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 Anything that was inconsistent with or was repealed by the subsequent charter, the 1952 charter, the City is prohibited from engaging in.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in and has the power to engage in anything expressly authorized under the 1919 statute or charter, unless it has been repealed by the 1952 charter or is inconsistent with.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?
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.
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?
This record will reflect that Mr. Hawes was shaking his head, indicating the affirmative.
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?
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 --
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?
'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?
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 --
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, 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 --
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.
I just don't understand why the research is confidential. It's on a public business.
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.
Councilman, would you let me just respond to that just for a minute. You have multiple clients, right?
Now, if you have a conflict, you got to tell us you 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.
Councilman Cohen, I will make available as much information as we have. You have my commitment to do that.
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.
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.
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?
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.
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 --
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.
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?
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 --
Councilman Cohen, 00090 speak more directly into the 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.
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.
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.
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?
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 --
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
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
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?
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.
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.
I got three answers: three yes's, two no's and one maybe.
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
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.
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, 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?
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?
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.
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.
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?