City may not engage in a proprietary or private business, unless expressly authorized by the General Assembly. The electricity supply distribution business is arguably a proprietary business. However, I believe that authority for the City to enter the electric business may be found in existing state law. In particular, there's a provision in a 1919 state statute which authorizes the City to manage water, gas and other public utilities, which may be read to include electricity supply. And that 00015 authorization was not repealed by the Home Rule Charter, which was adopted in 1951. This theory is similar to the theory under which the courts have upheld the City's power to engage in the gas supply and distribution business. In other words, there is an express grant of power for the City to engage in the electric as well as gas business under an antecedent grant of permission from the legislature that was not repealed by and is not inconsistent with the Home Rule Charter. Alternatively, it may be argued that the supply and distribution of electricity is ancillary to the supply and distribution of gas as a result of the competitive realities of the energy business and changes in the gas market. The existing management agreement limits the scope of PFMC's management and operation of PGW's business activities to the sale and distribution of gas. Therefore, specific amendments to the management agreement are required in order for PGW's business activities to extend to the electricity business. The bill, together with the amendments 00016 I offer today, authorizes the Mayor to enter into amendments to the management agreement to expand the scope of PGW's business activities. These amendments require City Council approval by ordinance. And to meet the November 1st start date, the ordinance must be enacted by October 30th. U. with QST, subject to City Council approval. I've also reviewed state law as to PFMC's venture with QST, a for-profit for business entity. The Pennsylvania constitution prohibits the City from being a stockholder in or lending its credit to any private corporation. Based upon our review, it does not appear that the proposed venture violates this constitutional prohibition. Neither the City, nor PFMC will be holding stock in or lending its credit to QST. The venture with QST requires the use of City assets, facilities and equipment.
The venture, however, does not appear to affect the City's ability to issue tax-exempt PGW revenue bonds 00017 or affect the tax-exempt status of outstanding bonds. It is not anticipated that PGW will devote more than a de minimus part of its tax-exempt finance, facilities and equipment to the for-profit private activity venture during the course of the pilot program. The venture is a business arrangement or affiliation. It does not form a separate legal entity such as a partnership. Although we may take the position that the venture does not create a separate legal entity, it is possible that taxing authorities may consider the venture an association of partnership, given the sharing of profits. PGW's share of profits, in any event, should be exempt from federal income taxes. However, it is possible that PGW will be liable for certain state taxes, and the venture may be subject to utilities gross receipts tax. We have been advised that the venture will rely on QST's license to supply and distribute electricity. Although PGW has applied for a license, it's not likely it will have the license before the start date for the supply and 00018 distribution of electricity on November 1st; nor will QST's license be modified to include PGW or the venture prior to that date. While there is arguably some risk in this approach, it is my understanding that this issue has been reviewed and approved by outside counsel working more directly with PGW. At this point, I'll turn to the potential impact, if any, of any expenses and losses to the pilot program on the rates or the general fund.
Can I interrupt. Are there people who have questions on legality? Maybe we should just deal with the legality question here and now so that when whoever's reading these notes of testimony, they'll read the testimony on the legality, and then there'll be the discussion. Because that, I believe, is bound to be -- you know, there's bound to be a bunch of questions. Can we -- are we capable or willing to try to now just discuss the legal questions involved in all of this? If so, I think it might be an appropriate way to kind of, sort of systematically kind of get through this. 00019 Is there anybody who wishes to ask a question about the legal questions? I saw Councilman Nutter's light on and Councilman O'Neill. Councilwoman Clark. Councilman Nutter.
Thank you, Mr. President. Just some quick, I guess, grounding information for Mr. Hayllar and for the City Solicitor. In addition to your roles as Finance Director and City Solicitor, what is the nature of your relationship with either PGW or PFMC?
I'm a member of the PFMC board and have been for, I guess, about two years and a half. As City Solicitor, the Solicitor is --
That is by appointment. And the solicitor is ultimately the solicitor for PGW.
Okay. And, Madam Solicitor, in the proposed amendments in the first 00020 page of Exhibit A, 3(a) talks about -- that there might be some difference between the venture agreement and the memorandum of understanding. Do we have a copy in either the old materials or the new materials we got today of this venture agreement? And can you explain the difference between these two documents?
Yes. The memorandum of understanding is attached to testimony that has been distributed to Members of Council. The venture agreement will be a more definitive document which goes into the details of the arrangement. It is anticipated it will be consistent --
Okay. The memorandum of understanding is really an outline of the business relationship. The venture agreement will go into more detail and address issues that the memorandum of understanding may currently be silent on.
Mr. President, I'm not overly concerned about the legality or the pilot, although I think (inaudible) --
Thank you. I think there will be bigger questions probably down the road when we decide if we're going to outside the City. But I'm sure there's a legal opinion that's been circulated internally in the Administration, and I was wondering if the Council President has seen a copy of that or his legal staff has. I would like to have at least the level of comfort that Council leadership and the legal staff has reviewed whatever written opinion there is. I'm not asking for a copy of it or to circulate it.
Well, my understanding is that there was a preliminary kind of a memorandum that was done on it that our staff 00022 has seen, but that that was being redone. Is that correct? To the City Solicitor.
There was a preliminary analysis that was provided to staff. That's correct.
Is there anything on legal questions other than what it is you have said to us today?
In terms of the issues, no. I will say it's a preliminary analysis for purposes of the pilot program only. There's some factual issues that we will be looking at as the parties negotiate the venture agreement. So, for example, one of the points I've just addressed deals with the potential impact on the tax-exempt status of the bonds based on the use of certain assets and facilities. The memorandum of understanding generally outlines the relationship. As we get into more of the details with the venture agreement, we will then work and make sure that there's nothing that changes the conclusion. But that's why I say it's preliminary. So there may be some changes.
Well, who is 00023 responsible for giving legal advice to the PFMC, under the agreement?
Under the management agreement, it is the City Solicitor.
All right. So it doesn't matter what anybody else says; the Law Department is the legal counsel for PFMC, which is the body authorized by the City of Philadelphia to manage these collection of assets. And it is the group, the legal entity that is being advised by the City Solicitor that this is something that we can do.
The Law Department is responsible for providing advice and counsel to PFMC/PGW.
And I think this record ought to be clear that you're here as the lawyer for the Law Department and the City Solicitor; and that, under the agreement, you are the one who is responsible. You or your agents are responsible for giving legal advice. 00024 And you are, by so testifying, advising the Mayor and this Council that you are our lawyer to the extent that we don't fight about whether or not you are our lawyer. We like to wait to see what your advice will be. And then if we don't like it, we just want to get rid of you, right?
We say, "We don't like that advice; we want other advice." But, I mean, is it -- are you telling us that you think this is a legal venture?
- -- yes. There's a difference between saying that based on our research, we believe that it's legal. But when you're engaging in something that is precedent- setting, I cannot say to you that it's not subject to challenge or question or some risk. 00025 But we are reasonably comfortable, based on the scope, limitation, size, duration of the program, based on the information that we've been provided, that we certainly have authorization to enter into this business. There are some legal issues that we will continue to examine and monitor. But on the authorization issue, yes.
And that's as to -- well, strike that. Councilwoman Clark.
Yeah, let's just let Councilman O'Neill finish up and then we'll --
(Inaudible) . . . and have it show up in the testimony two or 00026 three pages later.
Thank you for the yield, Mr. O'Neill. Your testimony speaks to the fact that it is your understanding that the issue has been reviewed and approved by outside counsel. Now my question is: Did counsel reach its conclusion that the affiliation, if lawful, using the same or different rationale than yours? Maybe I ought to ask who your counsel is, who the outside counsel is.
There was one issue that I referred to in the summary of conclusions of our analysis that, to a large degree, we deferred to PGW's reliance on outside counsel, and that was on the licensing issue. On the charter issues and the other issues, the Law Department conducted the preliminary analysis.
I just want to have some level of comfort and satisfaction that you 00027 and your legal staff particularly have seen the documents and are comfortable with the analyses provided to the Solicitor's Office. I understand we're getting into a proprietary area here. This is business. There's competitors out there. We don't need a bunch of legal issues floating around. But, at the same time, with all due respect to the Solicitor, whom I respect immensely, this a new area, and there's a whole lot of people with ideas. And I would just hope that our legal staff could support them as much as the Solicitor's Office is today; I'd feel better about it.
Yes. If I can give you any assurance, Councilman O'Neill, I would certainly be happy to sit with you personally and go into any of the details with regard to the legal analysis. But at the end of the day, in terms of the interpretation of the charter, I can assure you that that is from my office, and I am comfortable 00028 with the authorization. Because again, as I said in my testimony, it is predicated on exactly the same theory that supports the City's engagement currently in the gas business. So I do believe that on that basis, we're on solid ground.
I'd like to go back to my original question. Has it been shared with the Council President Street?
It is my understanding that we have what is available. Whatever it is that's available, we have it. It has been reviewed by our staff, and it is what it is. And it's not an answer. I mean, it's not a direct answer.
The Chair recognizes Councilwoman Clark now, in her own right.
Thank you, Mr. President. 00029 Again, Solicitor, I want to return to the risks associated with the venture supplying and distributing electricity relying on QST's license. Discuss for us those risks. What might a court say is within or outside reasonable bounds? Is the risk high?
I believe that under the circumstances, the risk is high. The memorandum of understanding provides for the possibility that QST and PFMC may have to part company; in which case, there would be an unwinding of the relationship. I think, if worse comes to worse, QST would proceed and PFMC would withdraw from participation, correct?
And from further involvement in the supply of electricity? Or would you re-group and come under your own license?
That's correct. That's correct. PFMC has applied for a separate license; PGW acting through PFMC. So, therefore, it is possible that PFMC could proceed unilaterally. They have not yet obtained their license, so that's 00030 still another question.
Now, the value and beauty of the affiliation, association, whatever this teaming project is with QST, is to permit PGW to meet the 1 November deadline for the sale of electricity?
That's correct. QST will actually provide the electricity services. It has the experience. This opportunity gives PGW the ability to learn the business, in effect.
Okay, but just to repeat what I thought I understood you to say, is there any legal disability with the present teaming arrangement causing the reseparation of QST from PGW or PFMC that you would then re-group and follow through on your license application and come back at a date as early as that license permitted you to still enter into the sale of electricity?
Certainly PGW, through PFMC, would re-group. They may come back 00031 with their own license, or it is possible that they could engage in a venture with a different party. But the upshot of it is, if there's a legal disability or an issue that arises, we believe it would be possible to work around it and restructure it to still give PGW an opportunity to participate.
What economies of scale does PGW hope to profit from?
The Chair quarrels with that question; it's not legal. We are now on legal questions.
I withdraw the question. Thank you. I withdraw the question.
Thank you, Mr. President. Good afternoon. On of your testimony, you state that it is possible that PGW will be liable for certain state taxes and that this venture could be subject to utilities gross receipts tax. 00032 Would that be gross receipts tax on electricity, or would it be gross receipts tax on gas and electricity?
This would probably be on electricity, just on electricity. And it's -- and it's assuming that there are receipts, profits.
Will we be taxed on the gross receipts collected by PGW -- QST? Who pays the gross receipts tax; PGW or QST?
This would relate more to the venture itself because there is an exception for a municipality. We would certainly take the position that PGW's share of receipts from the venture should qualify for an exemption, but we raise the possibility that there may be some liability. And it's only identified so that Council is informed of the risks. It's not to say it's an impediment or something that we believe to be insurmountable. It is a possibility.
This PGW/QST venture, is that a -- would that be a different entity within -- would it be a separate entity? 00033
It is not a separate legal entity; it is just a business affiliation, a relationship, a contract.
At what point in the electric program would we jeopardize PGW's access to the municipal bond market? Does it have an impact on our access to the bond market?
In terms of access to the bond market, I don't believe that there will be. If your question relates to any possible impact on outstanding bonds, we believe, as I said previously, that the extent to which City assets and facilities and equipment will be used for the pilot program, that they are used to a de minimus extent, and that there should be no impact.
It should not affect the tax-exempt status of the bonds.
In the terms of the memorandum of understanding, it says that the venture agreement will supercede the memorandum of understand. Who will review the venture agreement? 00034 Does that come back to Council?
The amendments proposed today to the bill provide that the venture agreement will be reviewed and approved in the first instance by the City Solicitor; and in the second instance, by the Council President. To the extent the Council President determines that the terms and conditions are inconsistent with the M.O.U., or that there are other material changes, it will come back to City Council by resolution.
Thank you. Are there damages if there's a determination agreement with QST?
The memorandum of understanding does not provide for liquidated damages in the event of termination.
Councilwoman, we're now venturing into another area, and that is the details of the memorandum of understanding. And what I would like to do is just sort of limit this to the overall legal questions about the kind of authority.
Is there anyone else who has any legal questions? The Chair recognizes Councilman Cohen.
Has there been any legal determination as to the possible effect, if any, on PGW's nonprofit status as a result of its engaging in this -- I don't know how to describe activity, together with a for-profit company?
Councilman Cohen, it would be PFMC's nonprofit status. And it is my understanding that we believe there will be no 17 adverse effect on their status as a nonprofit corporation. We have reviewed their articles of incorporation as well as their bylaws, and I believe that we've consulted with counsel for PGW with regard to any applications pending before the IRS in terms of their 501c.(3) status.
All right. I would request a copy of the research that was done which leads to that conclusion. Now, a second legal question: Throughout your legal analysis, it's indicated that we're under a legal requirement -- that is, City Council is under a legal requirement to complete whatever action it decides to take by November 1st. Now, isn't it a fact that that's a self-imposed deadline? It's not a deadline imposed by the statute, it's not a deadline imposed by PUC; it's a deadline that PFMC -- if I have the initials in the right order -- and QST have themselves agreed upon. That if, for example, Council took till November 15th to make this decision, it would not have any legal impact whatever; we would not be in violation of the statute, we would not be in violation of a PUC order, and that the agreement is 00037 to be effective as of then. All I'm seeking is a legal answer to that, Mr. President, as to what is the nature of this deadline that we're reminded of constantly in this memorandum.
PFMC and QST intend to start delivery of electricity service on November 1st as part of the participation in the pilot program. And, therefore, in order to start on November 1st, it must have the necessary authorization of City Council.
So then it's a deadline that they've imposed. It's like I said to somebody else, "I intend to do something by such and such a date; therefore, other people have to make up their minds by that date." But there's no legal requirement, is there?
Councilman, I think the answer to that would be: It's not so much a legal issue with a deadline for us; the problem is that we've got to get in the marketplace and get some customers, or it will all be a moot point. So if I understand what you're saying, 00038 from a legal perspective, I mean I can't answer that. But from a marketing business standpoint, the magic of November 1 is that that's when the electrons start flowing, and we've got to have some customers if we're going to participate.
Mr. Hawes, that may be. But then the date ought to be listed not under the legal issue, not indicating that we're under any legal deadline; but that from a marketing and a business point of view, it may be desirable to be able to begin as anybody's eligible to begin. But it's being presented by everyone as a legal requirement that we've got to move by then.
Councilman Cohen, if I could interject for a moment. I apologize. It is a legal deadline in terms of the PUC. If the customers have signed up by October 25th, then they will be required to deliver electricity on November 1st. So it is not simply a wish on the part of PGW, PFMC and QST to start on November 1st. They would be required to deliver electricity to those customers that have signed up by a certain date. There have been extensions. And so 00039 it's kind of a rolling situation where customers will have additional time to sign up after that date, but they have to start on the 1st.
I beg to disagree. I see nothing whatever that involves the requirement of a start-up. If two weeks later, Council were to act, it would seem to me clear from all of the legal aspects that this agreement of understanding could become effective then.
I think it could be. But by that time, the customers will already be signed up.
Councilman Cohen, I would be happy to furnish a copy. I don't have one with us, but I would be happy to furnish a copy of the PUC order. And that may answer your question more specifically.
I have a question 00040 for the City Solicitor. In your testimony, you indicate that there is a provision in the 1919 state statute authorizing the City to manage water, gas and other public utilities. It's always been my understanding that that provision was not repealed by the adoption of the 1951 charter. It's always been my understanding that the variety or various state-enabling ordinances and/or laws have always prohibited the City of Philadelphia from engaging in proprietary activity; i.e., activity for profit. And that we don't sell gas for profit, we don't sell water for profit. The $18 million that the City gets out of PGW is a return on investment, not profit. Now, how do you square, if at all, this idea that we're entering into a partnership arrangement with a for-profit organization and we agree to share both the profits and the losses of that joint venture arrangement?
You're absolutely correct that the City is not authorized to engage in proprietary business without express statutory authorization by the General Assembly. 00041 The position that we are taking on that issue is based on case law. There's a series of cases that uphold the City's power to engage in the gas business. And these cases specifically say that the proprietary business limitation does not apply to a city operating a proprietary business under an antecedent grant of permission from the legislature. That's the underpinning for the City to engage in the gas business because it's the same context. And so again --
You're saying we could operate the gas business for profit? The answer has to be yes.
Councilwoman Clark wishes to follow up on that question. I yield.
Madam Solicitor, it seems to me that the ambiguity as to what this organization is is compounded by your use of the 00042 term" profit," because the term "profit" seems to collide with 501c.(3) and all of the not-for-profits. Is there any other way you could characterize the excess over expenses so that we don't use language that invites further investigation of some of our assumptions which, by your own admission, are subject to interpretation, other than that which you've given?
Revenue. I think the word "profit" is itself is a red-letter word, and I think we ought to stay away from it because it invites the kind of close inspection that in these earliest times probably we don't want to have ourselves subjected to.
Unfortunately, it's all throughout the memorandum of agreement. 00043
I understand that that is a scrivener's correction. Go back through it, and wherever it shows up, give me something that arguably is not profit. Because I think when you get to profit, you're going to have to say that this is not the kind of profit that they contemplated in the legislation. And that's just going to be a silly argument.
We will use a different word in the venture agreement.
Now, what word might you use? That will be interesting. This is a for-profit business. Isn't QST a for-profit business?
Revenue. We could use the word "revenue" as a possible alternative.
Revenue losses and revenue gains? Oh, I think somebody would love that. Let me complicate this just a little bit further. What about this tort limit -- limitation that PGW has as a result of its affiliation with the City? 00044 Isn't there some kind of limitation on our tort -- what's it called? The Political Subdivision Tort Claim Act? I can't really remember that but I know we're only subject to, what, some $500,000 per incident? There was a big brouhaha around here. We got an insurance policy. Do you all remember some of that? Does any of that get affected by the fact that we're now engaged in a for-profit activity? Because I'm not buying that; it's for -- I think it's for profit. I mean, how does all of that work and how will that work? Is there any piercing-of-the- veil concerns that we ought to have?
PECO recently paid 12 and a half million dollars as a result of a gas explosion somewhere very close to Philadelphia. If they were -- if it had been PGW, the limitation you speak of would have applied, and the total liability would have been a hundred thousand dollars. 00045 Now, that's a question you're raising, right?
PGW has a benefit of the Tort Claims Act. The memorandum of understanding is currently silent on liability. We would make sure that in the venture agreement, PGW would have the benefit of the Tort Claims Act. And to the extent that there are any claims, we would seek indemnification from QST.
Now, I scribbled a question here. And I say, How does hold-harmless insurance or other -- or other something-provisions of law or contract insulate us from any liability? And what I meant was that other than the potential $500,000 worth of potential liability, those costs that were indicated in the factual material that is given us? And I guess what we're really kind of doing is flirting around with that whole topic. 00046
Well, again, these are the types of issues that we will be dealing with in definitive venture agreement. The M.O.U. currently is just a general outline of the relationship.
I guess what concerns me is we enter into this agreement, you know. Then, say, there's a bad incident out there, some kind of fire or something that gets related to all of this. And then some lawyer someplace comes along and says, Oh, no, I'm going after the City. I don't care anything about QST, I don't care anything about PFMC. The City is supplying electricity, right? PFMC is involved in it. This is a mess. I want $10 million, and I don't care about any of that. You know what I mean? And they just start hassling us 'cause this is what they'll do.
And what would happen is, they will get the notes of testimony from this hearing, that's the first thing they'll do. 00047 And my real question is: How do you push all of this off on somebody else so that we don't have to worry about it? I want it pushed off on somebody else.
Let me try to answer this generally. PGW, through PFMC, deals with claims matters --
See, let me interrupt you, let me interrupt you. I have to interrupt you 'cause we don't know what PGW is. And I know we've been talking about "What is PGW?" for a decade around here. 'Cause I'm not sure what PGW is because I have been told year in and year out that PGW is a collection of assets that are owned by the City of Philadelphia but that are managed by PFMC pursuant to a contract between the City of Philadelphia and an entity that they created to manage those assets. I've also been told that if there weren't a PGW, that all of that collection of assets would revert to the City of Philadelphia, be managed by the Department of Public Property much like -- and the Department of Public Property would be responsible for supplying gas service, if we all 00048 decided, much like the Water Department supplies water service. So you don't help me when you say "PGW" because I don't know exactly what PGW is. I only know they're probably somewhere in the annals of somebody's memory or documents here, you know. It may be fleshed out, but nobody has ever done that for me. I do know that there are pipes running under the ground, there are buildings out there, there is equipment and all kinds of stuff that PFMC, pursuant to our authorization, is managing through a management through the officers and employees of this company. And I don't know what PGW is. And I think that if you wanted to sue somebody, you would sue the City, PFMC and go after all the things that they manage. And so, for me, the use of "PGW" from the beginning, without a definition, doesn't help very much. And if you can shed some light on this for us. I'm serious about wanting to understand it 'cause I have been around here long enough now to have considered a ton of different amendments to 00049 this agreement -- most of them never go anyplace -- because there are all these questions that are outstanding about this form of organization. I'm not the lawyer.
Without trying to address the broader relationship in governance issues careful in trying to say PGW is acting through PFMC. I'm also trying to be careful as you pointed out and as other Members of Council are sensitive to, the purpose of my testimony is to try to address legal issues without giving a road map to plaintiff's counsel to challenge the venture. So there are a number of issues --
I'm sorry, but you can't try -- you can't withhold information from us or your thoughts about the legality of all of this from us for fear that somebody will read the notes of testimony and come up with some legal theory.
That is correct, and that's what we are trying to do. 00050 PGW, acting through PFMC, deals with claims on a day-to-day basis. PGW, as a collection of assets owned by the City, has the protection of the Tort Claims Act. The management agreement provides for indemnification. PGW and PFMC have insurance.
And that's my concern. Because, see, I would characterize this differently than you. I would say the City, through PFMC, is providing gas to people, to customers, its customer base. The City, through PFMC, is managing and operating these facilities to provide gas to a customer base. And what we have done successfully is sought to offer to -- we have sought to protect those assets from outside people by giving PFMC, right, the protection that has been offered to government. So we've made it an instrumentality of the State in some way, shape or form because we wanted that protection. Now what we are saying is, Well, but, on the other hand, we would like to -- we would like to manage this collection of assets in a way that authorizes this other activity, the sale of 00051 electricity with a for-profit. And what happens is, you get this -- you get this sort of a mixed problem here that raises these questions about liability.
But I do think it's important to point out just in terms of the relationships in the pilot program, the relationship between PFMC and QST. Again, the venture is not a separate legal entity. PGW -- PFMC is going to do certain things: marketing, billing. PFMC is not going to supply electricity; QST will supply electricity. QST will have a direct contract with the consumers, the customers. And so it is important to recognize that PFMC is not actually going to supply electricity or purchase electricity.
Yeah, but PFMC is going to be responsible for the result of this activity taking place. Because if it's a marvelously successful activity and if there's so-called profit made, then PFMC, and to a certain extent, the City, will share in that profit. If there are losses, then 00052 PFMC and the City, in some respects, will share in those losses. So I think that's almost a technicality. That doesn't have a whole lot of legal significance for us because that's simply a division -- for my purposes, that's just a division of labor, how it is we're going to divide the labor. PGW will do certain things and these other people will do certain things. But I think in the end, we all become responsible for the activities of each other in all of this.
Yes, sir. I am Raymond Sharbott, the Chief Financial Officer at PGW. I have looked at all of our insurance coverage for PGW/PFMC. You mentioned a number a few minutes ago of $10 million. We have a $250 million insurance coverage. Specifically included in those policies are the words "electricity" in the existing 00053 PGW policy. We also have in those policies references to ventures such as this, as being covered under the liability provisions. So I think we're protected above any exposure that we may have otherwise, through these insurance policies. Another factor is that QST is covered under the same company's insurance policy. They use the same insurers that we do. So from an insurance standpoint, I think we're in outstanding shape coverage any liability that we may have from an insurance claim aspect. The only thing that is specifically not covered is failure to deliver the product, unless there is some event or occurrence which prevents doing that. But we are very heavily insured.
So that there would be -- you're telling me the real answer to my question of how we can push this off onto somebody else is -- I mean what we don't want is that in some period of time during the course of this pilot, you know, somebody looks around and starts going after the City's general fund and/or other assets that we 00054 have in the event that some occurrence takes place. So it is your fundamental position that, notwithstanding any of these legal questions about governance and the charter and state-enabling legislation, the insurance policy picks up all of that?
And there is no way that the insurance company can say, Well, we aren't responsible because we thought that, you know -- we thought that this is an illegal activity here. And we now, therefore, are not responsible. I mean, you're covered on all of that?
Well, I'm just asking a question. Is it possible for an insurance company to say, Well, this is not a properly, lawfully organized legal venture in the first place; and, therefore, this is more than what we bargained for. And we, therefore, are not responsible for this.
Councilman Cohen. 00055 Into the microphone, Councilman.
Mr. President, if we're paying the same insurance rates as this other company; and by law, the insurance company would only have to meet a claim up to a hundred thousand instead of millions of dollars, we're overpaying on insurance. So I don't understand that. I'm also concerned about the existence of the policy because it would indicate that PGW, whatever it may be, has no confidence in that tort limitation claim, you know, as a municipal organization. PGW must be insured for $250 million because it doesn't believe it's going to be limited to the hundred-thousand-dollar damage loss. But what I'm concerned about now following this discussion is why doesn't PGW, if it wants to enter this business, why doesn't it file an application to do so?
It has. It's pending. It has. PGW has filed an application. It's pending. At some point in time, we'll get to this in the memo of understanding.
Councilman, you'll get a clear answer to that question. Respectfully to the witness, your review of these policies is appreciated, but I would like to have the Law Department review these policies and issue us a written opinion that it is your opinion that these policies provide the backup coverage that we all are looking for here so that we don't have to worry about being liable in ways that are typical of this discussion.
These will be made available to the City Solicitor for their review.
And, Council President Street, these are the issues that we will be dealing with as we go through the process of negotiating the definitive venture agreement. So that's part of the process that we would expect to go through.
Thank you, Mr. President. City Solicitor, in your testimony relative to the 1919 statute, has the Law Department 00057 reviewed at all the legislative journals and the original bills of the 1919 statute to determine further insight into the legislative past, which is normally a preamble of such a bill, or the review of the floor debate of either the House or the Senate, that would have indicated some additional insight into what they intended when this particular statue was passed? And can we take this even one step further? I mean, can the Gas Works, based on your analysis of the statute and the existing case law, go into the phone business? I mean, is there any utility at all that PGW, based on this statue and existing case law, would be able to enter into any utility business? I mean, I don't have an opinion at this point one way or other if it's a good thing or bad thing. But I'm just wondering how far, what utilities; just electric? Or anything else?
Responding to your question with regard to the scope of the research: This was, as you can imagine, researched very thoroughly by the legislative unit of the Law Department. The 1919 statute -- we are referring to 00058 it as "the 1919 statute" -- was actually the charter. And, yes, I'm comfortable that the research done was thorough and took into account the kinds of materials that you are concerned about.
For clarification, there was a 1919 Philadelphia home rule charter. Was it a 1919 -- was it a Philadelphia home rule charter?
But it was a charter setting up the governance of the City of Philadelphia.
Well, what's the difference between a "charter" and a "state-enabling law"? 'Cause I think that's really what Councilman 00059 Kenney is saying.