Committee Hearing, October 22, 1997

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?

No. As I said in my introduction --

Okay, he explained that it wasn't, that he didn't have it.

We didn't expect him to be here.

Do you have a copy of it?

Yes, sir.

Is it written?

Yes, sir.

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 --

Is that by appointment or --

It's by appointment.

-- or is that the nature of your position?

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 --

The arrangement between PGW and --

QST and PFMC.

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.

Okay. All right, 00021 thank you.

The Chair recognizes Councilman O'Neill.

Mr. President, I'm not overly concerned about the legality or the pilot, although I think (inaudible) --

Councilman, your mike.

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.

I'm trying to nail you down.

I know.

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?

That is correct.

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?

(No verbal response.)

I didn't understand that.

The short answer to your question is --

Maybe.

- -- 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.

Mr. President, I'd like to continue.

I'm Sorry. Councilman O'Neill.

(Inaudible, not on mike.)

I'd just like to finish up.

Yeah, let's just let Councilman O'Neill finish up and then we'll --

I understand that the Solicitor is here --

(Inaudible) . . . and have it show up in the testimony two or 00026 three pages later.

It's your call, Mr. President.

Councilwoman Clark.

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.

I understand. Stephanie.

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.

All that there is is all you can read.

Right. We have read all that there was.

As long as that's been done, I'm happy.

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.

While they're in the business?

From an established company. That's correct.

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.

Only?

Only.

I withdraw the question. Thank you. I withdraw the question.

Chair recognizes Councilwoman Tasco.

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.

Would our bonds remain intact?

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.

Okay. 00035

Is there anyone else who has any legal questions? The Chair recognizes Councilman Cohen.

Has there been any legal --

Councilman Cohen, I need you to grab that microphone.

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.

Has there been any legal research done? 00036

Yes.

And what was the conclusion of the research?

There is no effect on the nonprofit status of PFMC.

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.

On what 1st?

November 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.

Well, but that's a marketing thing.

That's why we want to do it.

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.

Engage in it, we do.

I think that's a "yes" or else we're in trouble.

That's correct.

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. Revenue.

I didn't hear you.

We can use the term "revenue."

You can use the term what?

Revenue.

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?

I think (inaudible).

Speak up into the microphone, please.

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?

That's the question.

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.

Yeah, but that's the City or PFMC?

PFMC would be indemnified by 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.

Lawyers would stand in line to take such a case.

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.

Correct, that is correct.

You got to tell us.

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.

Mr. President, I have reviewed --

Identify yourself.

Can you identify yourself for the record.

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?

Yes, Mr. President.

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?

I can't speak to the illegal activity side of it, but --

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.

(Inaudible/off mike.)

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.

But I don't understand why it's -- 00056

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.

The Chair recognizes Councilman Kenney.

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.

I'm sorry. What do you mean was actually the charter?

The 1919 charter.

Oh, fine. I'm sorry. Thank you.

For clarification, there was a 1919 Philadelphia home rule charter. Was it a 1919 -- was it a Philadelphia home rule charter?

It was not home rule.

Well then, what was it?

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.

The 1919 charter established the whole government. The charter adopted in 1952 was based on the Home Rule Act, and it established home rule in Philadelphia. Anything that was inconsistent with or was repealed by the subsequent charter, the 1952 charter, the City is prohibited from engaging in. And therefore, we take the position -- and necessarily have to with regard to PGW's current operations -- that the City can engage in and has the power to engage in anything expressly authorized under the 1919 statute or charter, unless it has been repealed by the 1952 charter or is inconsistent with. It might help if I could point you --

Let me interrupt you for one second. My assumption is that, and I may be wrong, but that in 1919 we had electric service. Was electric service available to people in 1919 or not?

It certainly contemplated electric service. And I can direct you to some specific language if, you know, if would 00060 give you a greater degree of comfort. For example, Section 5-900-D, it provides: The Department of Public Property shall operate itself, or by contract, maintain, repair and improve City electric facilities not under lease to others, etc. I mean, we have done extensive research that we have not distributed, to be very careful in this issue. We recognize the importance and the significance of it. There are also references to the fact that --

Excuse me, excuse me. See, one of the concerns is that it authorizes the use of facilities, and there are no facilities involved here. There are facilities involved in dealing with water, there are facilities involved in dealing with gas, but there are no facilities here. I mean, this is a contract, you know, that will result in our supplying electricity, but we aren't managing any facilities at all. And it's something that has been raised. And, you know, I guess you could 00061 probably kind of really liberally interpret that to say "facilities." You know, we can get the electricity and bring it in. But it's not really -- we aren't really operating any facilities here to supply electricity.

There are further references to the effect that the City shall, from time to time, inspect, test the quality of electricity that's furnished to the City and its inhabitants. There are other provisions that relate to management obligations dealing with poles and wires and powerhouses and substations and anything else related to transmission of power and switches.

I guess, based on the extent of all of that information -- and this is rhetorical 'cause you don't have to answer to this question, why wouldn't they just say electricity? Why wouldn't, in the 1919 statute authorizing the City to manage water, gas and other public utilities, just say "water, gas and electricity?" I mean, I guess that's where some of the ambivalence --

Well, I do think 00062 that relates to the second part of your question; what's within the scope of other public utilities? At the moment, however, we are dealing with electricity. And I do think it's reasonable to take the position that other public utilities would include electricity specifically with regard to the other references in the 1919 charter and also in the current charter, in the section I just referred to, that do specifically say "electric."

Okay. And when it comes to the issue of existing case law, those were cases that were decided from individuals who brought suit against the City for provision of gas service? There was no electric cases, correct?

That's correct.

Okay, thank you very much.

Councilman Ortiz.

I just had a conversation with my colleague, David Cohen. I am asking for -- he wants this to be simplified in the most clear way possible. Isn't this just really, what we're talking about here, an initiation fee? You're 00063 paying and we're going forward. And we're only asking -- or we're paying to enter into the ballpark. The November 1st is because we have to enter into the market. And it has nothing to do with legalities. A market is opening up November 1s. We have to be -- if we are going to be players in the long run, in the ten years forward, in the $10 billion market that is opening up, we are going to have to have some sort of team on the field on November 1. So we are paying a minimal amount of money to enter into the game. The legalities and all of the other aspects -- QST is a partner because QST has a ticket into the ballpark. We don't have a ticket into the ballpark. Isn't that right? QST has the ticket, they have the licenses. We don't have the license.

Yeah, but it's more than that.

But all that we're approving here today, in essence, is a pilot program to make us players in a bigger game that's supposed to come forward later on. 00064 Now, I understand that there's more than that; you know, the liabilities and so on. And the City Solicitor here has addressed herself to that. But in terms of legalities and in terms of November 1st, it is a marketplace, we have to be in the ballpark, and we have to go to do it or not do it. And if we go in after November 1st, the market is gone at that point. Is that true, Mr. Hawes?

Yes, yes.

Councilman Ortiz, I do have to --

This record will reflect that Mr. Hawes was shaking his head, indicating the affirmative.

It's very difficult in shorthand to take that down.

Let the record reflect that I said "yes."

You certainly did.

But I do have to say that there is -- the November 1st deadline, again, to repeat, is driven by a PUC order for any 00065 of the customers that have signed up by October 25th. So, yes, it is driven by the market, but it is also driven by the way that the PUC has constructed the pilot program.

Are we signing up customers now? Have we signed up any customers? How many customers have we signed up?

I don't have the exact numbers who today.

Approximately.

Approximately. I can't report the cards that we received, because some of them don't have the signatures, and they're not complete cards. We've received --

Just give us an approximate number.

About a thousand cards right now.

Okay. So that the reality is that he's either got to start delivering them service on November 1st, or they're going to be someplace else. So that's really not a big issue here. 00066 I mean, if we're going to do this thing, we got to do it on November 1st. I mean, is that fair?

Yes.

'Cause this thing is -- I mean, it's going underway. Now it's not like those thousand people can't go someplace else, but I mean, the company has been mailing and doing what it's, you know, it has to do in order to market. I have one last question for the City Solicitor. Councilman DiCicco, did you wish to ask a question?

Yes.

Then I'll yield to you.

This is a follow-up to Councilman Ortiz. If you don't make the November 1st deadline, you're basically out of the electric business, or you're basically out of the --

They're basically not in it.

You're not in it. So that means you're strictly dealing with what 00067 you've been dealing with all these years of gas service.

There's one option. I guess we could take a strategy that says, Our strategy will be now to test the brand by attracting those who've already signed on with others. And, of course, that's a catchup strategy. But that would be an alternative. And that would be one of the few alternatives after customers have signed up.

And in order for PGW to remain competitive and viable -- this just is my thought. With the possibility of gas deregulation coming in the future, assuming you don't get into the electric business and you're strictly dealing with what you've been dealing with for X-amount of years, gas service, now the pool opens up for other companies to come in and provide gas. The possibility of PGW's existence is at stake here; am I correct? Is that exaggerating or is that real?

I think I would agree with that. It's just an issue of how long. 00068

Thank you.

The Chair recognizes Councilman Nutter.

Thank you, Mr. President. Just two things. First, Madam Solicitor, at the start of all of this, I had asked the question about the nature of your relationship and the Finance Director's with PFMC because of a concern about just how far, I guess, the Solicitor's Office can be stretched among these various intragovernmental clients. Your response to the Council President's question, I guess, about an hour or so ago on the direct question of Is this legal? I have never seen you so reluctant to very directly and succinctly answer a question. And the ensuing discussion, to be honest, has given me some pause since Monday. One, I would hope that someone in the room is taking some pretty good notes about all of the requests for information. I think that your time and other's at the table has been somewhat tortuous as a result of a lack of information on the 00069 legal side. We've got plenty of information on the what are we going to do and how are we going to do it going forward. But whether it's Councilman Cohen's question about a copy of the PUC order or all the other questions about legal documents, a copy of the 1919 charter and whoever passed that, I would like all of this information prior to being asked to finally vote on this bill. And so I would seriously hope that someone has been keeping track of all the requests for information. Because I can tell you right now that I'm going to want them. I'm going to read them, and I will need them. And I don't want to be an obstacle to this process, but there were numerous questions. There were some answers, and there were things that either needed to be responded to at a future point in time; or I think the answer was, "We have those materials and we'll get them to you." I'd like to make sure that we don't end up in a situation where the requests for specific materials have been made and they're not available by next Thursday. 00070 Secondly, I'm intrigued by the earlier discussion about the use of terminology, whether it's profit, for-profit, revenues, revenues lost, revenues gained. From the standpoint of, I believe your earlier testimony or response to a question was that this is not a separate entity that's being created. It seems to be a creature of an initial memorandum of understanding; and, secondly, a more detailed venture agreement. If this is not a separate entity, how is it that you will be able to keep these quote/ unquote revenues of the PGW gas business City entity away from the PGW electric business, which is the quote/unquote venture, which, your own testimony indicates, that that side of the house could be subject to various taxes and other peculiarities related to people who are in the quote/unquote not-for-profit business? If it's not a separate entity, how do you keep one away from the other?

Let me respond to your first comment. With regard to requests for information, there is an extensive Law Department 00071 preliminary analysis in writing. It is confidential. If the request is for a legal opinion that gives you the benefit of the detailed analysis on the 1919 charter and the case law, we would be happy to provide that as a separate document; or to, in some other fashion, give Council some comfort on some of the legal issues. The concern, of course, is making such an expensive legal analysis public. But we'd be happy to make sure you're comfortable with the legal analysis. The only other request for --

Now, Solicitor --

I'm not sure what that means. You got to tell us what that means.

Yes, right. Madam Solicitor, I mean, we're not going to have --

We could provide either a legal opinion or a more detailed legal briefing.

We're not going to have a fight here this afternoon, but I am not going to be in a position, and you and I have had these 00072 kinds of discussions before, public and privately. I'm not going to be in a position where I am told that an analysis has been made but it is confidential and I can't share it with you, but I do expect you to make a vote on a very serious issue in a week.

The Chair recognizes Councilman Cohen.

I just don't understand why the research is confidential. It's on a public business.

It can't be confidential.

Councilman Cohen, Councilman Nutter, Council President Street, the general policy for the Law Department, which goes back to the broader question you raised with regard to our representation of multiple clients, our general policy is and has been with regard to legal opinions and advice, when we prepare legal advice, research memoranda, opinions for individual clients, if those opinions are initially issued in draft form, they are not to be relied upon until they are finalized with the client's consent, and they are 00073 not public without the client's consent. I would be happy to make available the legal analysis to Members of Council in a way that doesn't undermine the City's position legally.

Then there are two issues.

Councilman, would you let me just respond to that just for a minute. You have multiple clients, right?

Right.

Now, if you have a conflict, you got to tell us you have a conflict.

That's correct.

Are you telling us that you have a conflict.

I do not have a conflict.

If you don't have a conflict, you got to answer every one of our questions the way we want them answered, but I mean, in the form of the question that we need. And if we want you to put it in writing, you have to put it in writing. And we want certain things in writing because we are now 00074 embarking on something that's very new and very different and of at least questionable legality, even if it's possibly legal. And we don't want to do this without this in writing. And we aren't going to take it, we aren't going to do it unless you are prepared to put it in writing. And we want you to do a legal opinion that is in writing, that can be directed to me and copied to all council members, that speaks to the legality of this venture. As a secondary proposition, I want you to issue a legal opinion to me, copied to all of the Members of Council, regarding the liability issue and the insurance and the question that was raised about this whole business about, you know, that tort limit act, the name of which we can't ever remember, which I mentioned the other time. I mean, we want to know that it is your legal opinion, having reviewed these policies, that we are protected, and that the veil of this company will not be pierced, and that it then ceases to become a nonprofit; and because it's now not a nonprofit, you know, these insurance people can wiggle away from their liability. 00075 I mean we just want to know that. We're entitled to know that. If you put all that in writing, to us, you know, pledge your first-born, right? Then maybe we could be happy with it. But we think we are entitled to have just that assurance. Now, we'd like to see it in writing. Because, I'm telling you, what we're going to do is, we're going to circulate it around here, Tom Erickson is going to look at it, various other lawyers that we have around here that have been doing this stuff since time immemorial, and we're going to take a look at it. Now, we didn't set the time here. You know what I mean? We were given two weeks to do this. And when the bills came, I transmitted them to Councilwoman Tasco and said, Councilwoman, please introduce these bills, we want them introduced. That's exactly what I said to her, please introduce these bills. Under ordinary circumstances, we wouldn't even think about doing this in two weeks. But we said, Please introduce the bill and made 00076 arrangements to have a public hearing. We'll stay here as long as we have to tonight and as long as we have to any other time to try to cover this turf in a way that allows us to make some kind of decision. But you're going to have to cooperate with us. And if you need to have some people over there right now working on some of this stuff, then they should be doing it. Because we weren't the ones who created the time problem. And, I am telling you, I have asked every one of these Council members to come here and to be here and to pay attention to this. We could all be down at the Navy Yard right now at a press conference, you know, lauding this deal here, but we're all here talking about the City of Philadelphia and PGW getting into the gas business. We don't have any problem with that. But we're going to want the opinions that we want, and we're going to want to have an opportunity to review them so that within the limitations of the time we have, we can make an informed a decision as we can.

Council President Street, you are absolutely correct. And to the 00077 extent that my comments or remarks have been construed as any reluctance to provide you information, I, of all people, recognize how important it is for City Council to make an informed decision. What I had hoped, by supplying copies of our preliminary analysis through members of staff previously and through my testimony on some of these issues, was to give you the assurance that this has been reviewed by the Law Department. I do not have any problems issuing and will issue the requested opinions.

And let me just say further, I think Council Members are being eminently fair here. And the reason why they're being fair is because nobody has asked you to recuse yourself in this. I mean, I will tell you, there was a time in the history of this Council when I have been here when we wouldn't have been in this room ten minutes before we would have been saying the City Solicitor is out, we want somebody else in here, we want our own counsel on all of this, send us a letter please, thank you, right away. 00078 I think the fact that we are willing to accept your advice in this in writing with our indication that we support the legal work that you do. But we this over here ASAP so that we can take a look at it. These are very significant and serious questions. And I think you caused us to have the when you hesitated at the beginning about giving up any opinion on all of this. Councilman Cohen.

I came in here prepared to vote for this. But now I'm very much confused. When I hear talk about things being kept confidential from members of City Council, I'm now disposed not to vote for it. It will not be enough for me, sir, for the City Solicitor to write a legal opinion and have us review it unless we are able to go back to her and say, We would like to see the memorandum of law that was prepared and the research that was done. Now, if she or her whole legal staff is unable to do that, then I think we've got to make other arrangements.

I think she's made a 00079 commitment that she would give us everything that she has on the subject.

Well, I thought she was very careful not to say that.

Councilman Cohen, I will make available as much information as we have. You have my commitment to do that.

Let me finish my point.

Councilman Nutter just yielded for just one second.

Well, I appreciate this, Solicitor, your responding in a different fashion after a fuller explanation of this situation. I think the Solicitor is quite aware, at least in terms of myself, and this is not just an issue with the Law Department; it's a really larger issue about the nature of the relationship between the Administration and the Council about the sharing of information and the element of trust. I mean, if you are asking us to proceed down this particular path -- and you have asked us in the past to proceed down other paths, and you 00080 will ask us next week or next month or next year to go down other paths. If we're going to have full participation and full discussion, then I expect full information. And if something is sensitive, if it needs to be kept confidential, we are grown enough around here to take information in hand and keep it where it needs to be. But the answer from anyone in the Administration that "I can't give you certain information" is never an acceptable answer to me as a member of this legislative body, never.

Councilman Nutter, you are correct. And to the extent you interpreted my comments or my remarks as saying that I would not share information, that was not the intent.

Okay.

Also, just to address the other point that Councilman Cohen made, my reluctance in terms of saying a flat unequivocal, "yes," that something is legal or illegal is simply based on my training as a lawyer. You can always qualify anything and everything. But I would not be here today 00081 testifying to the extent that I have been if I did not have the degree of comfort with regard to the legality of PGW, acting through PFMC, embarking in this venture for purposes of the pilot program. There are a number of complicated legal issues. The analyses that we have conducted are extensive, and we would be happy to share the information and research that we have done with Members of Council.

Okay.

I had hoped, for the sake of brevity, to simply summarize the conclusions to give you the assurance that you were looking for, but we'll be happy to provide more detailed information.

Okay. There was a second question. This is a separate entity, revenues, venture, profit, nonprofit. How do you keep one away from the other if your earlier testimony was that this is not a separate entity? How do you do that?

Let me try to answer that and give you the business answer, and Stephanie can bail me out with the legal answer. 00082 I don't -- based on the way we intended to structure this, I don't know that we even need to use the word "profit," because there's no way in this pilot that I know that we can make a profit because we don't have a revenue. And in order to have a profit, you've got to have a revenue and an expense. Our participation is expense. On the QST side, I believe that QST gets money in, but it's money that they've already spent to buy the gas. So while I know there must be some underlying things in this that I don't know that has provoked this discussion around profit and so forth, for PGW, I don't know how there could be a profit. This is an investment that we are making to understand a marketplace that we think will provide a lot of profit at some point.

Well, I understand that. I guess in some situations that I've seen, nonprofit entities create separate entities to go into for-profit businesses, and it is very clear. And, you know, the ones's money is their money, and the other's money is their money. Now, we are consciously deciding not to 00083 concentrate a separate entity, but we are engaged in a relationship which involves some elements of business. I mean, it's new, it's different. Someone is doing something November 2nd that they weren't doing October 31. And people are going to pay for that. Now, you can call it "revenues," "income," you can call it "money coming in the door," but our expenses are more than what's coming in, but it is a business venture. And so if you're not creating a wall to separate the government entity which only provides gas on, I'm sure, a very nonprofit basis from a memorandum of understanding and a venture agreement with a fully for-profit, make-as-much- money-as-you-can company, how do keep them separate?

Well, again, I believe that -- my nonlegal and my business answer is that if we get to the point where we decide, or you decide, that we ought to go into a business other than gas, I think we have to then have a discussion of the separate entity.

But the issue 00084 before us today will have you, if it goes forward, any business other than gas on November 1st. Whether you make any money on it or not is almost irrelevant to the initial issue which is you're going into a new business on November 1st. And there are tons of people in this City in business not making money.

I want to give this back to Stephanie, but I guess I believe -- (Interruption.)

I guess I'm not sure what I was just told. But I think the intent is that this is not a legal entity; it's an arrangement, whatever the legal term is. And, as such, we've got this very clearly separated such that there's no question about what we're spending on what. I think also, Councilman Nutter --

I'd like to enter into an arrangement with someone to keep the federal government and the I.R.S. From collecting income tax from me.

No, I think how QST chooses to handle their accounting under this agreement is not something that I think we are involved in at 00085 this point. I think also that it might --

Won't PGW, though, receive something from these thousand customers?

We won't receive anything.

How do you make your money from this?

I think the supplier -- I think when we get to the charts, I think this discussion, from a business perspective, probably ought to be tabled until we can get to how the arrangement really works. QST is a supplier. A lot of the expenses that you're probably thinking about are still expenses and services provided by PECO. So I think when we look at the components of the bill --

The Chair needs to recess for five minutes. This will be a serious, serious five-minute recess. Can we just sort of sit still for five minutes. (Brief recess taken.) (Proceedings resume.)

Is there any Member of Council who has any other question on legal 00086 issues? (No questions from Members of Council.)

I would like the Solicitor to explain how the Declaratory Judgment Act might be used to clarify some of the questions and legal issues that are raised here.

Council President Street, I can't answer that question for you right now, but I'd be happy to research it and respond as we provide the more detailed opinions that Members of Council have requested today.

Are you familiar at all with the act?

Can you just comment on it without being nailed completely down about what some of the possibilities might be?

If it pleases the Council President, I'd like to have an opportunity to consider the possibilities before commenting on them at a public forum. I would, however, be happy to address that issue specifically in the opinions that I provide to Council.

I'd like for you, if you can, to be prepared to comment on them by 00087 tomorrow morning. Not anything in writing, but I think we ought to have a discussion about this whole possibility as a part of your discussion about legality. I can understand you'd like to --

I will do that, I will do that.

It's been many, many years since I looked at the act, but I do know of its existence and do know that there might be a way that it can be used to help us get some resolution 13 -- believe there's a possibility that there might be a way to use get some clarification on some of the legal questions that are raised here. I'd like for you to read the act and be prepared to have just a kind of discussion on it in the morning, in a general way, with maybe something -- the possibility of something written to follow later.

I'd be happy to do that.

Thank you very much.

You are referring to

The Declaratory 00088 Judgment Act. Is there anyone else who wishes to raise questions on legality? (No questions.)

I believe in your statement, you were at the end of the next to the last paragraph on . Is that where you were?

Prior to the section on potential liability.

Right, impact on the general fund. Perhaps you could pick up from there and go to the next part of your statement.

At this point, I'll discuss the potential impact, if any, of any of the expenses and losses of the pilot program in re to the general fund. It's always difficult to anticipate the expensive possible litigation, especially without knowing the scope of issues that may be presented in any possible lawsuit. PGW will bear the cost of any litigation. The preliminary budget submitted in connection with the pilot program includes a line item for legal expenses as well as a contingency. In cases such as this, typically, the 00089 potential plaintiffs could include competitors in the electric industry. At this point, however, it appears that a competitor lawsuit during the pilot program would be unlikely. There's a 15-day notice period following the filing of the license application. That period has expired. No notice of protest had been filed. A taxpayer lawsuit is also a possibility. It could be brought to enjoin PGW from entering into the electric business. In the worst-case scenario, however, if a court were to enjoin PFMC/PGW for participation in the pilot program, PGW would bear the cost to unwind the venture with QST. It is possible that such litigation could be comparable in scope to the last major PGW litigation. It's very difficult to predict, for the reasons I've stated previously. And as to possible exposure to the general fund, there are two potential risks. However --

Are you speaking about (inaudible) --

Councilman Cohen, 00090 speak more directly into the microphone.

I'm raising a question.

I know. If you could speak right into that microphone.

In the paragraph that the City Solicitor on refers to the litigation that went all the way through to the Supreme Court, would there be any indication of what the cost was in that lawsuit so we have something to compare with it and an indication of what years it covered? 'Cause I expect that legal costs have gone up. That would give us some idea of what we might face.

Maybe the law firm volunteered, Councilman Cohen.

I'd like to hear that.

That case was actively litigated for four years, involving both the Law Department, involvement in outside counsel. I do not have the exact figures; although, I believe, it was certainly hundreds of thousands of 00091 dollars.

All right. If you could furnish that information at a later time, the outside litigator cost. Thank you, Mr. President.

Thank you. Please continue.

As to possible exposure to the general fund, as I stated previously, there are two potential risks. However PGW anticipates that any financial or liability exposure to the general fund would be minimal as a result of the pilot program. First, it is expected that the cost of the program will be included in the rate base for PGW's gas customers. It is my understanding that this has been included. These costs are in the operating budget before the Gas Commission. And the cost and the potential losses to the pilot program, as you'll hear in the more detailed business testimony, appear to be minimal. Certainly if the costs and losses to the pilot program are included in the rate base for the gas customers, it is possible that rate-payers 00092 may seek judicial relief to have those costs borne by the general fund. Second, it's my understanding that there is no express covenant to PGW bondholders guaranteeing that PGW will not deviate from its core gas business. Moreover, PFMC's participation in the pilot program is very limited, as I've stated previously, in size, scope and duration. Therefore, it's unlikely that there would be any material adverse effect on any of the outstanding PGW revenue bonds. Therefore, any potential exposure to the general fund would be minimal. That concludes my testimony with regard to the legal issues. And at this point, I'd like to summarize the proposed amendments, unless Council would prefer to go into more of the details with regard to the program itself.

Is there any Member of Council that has a question at this point? The Chair recognizes Councilman Nutter.

I'm sorry. Are we out of the legal section now, Mr. President?

We are now -- we are 00093 now on anything that the Solicitor has testified to date, to this point.

There was an issue raised a little while ago about the PGW application for its own license. In the new materials that we got today, which aren't -- the pages are not numbered, but there's a panel that reads "PGW's Venture With QST." And there are five bullet points on this page. But one of them reads"Exclusive agreement within City." Should I read that to mean that QST can engage in their business without us, outside the City.

That's correct.

And in the realm of, PGW license application, there was some discussion earlier about either terminating the agreement for various reasons, either as a result of litigation or they fall out of like or they don't like being in business with each other. If PGW gets its own license and, subsequently, the agreement between PGW or PFMC and QST either runs its course or is terminated, is 00094 there the potential, I guess, for competition at that point in the City between a licensed PGW and an already Pennsylvania-licensed QST?

Yes.

Is there any provision for a no-compete clause?

There is no 9 provision for a no-compete clause in the memorandum of understanding.

Is there anything that would prevent a no-compete clause?

This is a topic that's under discussion in terms of the venture agreement and the negotiations that are ongoing currently between PFMC and QST.

Is PGW concerned about the prospect of the potential competition between a licensed PGW and an already-licensed QST after their venture as partners in this pilot? QST, obviously, with the exception of two briefings here, I think, has virtually no name recognition in Philadelphia, and would benefit from the 14- or 15-month relationship with PGW. We obviously the get something out of 00095 it as well. I mean, everybody's getting something here. Why wouldn't we want a no-compete clause as a function of the nature of this relationship?

Let me answer that Councilman. From a business perspective, we believe that if PGW --

Bud, have you spoken previously in this hearing?

You should Introduce yourself.

You might need to identify yourself.

Thank you for reminding me of that. My name is Bud Karachiwala. I am the Vice President of Energy Management for Philadelphia Gas Works. With regard from a business perspective, PGW brings a very strong name recognition, we believe, in the Philadelphia market. You are correct that QST, going into this project, does not probably have the name recognition. However, they have been quite active outside the 00096 City limits as a part of the PECO project. It is my belief and is, I think, the belief that's shared by the management of PGW that we are in favor of competition in this project; and, therefore, we do not necessarily believe that we will be disadvantaged by having QST compete with us and the City of Philadelphia, along with other players that will also be competing in this market, if it comes to that point.

A question was raised the other day in the briefing about -- the present view is at least that you want to go after the customer base that you have in Philadelphia for the electric, that you already have these customers for the most part. Unless, I think, as Mr. Hawes indicated, you can accumulate 75 thousand units of something. Is there any interest going forward, if this venture works, would PGW be in a position to contemplate trying to provide gas service outside the boundaries of the City of Philadelphia?

Councilman Nutter, there's nothing I would rather do today than to do as you say. I would rather not even wait. 00097 But, I think, the issue for us is one of resources. We have spent now the better part of months building a very strong gas 5 infrastructure. And I think that these or or 6 3,000 customers that we might get is all that we can 7 handle right now. So we have looked at the 8 priorities. 9 And our priority is to go after first 10 protecting those customers that know us best. And 11 if we can do that, then, of course, we'll have -- 12 priority two take care of itself. 13 But I don't want to be unclear. If we 14 had the resource, I'd like to go inside and outside 15 right away, but we don't. And the practical matter 16 is that if we can make sure that these 24,000 17 current PGW customers today have the option to 18 choose us if they want to, that would be success for 19 us in the short term. 20

Okay. 21 Mr. President, with your indulgence, I 22 only have three quick questions, and I believe I'll 23 be finished. 24

Go ahead. 25

Can we go back for 00098 a moment to this exclusive agreement within the City for QST. And I believe the answer was that they can, in an unfettered fashion, go after business outside of the City limits. Does PGW again benefit in any way, shape or form if QST does engage in business outside the city limits? Again, based on the notion that they come into the marketplace fairly unknown. Through this agreement, they attach themselves to name recognition, any level of good will that PGW has developed not only in Philadelphia but certainly outside Philadelphia must know about the existence of the Philadelphia Gas Works. Is there any financial benefit to PGW from QST business that is outside the City of Philadelphia?

One of the things that we recognize going into this, as we were looking at striking a relationship with someone who is a licensed Pennsylvania supplier, was the fact that our name recognition in the City would be a tremendous advantage, regardless of who we pick. And in this case, it's my opinion that 00099 QST does indeed benefit from the name recognition. But that same benefit would have occurred had we chosen any other company. I don't want to be specific about those companies. Also, QST, as a licensed supplier, is participating not only outside the City of Philadelphia as a part of PECO's program, but they're also participating in other electric utility programs within the State of Pennsylvania. And, right now, as Mr. Hawes explained, our focus is on the pilot program where five percent of PECO's customers, which amount to approximately 24,000, the next phase on 1/1/99, that number increases almost 6 times. And so the focus on staying within the City does make sense from a business standpoint, based on what Mr. Hawes said, as far as not stretching our resources, but positioning ourselves for a larger number of customers that come pretty much on a 12-month basis.

I understand that. That was a great answer, but I don't think it answered my question. If QST does business in Montgomery 00100 County, does PGW benefit from any of the revenues generated by that business?

We do not benefit at all from anything that they do outside the City other than what we learn in the process of how they're conducting themselves. That's also how other competitors are also conducting themselves.

At the risk of further not answering your question, I do believe that -- I equate our relationship with QST to almost a courtship at this point. There's nothing to say -- and I believe that as relationships go -- if it works out, that we get along, we have carefully selected QST based on their size, based on their culture, based on their experience in trials. And so all of the things that you look at up front to pick a long-term mate, we've already kind of set aside in our minds for QST. So there's nothing to say that, with the permission of this body, if we choose to go further, I would suspect that QST would be one of several potential partners.

Okay. Where did the 15-dollar check idea come from? 00101

Where did it come from?

Yeah. I mean, what's the concept here?

The concept, it was a joint marketing plan developed by QST and PGW. To share with the Council several of our thinking, which we got to the offer was, we had to recognize what we considered to be the leading offer in the market place at that time and then to capitalize on that is to provide a slight premium without having too much of an impact from a cost standpoint. And so various levels of cash rebates were discussed. I personally have experience in pilot projects on the gas side. QST has experience in pilot projects on the electric side. And we put out heads together and we decided that was a meaningful incentive to entice customers to choose us.

Okay, last question. Does PGW, PFMC, do you do your billing in-house?

Yes, we do.

Okay. And would 00102 that be the same for the electric?

That is -- our plan right now is that PGW will be doing the direct billing of its electric customers too.

Okay, thank you.

Now, I'm curious, before we go to Councilman Rizzo, as to whether or not the Law Department believes that it would be lawful for the Water Department to contract with QST to provide electricity.

Should I answer that question in my detailed legal analysis?

Please answer. Speculate for us. It's not a hard question; it's an easy question.

Yes.

I got three answers: three yes's, two no's and one maybe.

The answer is yes, based on the analysis.

All right.

The City.

The City could do it. 00103

Although it specifically refers to the Department of Public Property, which oversees PGW.

I guess, Mr. President, the only thing I would add is they have to be a participating customer in the pilot program of PECO, but I have some sign-up cards available for

You have --

Customer sign-up cards if they are a participating customer and if they do not have a long-term contract with PECO Energy that they can get out of.

All right. The Chair recognizes Councilman Rizzo.

Thank you, Mr. President. Possibly you're going to have to repeat this because I may have missed this point. QST, what process was used to select QST? And what other process was used to see if any other supplier could have provided the same service as QST or a better deal to PGW than QST?

Yes. The first criteria was, of course, the fact that QST had a 00104 Pennsylvania license and was licensed to be a participating supplier in the Pennsylvania pilot programs. That was the first and probably a very critical and necessary criteria to select QST. Secondly, we wanted to partner ourselves with a company that had experience in pilot projects, particularly on the electric side. Third, we wanted to make sure that the company was in the business of supplying electricity for sometime. In this particular case, QST happens to be a combination gas and electric company, with over 85 years record of service, serving reliable electric service to its customers. We also wanted to make sure that the company was comparable in size to us so that we would be hopefully having some negotiations on a more level basis rather than a very grossly unequal basis if the other partner was way bigger than we were. And the last thing was the chemistry between us and QST. In my previous job, I was involved with a gas pilot which was the first of its kind in the country. And during the course of that program, I did become acquainted with people that 00105 were part of the parent corporation of QST. So there was a personal relationship, there was a comfort level about their expertise and their knowledge. And all of those factors were considered in our choice of QST.

Thank you. How does PGW plan to respond to the competition when, I assume, like other suppliers were caught a little short when another provider indicated that they were going to provide a 20-percent discount on electricity, and yours is 10 percent. How do you plan to deal with another company that plans to double your offer?

First of all, our offer, if you take all three elements, amounts to up to 15 percent, so the 10 percent is one of three elements of hour offer. Second, I believe the competitor that you're talking about -- while I won't name it, it's the one with the slanted e -- we do have an offer from that particular company that company that one of our employees received, and they do not mention 00106 the 20-percent savings that you are referring to. As a matter of fact, there is a fixed price for kilowatt hour. There is four weeks of free electricity after months. And that's it, 6 what you got to the offer. 7 So I believe that, unless this 8 information that I received is grossly erroneous, 9 that PGW's offer is better, from a customer 10 standpoint. 11

Thank you very much. 12 Thank you, Mr. President.

The Chair recognizes Councilman Ortiz.

Thank you, Mr. President. I just have one question. Ben, you're talking about the marketplace. And Mr. Hayllar, have we done an analysis of the impact of deregulation on the City of Philadelphia as to timetables and so on?

Are you referring to our own purchases as a customer of electricity?

Right. Have we, as a city --

Yes. 00107

-- made an analysis of the impact?

Yes.

Could you supply that analysis? Would be kind of helpful.

I will get it for you. Boat will float on whoever succeeds in the deregulation debate between the company with the e, symbolized by the letter e and PECO. Our agreement will go down, depending on whoever won. So we are advantaged either way.

But we signed a contract with PECO for four years, did we not?

Mm-hmm. PECO, under the terms of the debate that's going on, PECO would be the subsidiary supplier to that other company, so that wouldn't affect our agreement. We would be advantaged no matter what happens.

So given the same circumstances -- MR. HAYLLAR; I will get that to you in writing.

But given that same circumstance that the President said about the Water 00108 Department contracting with this company, can you then supply all of the electric needs of the City?

To. . . ?

To the City.

Can we supply to the City, to ourselves?

I don't think that --

QST, can we then contract from QST to supply --

The Chief Executive Officer of PGW is nodding his head.

I mean, can we, as a city, look at it and you say, You offered us a better price than PECO, so we could, you know, get it through you guys.

We would be most interested. And if contractually based on the City's contract with PECO, whether that would allow them to do that, that's not an issue or an answer that I can provide.

The Chair recognizes Councilman O'Neill.

Thank you, Mr. President. 00109 First, let me start out by saying that we had discussed this in the briefing the other day. And one of the more uncomfortable things that happens when I come into in this chamber is every once in a while -- and, fortunately, it's only once in a while -- there's a big sign outside that says "The rubber stamp is inside." And the way this was done, with the solicitations going out first and then coming in to Council, I consider this a rubber-stamp situation. We're either to stamp it and stamp it quickly or we don't do it at all. And I'll get past that point; we went through it in the caucus room the other day, and it's going to do so any more good to go through it. But I don't care if you're a new mayor, or whatever, you only one shot at doing that as far as I'm concerned. You may need something six months from now or a year now. I would hope, and I would ask you to put on the record that we don't have to go through this again, where something is needed from this body, and I'm not talking about briefings, when 00110 you're just doing something and wondering who you should tell about it. But where there's a direct connection between legislative approval and what you're doing, that the Council be consulted in advance and that we have a chance to discuss it and not read about it in the paper or see that solicitations are made and that there's a deadline. I would just like some --

Councilman O'Neill, you're probably a little bit more generous than I am because I have a question here on my little. I make notes as other people are talking. And I would really like to have an explanation as to how we got here, how we happened to have two weeks to do this. I don't think it's an unfair question.

Then we'll make it a two-part question because I don't mind that at all.

I mean, have some concern. Now, the fact that I have some concern doesn't mean that -- 'cause the bill was transmitted, the bill was introduced, we expedited a public hearing. 00111 But I think it is only fair that -- I mean we are here being asked to do something on the strength of a fairly dubious and questionable and at least arguable legal-problem basis. We have a memorandum of understanding, and there are all kinds of things in it that haven't yet been negotiated. A thousand customers have already signed up. We have to -- I have to know that PFMC -- and those are the people that I'm concerned about because PFMC has authorized all of this and has produced a resolution to this Council saying, This is what we want you to do. I have to be concerned with why it is that all of this happened on us within this time frame. And I think that this Council is entitled to an explanation to that, which is one of questions that I raise, which is a little different than your question, but it gets to the same point.

It's same the question I raised in the briefing.

Let me try to answer from my perspective, and I hope there may be other perspectives. Part of the problem for us was that we 00112 got a final notice -- well, let me go back, let me go back as I did in the briefing to January. Being in the gas business and not in the electric business, we were not following the legislation. But what we were doing was strategizing around how the company would be successful long-term. And we figured, after doing months of environmental work, that if it was going to be strong, it would have to be able to expand inside the City and look at opportunities outside of the City where you can leverage the infrastructure that you already have in place. In other words, you spent X-number of dollars, now you got to figure out how to get the bacon. So we were not thinking about specific electricity, but we were thinking strategically about how we would grow the business. The pilot -- I mean, the legislation came along, and during the first part of the year, when we were still trying to run a business and plan for the future, it dawned on us that we had an opportunity created by the legislation that may be 00113 in our backyard. We did not get -- and I think this is accurate. We have to keep in mind that this is an agreement between PECO and the PUC that has certain rules and regulations associated with it. As we were doing all of the research that we had to do to see if, in fact, we wanted to participate, we did not get -- there was a compression, I believe, created by the rules of the game, which we didn't create, as you did not create them. We got the notification of the details of the pilot August 22nd. We got the procedures from PECO around how the August 20th direction would be implemented, I believe, the first week or so in September. And so our employees and everybody else who we could find to help us spent, in some cases, day and night for a couple months, looking at all of the numbers of issues that had to be looked at before we would know what kind of agreement would be needed and who would approve -- what kind of approvals would be needed. My view is, and I feel, you know, 00114 terrible about the way it's happened, but one of the downsides of a competitive environment where you don't control the rules or the time frame is that you get caught up sometimes in trying to do everything quickly once you become convinced that it may be an opportunity to do what you hired us to do to do. The things that come to mind right away, we had to do research on whether or not we wanted to do it. There were issues around the application, which is so voluminous. You wouldn't believe what we had to complete, because we didn't know whether we could find a partner quick enough to do it, and we could not do it without a partner.

I need to interrupt you. That's not my issue; this really isn't my issue. My issue is: Why are we coming here, and the Law Department is telling us that, you know, we don't have any definitive legal opinions about what's legal and what isn't legal, and we have an informal or kind of memorandum of understanding, a memorandum, a legal memorandum. We don't have an agreement in front of us; we have a memorandum of 00115 understanding. We are told that there could be an agreement by the 30th or the 1st, but that the memorandum of understanding doesn't require that there actually be an agreement until after the pilot project is started. You know, that puts us in an absolutely awful position. And let me just tell you a part of the reason why. If you think that there are serious questions about whether or not we can do -- whether or not the pilot is legal, we haven't even begun to address the questions of whether or not it would be legal for us to engage in this proprietary activity for profit with a partner in the suburbs. You know, I mean we haven't even gotten to that question yet and may not get there until tomorrow. And if -- and if -- and I will tell you, the question of whether or not we can supply electricity pursuant to our facilities to us under a strained interpretation, which I regard as a strained interpretation of the 1919 charter state law is one thing, but it's a totally different question if we are now talking about using that 00116 provision to say we can go and engage in this for-profit activity in Bucks County or Delaware County, which is another whole thing. And every time I hear this thing discussed, what I get told is that this is a program that's designed to strengthen this company that looks to the future, and that you really shouldn't get caught up in the details of the pilot. It's a way to get this company experience so that it can compete. That's what I -- what I hear, which is fine, and I don't have any problem with that. But I'm saying to myself, Compete where, with whom, under what circumstances? Because the primary problems that we have, which prevent us from effectively competing in the delivery of gas service today -- and I'm not talking about the changes. I mean, our rates are still artificially high for a number of reasons, and those reasons are not addressed at all by any of what we're doing here today. Those reasons are not addressed by anything. The only thing that I have heard, and that is our customer service policies, our social 00117 responsibility policies, you know, which includes our senior-citizen discount and all of those things. I mean, they cause us to have, you know, the debt-to-equity ratio that we have, and it isn't getting ready to go away tomorrow, and a number of those other things. I'm having trouble understanding how this prepares us for the future in a technical sense. And I'm also having trouble understanding how it is -- even assuming that you have the greatest answers in the world to all of those questions, how did we ever get to deliver electricity or anything else out into the suburbs, under the current situation? It just seems to me that we are creating -- I mean, it is such an uphill proposition that I'm asking myself, Why are we doing this?

Well, if I could respond, President Street. You've raised probably about four or five issues, all of which I would love to respond to. Let me just say that the issue of the gas side and rates is an issue that I would love to talk to you about as long as you want to talk about 00118 it, but that's a separate issue than the issue of the trial in the City. We're doing a lot of things to drive down rates, and I could tell you a number of 'em. We've got proposals on the table for securitization, we've got efficiency measures going on all over the company, all designed to drive costs out of the business which, hopefully, will drive rates down.

Mr. Hawes, you can't forget when I asked you this question in that caucus room, what you said to me was, in a deregulated gas industry, unless the General Assembly does something to make sure that all of the players are at least in part responsible socially to take care of the part of this population that is unable, for no reason for which it is responsible, to take care of some of this, we are in deep trouble. And once you make that statement to me, then what you lead me to conclude is, in a deregulated environment, we can't handle that on our own. We need help to handle that. And if we need to help to handle it on our own and if there's a big, serious legal question about whether or not we could do a pilot, which 00119 translates into a bigger legal question of whether or not go outside of the City to engage in proprietary activity, 'cause we would not -- I mean, I don't believe we are talking about PGW without some kind of partner going into the electric business in this region. And I'm asking myself, Are we ready for all of this? I mean, have we thought this through? And it just seems to me a morass, a quagmire that we're getting into here. I mean, we've got rate-payers that -- the testimony says we have rate-payers that are going to pick up the cost of this. We are told that the litigation that was involved in the $18 million cost us hundreds of thousands of dollars. And that if the rate-payers said, We aren't going to pay or -- and I guess Councilwoman Tasco could say rate-payers are not going to pay, or a court could say rate-payers are not going to pay, then the only people who could pay would be the City's general fund because PFMC doesn't have any money. And if a court of the Gas Commission said it is not a lawful and legal expense to come 00120 out of rate-payers' pockets, then the general fund would have to pay. And I'm asking myself, Is it realistic to think that we're going to just interject ourselves into this big, competitive environment as a municipality, and somebody's not going to say, Well, we'll see about all of that?

Well, again, I don't know if we can dissect the issues and talk about them separately and then come back together and talk about them in a macro perspective.

Well, we can dissect them any way you want. I think we're going to end up having to talk about them because my next request to the City Solicitor is an opinion about what it is we have to do and what are the complications involved in going into the counties and being able to do gas and/or electricity in the counties. 'Cause if you can't give us any reasonable assurance that there's any possibility that we could do any of that, then that raises a question about whether or not we should expose the general fund and our rate-payers to what could amount to a pack of litigation expenses, not unless 00121 QST wants to pick up all the litigation expenses.

President Street, those are all good questions and they're questions that we spent a lot of time talking about, each and every one of them. I think the issue -- number one, let me go back to the issue that started this. You asked about the reason that this was pushed down to the last minute. I tried to answer that based on one perspective, and that was the perspective of all the work that had to get done and the fact that we were feeding that work into the Legal Department as it was being completed. I think that was just time compression that is a function of the requirements of the rule.

Mr. Hawes, I have to tell you, I don't hold you responsible for any of this. And I'll tell you because I believe you are trying to do a good job. I'll tell you who I hold responsible: I hold the board of PFMC responsible, I hold legal counsel to the board of PFMC responsible, because the moment this idea was hatched -- and it could be 00122 a great idea. But the moment anybody knew that there was a possibility -- we've now known -- we now know that there was a possibility that this could be done as early as August. But the moment that anybody talked about any of this, then the Law Department should have been on the case to determine in writing as best as anybody could say -- could produce whether or not this is something that we can do. And if the Law Department decides that this is something that can be done, which is fine, then the question is: How can it be done? And if it can be done, if we conclude that in order to do it, it has to be -- it has to be done with an ordinance of Council, then I'm telling you, the moment that that decision was made or that possibility was raised, which we now know is at least a couple months ago, that legislation should have been drafted. And all of these questions should have been posed and asked while you did everything else that you had to do, everything else.

Let me go back to the question of us participating in the pilot. I think 00123 the ordinance and the amendments, as structured at this point, suggest and ask for permission for to us participate in the pilot. We do not believe, and I can assure you that that is a very, very cheap way to learn and train people on what's going to be coming in gas anyway. So I don't see that --

I don't understand that. I need you to repeat that sentence a little slower.

Okay. The participation in the pilot, if we, for instance, get 1,000 or 1500 customers, we don't believe that that puts any stress on the organization, because we have 500,000 customers; 1,000 more won't make a whole lot of difference. The proposal that we have is to test this in the City. And it's not a foregone conclusion that we would recommend to you at the end of the year that we're go outside of the City. There's enough for us in this market where we have a strong name recognition -- (Interruption.) 00124

Excuse me for just a minute.

Sure. (Hearing resumes.)

I'm sorry.

That's all right.

Please continue.

There's enough in this market. And I think that -- I'll tell, you from our perspective, we don't have any fear of PECO or anybody else. You know, everybody starts out with or without a customer, and I don't think size has a lot to do with how you go about goes about how you go about attracting and maintaining a customer. I don't think that we necessarily have to go out of the City to be extremely profitable. There are 5 or 6 or 700,000 electrical customers in the City. And I think the most important thing to understand -- one of the questions that I think Councilman Cohen asked earlier was about leveraging the resources. We can go after those customers with dollars that we've already sunk for gas customers. 00125 Now, if gets to be a business, obviously, we've got to look at some sort of legal separation, but I'm just saying that it almost is -- it would be a terribly wasted opportunity for us not to participate in this pilot and then start to review in about a year what the next steps are, whether they be expanding in the City. I don't think in a year's time, without a partner, we could go outside the City, but this whole business is about partnerships and alliances all over the place. And what I want to assure you is the fact that or this other company PECO are bigger will have little bearing on our success in our current market, with our current customers for electricity.

Council President Street, if I might speak to your concerns from the Law Department's perspective. As Mr. Hawes pointed out, there has been a compressed time frame. The Law Department has been looking at these issues since even before the pilot program was constructed. As I've said to you, we do have research memoranda, which I will share with Members of Council. 00126 I do not want to leave the chambers, giving you the impression that we have not been involved and have not looked at these issues. We have been involved, we have looked at these issues, and I will make the research memoranda available. I will issue written legal opinions. We would not be here today if I did not believe that we have the authorization to do this. I would not waste the Council's time, and I certainly would have communicated that to PFMC and PGW before today. As you also pointed out, though, there are a variety of different questions, and there are some issues that we are continuing to research and examine as we go through the negotiations of the venture agreement. So I'd be happy to provide you with the backup memoranda, some of which will answer some of the questions you've raised today. I will supply additional legal analyses and memoranda; and, if necessary, I will convene a separate legal briefing for Members of Council, or meet with individual Members of Council at their convenience.

Convening a legal 00127 briefing on what?

After I circulate the legal memoranda which cover the issues we've researched, as well as additional issues that have come up today, which we will cover as well, then we can convene a legal briefing to respond to any specific questions, if that's Council's pleasure. Or I can meet with individual Members of Council.

Well, I think probably we'll see what we get. The Chair recognizes Councilman Cohen.

Mr. President, I think there is a great confusion between legality and policy here. We seem to be operating on the theory that if something is legal, that means we ought to go and do it. Now, I want to state for the record, I will fight till the very end against PGW performing services outside the City. It is not -- we have not acquired PGW to become any kind of a profit-making venture. We want good service for Philadelphians. And I hear you say that you've made changes. I can tell you, the complaints in my office have not diminished at all in volume, 00128 complaints about the lack of good service by PGW. It's one thing and it's quite easy to declare, "We have made changes and we've made great progress," but I must measure them, and I expect other Council members to measure them by what we hear when we go out to meetings and what comes across the telephone or comes to us from meetings with people. We don't know that there's been any change. And, sir, when you say that PGW has name recognition in Philadelphia -- and I hate to say this because it hurts me personally and I don't think it's good for Philadelphia -- but the kind of name recognition PGW has is not an asset, in my opinion, for any other company because PGW's name recognition generally goes together with the condemnation of PGW for the lack of services to people or because its rates are so high. Now, what the future proves -- I share the welcome of the new officials to PGW. But I would like to see, before there's any concept of venturing into other areas, I would like to see a concentration that produces better service and, if possible, lower rates for Philadelphians. 00129 That's why we have PGW, to service Philadelphia, not to wander about wondering, Is there a new field that they might do something well in? And, therefore, maybe we'll go do that. Now, it always worries me, Mr. President, when people from outside Philadelphia come in to head Philadelphia agencies. And one reason I worry about that is being exhibited here today because, apparently, the new leadership of PGW doesn't recognize the same mission for PGW as the citizens of Philadelphia have always recognized it to be. That's good service. That's not telling people they're going to wait two or three days for service when they call about a complaint. That's not to say, We'll be there tomorrow, if it's an older person in a house and in the wintertime. Now we're going to see what happens this winter and the kind of service. So, Mr. President, I don't think this just a legal issue. The legal issue is, first, if you can't do it, then you can't do it, no matter what the policy might be. But we have a second issue. Let's 00130 assume it's clearly legal. There are all kinds of questions. You were talking about this company, was it QST? I never heard of them before. Mr. Hawes, you talked about how in your consideration of what led you to the decision to pick QST, you gave a good accounting of, I think, five reasons, one of them was the culture of the company. Well, I'd like to know about the culture of QST. Tell me, what do the labor unions in the area of QST think about the company? What do the consumers think in all of the areas where QST is? I would feel ashamed that the City of Philadelphia would in any way affiliate with a company that might have a record that I'd be ashamed to present to anybody. You haven't shared that with us. We know nothing about QST. We don't know how embarrassed we might be by disclosure that might come six months or a year later about some activity of QST that was thought to be harmful to some people in the area that it was serving. You didn't say anything about having an 00131 open competition where different companies might meet. The financial officer testified that he knew some of the people from QST, but that's no basis for choosing that company. We don't know why you chose them.