COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING AND PUBLIC MEETING BEFORE THE COUNCIL COMMITTEE ON FINANCE - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, May 11, 1999 10:05 a.m. - - - BILL 990285 - An ordinance constituting the 16th Supplemental Ordinance to the General Gas Works Revenue Bond Ordinance of 1975. . . BILL 990286 - An ordinance constituting the Second Supplemental Ordinance to the General Gas Works Revenue Bond, Ordinance of 1998. . . BILL 990219 - An ordinance amending Chapter 14 19-1500 of The Philadelphia Code, entitled "Wage and Net Profits Tax". . . BILL 990220 - Amending Chapter 19-1700 of The Philadelphia Code entitled "Review, Refunds and Compromises". . . PRESENT: COUNCILWOMAN JANNIE BLACKWELL, Chair COUNCIL PRESIDENT ANNA C. VERNA COUNCILMAN JAMES F. KENNEY COUNCILMAN MICHAEL A. NUTTER COUNCILWOMAN MARIAN B. TASCO COUNCILMAN THACHER LONGSTRETH - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2 /99 FINANCE COMMITTEE I N D E X Bill 990285, 86 Ben Hayllar . . . . . . . . . . . . . . . . . 3 Joseph Bogdonavage, PGW . . . . . . . . . . . 13 Bill 990219, 20 Nikki Marx, Revenue Dept. Commissioner. . . . 99 3 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 P R O C E E D I N G S
Good morning. We would like to begin our finance hearing. A quorum being present, we will begin our finance hearing. To my left is the cosponsor of this legislation and head of the Gas Commission, Councilwoman Marian Tasco; Councilman Thacher Longstreth. To my right is Jim Kenny and, of course, I'm Jannie Blackwell. The clerk will please read the title of the first bill.
Bill No. 990285, an ordinance constituting the 16th Supplemental Ordinance to the General Gas Works Revenue Bond Ordinance of 1975, as amended (The "1975 general ordinance"); authorizing the Mayor, the City Controller, and the City Solicitor, or a majority of them, to sell, either at public or private sale, Gas Works Revenue Bonds (1975 General Ordinance), 16th Series, of the City of Philadelphia, in one or more subseries, in the maximum aggregate principal amount of $80 million (The "Sixteenth Series Bonds"); 4 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 provided, however, that, if the Sixteenth Series Bonds are sold at a discount, the aggregate principal amount may be increased to reflect such discount as long as the aggregate gross proceeds to the City from the sale of the Sixteenth Series Bonds do not exceed $80 million, plus accrued interest, if any; designating that the Sixteenth Series Bonds are being issued to redeem or refund all or a portion of certain outstanding series of revenue bonds of the Philadelphia Gas Works (The "Gas Works") and the application of proceeds of the Sixteenth Series Bonds for such purpose; authorizing the City to obtain credit enhancement for the Sixteenth Series bonds; determining the sufficiency of Gas Works Revenues; covenanting the separation of Gas Works Revenue Accounts and proceeds of the Sixteenth Series Bonds from general accounts of the City; covenanting the payment of interest and principal on the Sixteenth Series Bonds; authorizing covenants and action in order that the Sixteenth Series bonds shall not be arbitrage bonds; authorizing the Sixteenth Series bonds to be issued in the book-entry form and providing book-entry provisions to apply in such 5 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 case; and providing that this ordinance is supplemental to the 1975 General Ordinance and that the provisions of the 1975 General Ordinance, to the extent not modified, amended, or superseded by this ordinance, are applicable.
Thank you. Do any members of the committee have any remarks or questions they would like to ask before we begin? (No questions.)
Thank you. Then we will certainly ask Ben Hayllar, CEO of PGW, to come forward. I understand that with him will be Whitney Reid, our City Treasurer; Barbara Bisgaier, Public Financial Management; Joseph Bogdonavage, PGW; and Joseph Golden, PGW. The question is, if the bills are related, would you like to testify on them at one time in a unified manner?
The testimony is written to deal with Bills 285 and 286, and I notice you've only read the first bill.
All right. Then we will have the clerk then read the title of 6 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 the second bill so that your testimony will be appropriate.
Bill No. 990286, an ordinance constituting the Second Supplemental Ordinance to the General Gas Works Revenue Bond, Ordinance of 1998 (The "1998 General Ordinance"); authorizing the Mayor, the City Controller, and the City Solicitor, or a majority of them, to sell, either at public or private sale, Gas Works revenue bonds (1998 General Ordinance), Second Series, of the City of Philadelphia, in one or more subseries, in the maximum aggregate principal amount of $115 million (The "Second Series bonds"); provided, however, that if the Second Series Bonds are sold at a discount, the aggregate principal amount may be increased to reflect such discount, as long as the aggregate gross proceeds to the City from the sale of the Second Series Bonds do not exceed $115 million, plus accrued interest, if any; designating that the Second Series Bonds are being issued to pay the costs of certain projects of the Philadelphia Gas Works (The "Gas Works") and the application of proceeds 7 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 of the Second Series Bonds for such purpose; authorizing the City to obtain credit enhancement for the Second Series Bonds; determining the sufficiency of Gas Works Revenues; covenanting the separation of Gas Works Revenue accounts and proceeds of the Second Series Bonds from general accounts of the City; covenanting the payment of interest and principal on the Second Series Bonds; authorizing convenants and action in order that the Second Series Bonds shall not be arbitrage bonds; authorizing the Second Series Bonds to be issued in book-entry form and providing book-entry provisions to apply in such case; and providing that this Ordinance is supplemental to the 1998 General Ordinance and that the provisions of the 1998 General Ordinance, to the extent not modified, amended, or superseded by this Ordinance, are applicable..
Thank you. Thank you very much. Please identify yourself for the record and begin.
I am Ben Hayllar, 8 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 Director of Finance for the City, and the interim president of the Gas Works. With me is Whitney Reid, who is the City Treasurer, and numerous people from PGW and others involved in this deal. My understanding is my testimony is to try to render into comprehensible English the legal language that the clerk just read.
The first Bill, 990285, would authorize the City to refinance some existing debt of the Gas Works up to $80 million. In fact, we intend to refinance approximately $59 million of some older debt to achieve savings of approximately $10.2 million. This is a 14.6 present value savings. As you may know, the norm -- for standard for refinancing is 3 percent. So there are considerable savings to take advantage of the lower interest rates on behalf of the Gas Works. We intend to take a little over $2 million in this fiscal year and take the rest over ensuing years. We also would receive, with Council's approval, the ability to refund up to $4 million 9 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 of some other existing debt. We would only take these savings if it was absolutely required in order for the Gas Works to meet its 1.5 debt covenant. The second bill authorizes the City to sell, on behalf of the Gas Works, new debt for capital projects going forward. We intend to sell $109 million for new financing. As you know, the Gas Works is a capital-intensive operation that requires consistent maintenance, particularly for our liquification plant in Port Richmond. This is a standard financing for new money. We do not expect to be back before Council for additional funds until 2003 or thereafter. This is, as I told Council in a briefing a couple weeks ago, a fairly standard set of refinancing and new financing legislation. We would have to point out to you, as we did then, that even with Council's approval, this refinancing and new financing is being sold in a climate that we have not experienced before. Specifically, we are led to believe that the Senate will pass a gas deregulation bill as early as tomorrow. It will go to the State House. The 10 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 State House will amend it to include PGW. This puts the issue in an unusual climate that we have not recognized before. Our intention is to make certain that the covenants that our bondholders have are protected, even though we do not support in the slightest the bill. If we are able to achieve that, we believe the refinancing and financing can go forward. We have numerous attorneys working on this to make sure that we are protected both in terms of existing debt and future debt, but this is an unusual circumstance that we will find ourselves in. Mr. Reid and myself would be more than happy to answer any questions that you might have.
Mr. Hayllar, what's the substance of this Senate bill, and how does deregulation fit into all of this?
The State is interested in deregulating the natural gas utilities as they have deregulated the electric utility. The industries are quite different, but there is a certain political cachet right now in doing this. 11 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 And the majority parties in the Senate and in the House are apparently intent on going forward with it. Philadelphia, as you know, represents more than half of the natural gas sold in the state of Pennsylvania. The marketers who are particularly interested in this bill are very interested in having the Philadelphia Gas Works included in it. We are a market that is relatively in many ways easy for them to penetrate if they were allowed. Deregulation would allow them to do that, it would separate the supply of gas from the delivery of gas function. Secondly, as I understand it, in the House, there is a strong movement that would have the Gas Works regulated not by the local Gas Commission but by the Public Utility Commission. This, as we've said before, presents an extremely serious problem regarding the debt that we have sold. It's approximately $800 million of outstanding bonds. It is protected by a very high revenue-to-debt covenant of one and a half times debt service. Traditionally, you see 1.1, 1.2, but 1.5 is a very strong covenants. That in turn 12 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 is protected by City law that requires the Gas Commission to provide revenue to meet that covenant. This is different from the way PUC has regulated its utilities. And if this were to go forward, the PUC would have to provide the same protection for our debt holders as the Gas Commission has. And this is one of the great questions. If they fail to do this properly, we foresee a very serious set of legal issues that would involve both the company, the City, and the State. We hope very much that we can avoid that. But that is the cloud that confronts us in what would otherwise be a fairly routine financing.
What capital projects other than rehabilitation of Port Richmond does PGW expect to fund with the proceeds of Bill 980285?
Joe Bogdonavage of the Gas Works is here and can answer that in more detail. But these are routine matters. We have an older system that has a great deal of cast-iron 13 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 pipe under the ground; we seek to replace that. We continue to have information technology systems that have been ignored historically that we are now replacing in its entirety. There's a large panoply of projects that this would help fund. Joe, can you help a little more. Mr. Bogdonavage.
Some of the major projects in the year 2000 Capital Budget that we have, as Mr. Hayllar pointed out, was the refurbishment of the LNG plant. We also expect to spend about $21.5 million on infrastructure replacements, cast-iron mains, and services in the year 2000. We also have about $6 million worth of expenditures budgeted primarily for the installation of the automatic meter-reading devices. In addition, we have about $3.4 million in transportation replacement vehicle equipment.
How much was 14 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 that?
That's correct. And we also have about $3.4 million in information technology enhancements. The bulk of this being for the replacement of the existing material and purchasing system. In total, that should be about $48.2 million in expenditures.
Thank you. One final question before I certainly allow the President and members of the committee to ask questions. How does this affect? Do you expect the issuance of these bonds to result in a rate increase? Big question.
Okay. No, I don't think it would do effect a rate decrease; nor do I believe it would effect a rate increase. PGW is a company that is surrounded by 15 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 a great deal of myth. One of it is that we are extremely expensive. As the Gas Commission chairwoman would tell you, we have not had a rate increase since 1992, and that compared to surrounding Pennsylvania-regulated gas utilities, we are not only competitive; but on the residential side, we are very competitive, in fact lower than many of the companies that surround us. This is principally due to the way that we purchase gas, not necessarily our operating costs. But PGW has been, although it has allowed itself to be portrayed as expensive, we are not an expensive utility when compared to other utilities. In addition, recently the Baltimore Gas Company presented a filing to its regulatory commission and compared the rates for residential customers up and down the eastern seaboard -- Baltimore, New York, Brooklyn, Philadelphia, Washington, Richmond. Again, we fared very favorably in our rates. So we have been -- the Gas Commission has been extremely diligent in preventing rate 16 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 hikes that were unnecessary. We have achieved this by achieving savings within the operations of the company and through gas purchasing. Passage of this legislation would not affect rates one way or the other. However, it would add, of course, additional debt burden, but there is a financing that would assist us. But also, I couldn't resist the opportunity to point out that PGW is really a competitive provider of residential gas.
I know for a while there, we were getting rate increases, and then former Councilman Lucien Blackwell came aboard and not only didn't allow for rate increase, but had management take a 5 percent decrease. And it just proved that we can do it if we really want to.
Yes. Now we'll certainly open the floor to questions. Madam President?
I have a couple but you've been sitting here before me.
I wanted to follow 17 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 up on that question.
Thank you very much. I want to go back to the issue of whether or not it would be a rate increase. According to the Stone and Webster report, you have been talking to us, the Gas Commission, about gradually having a base-rate reduction starting soon, but the start date keeps getting pushed back.
According to the Stone and Webster report, this is no longer the plan?
Instead, there will be a $20 million rate increase or possibly expense reduction in that amount or a combination of the two starting in the fiscal year 2002?
In the budget that we will submit on time at the end of this month to the Gas Commission, you will see five-year 18 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 projections that show that we will require either $20 million of additional sales, a $20 million further reduction -- and we are reducing costs annually; our budget that you will see will be 6 percent less than last year's budget -- or $20 million in revenue enhancements. Clearly, our goal is to fill that gap which will take place somewhere around the year 2002, 2003. We're going to try to fill that with cost reductions. We are not interested, as is anybody else, in a rate increase if we can possibly avoid it.
What would those cost reductions include? How would you reach a $20 million cost reduction?
We have, as you will see in the budget, a conservative plan for reducing FTEs, full-time equivalents.
We have a no-layoff clause in our contract but we do have the normal 19 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 attrition. We started this year with approximately 1900 employees -- excuse me -- with approximately 2,000 employees. We are now at about 1900 employees. We've reduced in 1 year by 100.
Through attrition. Now, there have been layoffs of non-union personnel because previous management beefed up the marketing function far beyond what we believed was appropriate. We just didn't have additional product for these people to sell. So we did have layoffs in this nonunion area. But through attrition, we believe we will be down on average next year of 1836. By the end of the fiscal year, we'll be close to 1800 employees. That probably can be escalated. We also see opportunity in health care. We have an overfunded pension that we are looking at to see if that can be of assistance to both the pensioners and the company. I mentioned health care. We believe that a number of contracts can be reduced to achieve these savings. 20 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 It's a task, but when you look at our non-gas commodity rate now, which is now $2.43 -- excuse me, it's $3.43, we are considerably higher than our surrounding competitors. And that's where we know we can squeeze savings.
If you have a staff reduction through attrition, how would it -- what would the total number be? You gave me what we have now and what would be, but I can't calculate that figure. And then how would that decrease impact on the quality of service to the ratepayer? And where would those cost reductions take place?
Throughout the system, through normal retirement and attrition. We would have some additional flexibility so that we can move people in an area that has more person power than is necessary -- gas meter-reading comes to mind because we have automatic meter-readers and we do not need the meter-reader force that we once had, and they're being moved into our areas. We believe that the number for the end of the next fiscal year ending in August of 2000 should be much closer to 1800 than 1900, where it 21 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 is now. We can probably escalate that. The big question is, you don't want to reach a level where your service declines. Right now. Our service is respectable; it's not where we want it to be. We are today answering approximately -- and it's a big swing on this. But yesterday and the day before, we were answering approximately 85 percent of the customer service phone calls within 3 minutes. We are making and keeping appointments for morning and afternoon appointments for repairs -- you don't want to lose that. We believe that we can welcome continue to do this with increased person power through, you know, improved technology, the investment we've made in information technology, gas management assignment tools, customer service tools, that that will assist us. We also recognize that we need to improve the training of our people, particular people that are being moved in, and that should certainly help productivity.
I was going to ask you a question about productivity. What plans does your human service department have in place 22 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 to work with your employees to increase productivity? And do you have an adequate staff in human resources to do that?
In human resources, we've added a good number of people. I think that we can probably get some -- need some additional help as time goes on. We are examining the training area throughout. The field services, the people that work in the street and work with the live gas, I don't think there's been any question that the training they receive exceeds the industry standard. In terms of training for the new customer service phone systems, the billing systems, training for use of manpower dispatching materials, that has to be ongoing. The human services area is looking at other ways to improve. One of the thing the Gas Commission has asked for this year is a five-year plan, very similar to the five-year plan that the City receives. In there, you will see an outline of the areas where they believe they need to prioritize their training. And that five-year 23 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 plan will be submitted to you at the same time the budget is presented.
I'd just like to point out that the five-year plan was my recommendation for PGW so that they would have an idea of where they are going. While the Commission would like to have the plan, it was my recommendation that you have a working plan such as we have in the City so we know where we're going for the next five years.
We requested it because we thought it would be helpful to you to do.
And I think we immediately agreed that it was an appropriate way to unify PGW. One of the problems PGW has had is each of its units has been run as a subsidiary and has not been run as a collective team. The five-year plan allows people to build that support structure between departments of the company so that there's less of set of fiefdoms, if you will, and there's more of a sense of one company working together. 24 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
I have some more questions, but I will yield to the President.
Thank you. I believe I heard that $6 million is earmarked for the automatic meter-readers. Is this the last year for the installation of the meters? It took the Water Department practically no time at all to install their meter-readers. Why is it taking so long for the Gas Company to do it? And will this be the last phase of it?
Yes. I believe we're due to finish the summer of next year. The reason there is a difference between the Water Department and the Gas Works is that the Water Department used outside firms to make the installation; they contracted for it. The Gas Works is not permitted by contract and legal arbitration rulings to use outside contractors. The company tried some years ago and was told that it had to desist. So all our meters are installed by our own personnel, which is restrictive because our 25 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 personnel have their own other work to do. Whenever we enter a building, we put the automatic meter-reader in, there is a systematic way of doing it. But by not going to the outside, we had a much slower process than the Water Department had. And I think the Water Department's system -- I don't think anyone believed that they were going to be able to install that many automatic meter-readers in the time they've done it, it is very impressive.
I agree. How many more does the Gas Company have to install this year?
Yes. The last group of those will be the hard-to-enter homes where water and gas will jointly try to get into those buildings to try to get them in. That's probably going to be the real challenge.
You know, I don't know why the Water Department and the Gas 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 Company could have not worked on this together and probably have saved a great deal of money, a great deal of time, and a great deal of effort on everybody's part.
There are many areas where that question can rightfully be asked. One of them is the area of meter-reading. They use a nitron automatic meter, we use a nitron automatic reader. We have our trucks going around, they have their trucks going around reading them. This does not make a whole lot of sense.
But I'm talking about the installation of the meters.
Yes. But it is not untypical of the lack of coordination that historically has happened.
Bill No. 19 990285 authorizes the issuance of up to $80 million in Gas Works Revenue Bonds. What is the breakdown of the requested $80 million authorization between the Eleventh Series C and Fourteenth Series C Gas Works Revenue Bonds?
Recognizing that I may be corrected on this, it's $59 million from the 27 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 Eleventh Series and $4 million, if absolutely required, from the Fourteenth Series.
When will you know if PGW needs the issuance of the additional Fourteenth Series in order to make your debt service coverage requirement?
We will make an estimate of debt service requirement just as we go to market, and that's when we will make that determination. I do not believe we will need it. It is in there solely as a precaution in case something bad happens. Something bad always seems to happen, so it's there as a precaution. Right now, we do not believe that we will need it.
Okay. And when do you expect to sell these bonds?
What will be the total of PGW outstanding debt after the issuance of these bonds?
I beg your 28 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 pardon?
What are the operational and financial impacts to PGW if, as a result of gas deregulation, you are not able to sell these bonds?
I would hope it would only be a deferral because ultimately, we don't need capital money immediately. But ultimately within the year, we will need capital money for the ongoing maintenance of a very sophisticated and capital-intensive plan. We would vastly prefer to be able to achieve the refinancing because that will give us additional comfort on making the 1.5 debt service coverage. We may be able to slip through without it, but I don't want to take that risk. So without the refinancing, you have the possible technical default on the ratio. I don't think it's going to happen, but our fiscal year ends in August, so there's a lot that can happen. We'd like to have it there to be sure. Secondly, we will ultimately need new capital to keep our system going. 29 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
Mr. Hayllar, why are you requesting approval of Bill No. 990285 prior to PGW receiving the various approvals of the proposed capital expenditures? And will you receive all of the required capital budget approvals before you attempt to go out to sell the bonds?
I don't believe so. I believe that we will present a capital budget to the Gas Commission on the -- at the end of this month. This financing is not coupled with any particular budget; it is just to provide funds for whatever capital program the Commission and Council approves. This is the financing. The approval of the capital program, the authorizations, can come later. We're just putting the money -- making the money available. We're doing them together because there's companies of scale. We want to do the refinancing because that will help us this year and the market is extremely advantageous for us. If we have a bond team and the expense of refinancing taking place, you save money by doing 30 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 the new financing at the same time.
Well, what happens if you submit your capital program to the Commission and they don't approve it? You say you're submitting it at the end of May?
Yeah, that -- the deadline is June 1st. If they don't approve it, this money can be spent on current approvals that have not been exhausted where this money would sit. We are asking for the new money because we are going out for a refinancing in the economies of doing -- it is more expensive to do two transactions than one. We would not venture with a year 2000 capital program without Commission and Council approval. We can't.
And if the numbers change and we're going out and selling the bonds without -- I don't know, how long does it take the Commission to submit approval?
This is not dissimilar from what the City does. The financing of the program is independent of the program itself. You approve a capital program of things that you agree 31 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 we can spend money on. Sometimes we have money available to begin those projects immediately, sometimes we finance at a different period of time. They do not go hand in hand. This money is not for the year 2000 capital program exclusively. It's for capital program projects that the Commission and the Council approve. The two are independent.
Mr. Bogdonavage reminds me that this is exactly the sequence that took place last year, that the new money was sold without a '99 capital program. It was just that the money was needed for capital improvements. You can't spend it without the authority of a Commission and Council, but they are independent.
What happens when you exceed in very large amounts of money what has been placed in the capital program?
If we spend -- and as you probably know, 'cause I've discussed this with 32 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 Mr. McPherson, if we exceed an authorization, I believe we have to come back to Council to correct that with an increased authorization afterwards. You should not --
How frequently has that happened, in your memory?
I believe it has happened in two years, and it is projected to happen for '99. We are still working on trying to ascertain those numbers. There was -- the accounting profession uses a nice term called "management override." Members of management were not watching the authority -- the authorizations that have been provided to Council and the Gas Commission, and have exceeded, or are projected to exceed, those authorizations. We are working on that now and we're trying to work on a program to correct those excesses. We have to come back to you ultimately is, I believe, the answer.
Thank you. 33 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 Councilman Kenney?
Thank you, Madam Chair. Is there a percentage of projects that had previously been authorized that a portion of these new dollars are going to fund? For example, have we started projects, had projects authorized, started projects, and now will take a portion or a percentage of the new dollars either through the refunding, the refinance, or the new borrowing to pay for projects that are already in the pipeline? And if that's true, what percentage of them are there and how often does that happen?
None of the proceeds from the refunding will be used for any capital projects; that's strictly a debt service refunding. Of the $100 million in new money, we probably have somewhere around 15 to $20 million of prior-year spending that may be a part of this new $100 million issue. So I would say somewhat under 20 percent of the capital projects that we're going forward with were approved prior to 1999. 34 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
What's the general reason for the percent lag in prior-approved 4 capital projects and their funding? 5
The biggest area of 6 capital spending is in the distribution department 7 and currently on the information technology side. 8 Historically, some of the distribution projects, 9 we would spend probably about 80 percent of the 10 money in the current year's program in that 11 current fiscal year. The remainder of that would 12 probably stretch over because of some long-term 13 duration projects one or would years. 14 In the information technology area, 15 some of those programs with the information 16 technology initiatives we have stated have 17 exceeded the one-year horizon and have taken over 18 two years to accomplish some of those technology 19 issues. That's where we get about the 20 percent 20 lag time we have in the project.
So the issue not only of lag time but of costs associated with the lag time, does that require you to come back and get post-approval for overruns in projects that were pre-approved at a certain level of funding? 35 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
I believe we will have to come back for what you referred to as "post-approval."
I guess 'cause it's like, what comes first, the chicken or the egg?
And percent of 12 what we're approving in the $115 million new 13 borrowing is going to be earmarked, or has been 14 earmarked, for projects prior approved that have 15 not only overrun in time, but obviously the time 16 cost money as overrun in dollars. 17 Why have we not had an approval process 18 for the projects that have run longer and more 19 expensive than was prior approved? 20
Two reasons. One, the capital budgets tend to be passed after the fiscal year has started, and there's just not a good control mechanism when you do that. Secondly, I was not aware of the exceeding of the authorizations until about a 36 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 month ago, and we are now trying to determine exactly how much of the -- how much we will have exceeded that authorization so we will know what to come back to Council and the Gas Commission for. We don't know yet.
Because of the climate, the favorable borrowing climate that now exists and because we're being asked to approve $115 million of new money prior to the approval of the Gas Commission on the actual expenditure of those dollars, would it not in some way be better to borrow all that we need to cover what has been a shortfall and then to move forward with the projects that we expect to be done or need to be done, maintained or expanded in the course of the next year or two? Do you understand what I'm saying?
No, increase the borrowing so that we get the number, the 20 percent number that we need to cover what has been -- either has gone longer than we wanted to, more expensive that we wanted to, or in the pipeline now. And then move forward with a real number -- 37 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 not a real number, but I don't want to make it sound as if it's an unreal number. But move forward with an actual number of what it's going to cost us capital-wise projected in the next three years, I guess is what you're saying.
I'm not sure I understand the question. But I think the answer, if I understand it correctly, and the answer is that we don't know what to ask -- we don't know the number that corrects the problem. We know there's going to be -- that there's going to be -- we will have exceeded the authorization in some years. We don't know the number at this point.
But we do know from your testimony that we're not going to need additional capital dollars, at least until the year 2003, so there must be --
We'll need it beforehand. We don't need this new borrowing immediately, but if you're going to go into the market simply to say cost of issuance, you do the two together. And we'll need additional money after this, probably in 2003.
It says, "We do not 38 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 anticipate seeking additional capital funds until the year 2003 or beyond."
That includes this request for $150 million in new money.
No, it assumes that the question is already in -- has bee been done.
It assumes that we're going to approve the 115 million.
Okay. If we have a percent lag, say, on average of prior-approved 14 capital projects in the pipeline, why can't we end 15 that lag in this favorable borrowing climate now 16 and then move forward? 17
Okay. It's not a problem 18 of financing; it's a problem of authorization. We 19 believe that previous management, in some areas, 20 has exceeded the authorization. It's not a matter of not having the money. The two are really quite separate. It's a matter of exceeding the permission that the Commission and Council have given us.
But in some ways, 39 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 we don't have the money because if we're going to take potentially percent of this new 4 $115 million to pay for prior-approved projects, 5 we don't have the money. For example, 6 hypothetically, if we don't move forward with this 7 115, you're going to be 20 percent short -- 8
So why don't we end 13 it now or try to figure out what we need to borrow 14 in excess to stop that continual -- when you come 15 again in 2003, will there potentially be another 16 20 percent lag in the current projects that are in 17 the pipeline? 18
It's possible, but, one, 19 I don't conceive of my being here in 2003; and 20 secondly, I would not want that to happen. We would curtail other projects rather than to exceed authority.
Not to beat this dead horse deader than it, is not the climate now the most favorable it's been? 40 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
We're going to be $830 million in debit anyway, all right? And if the State does what it's supposed to do and covers the covenants and our borrowers are secure and the climate is favorable, isn't it better to eliminate this?
The problem with borrowing more is that our debt service will go up, and there is a point where our revenue can't sustain that. So you have to keep your borrowing at least into a manageable rate.
Okay, next question. How do we -- do we do that internally, do we do it with an outside --
There is -- there is 41 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 nothing wrong with the people who are following the capital program. The problem was that senior management in the past ignored, or was not aware of, the authorizations and apparently blew past them. And that's that wonderful accounting term called "management override," and you have to have a system where management doesn't over ride it.
But, well, you didn't make me feel better about the answer to that last question in that you tell me that the people who are watching, monitoring the capital program are capable of doing so, then how-- did the management ignore the middle level --
So John -- so "Mr. Smith," who's in charge of a specific capital project, was telling prior management that, you know, We're late. Behind schedule, and we're over budget, and they just said, Never mind?
It's complicated, but in essence -- and his name is Mr. Gallagher and he does his job very well. He filed the reports; they just were not understood or not followed. 42 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
Okay. You testified on another issue, your five-year plan. You expect to be approximately $20 million revenue shortfall at some point around 2003?
You recognize there's going to be an inflation. I think we're projecting inflation about 2.2. We have a contract that has raises in it until the end of the contract, 2001. We make an assumption that for the rest of the five-year term, there's going to be some kind of mandatory contractual wage increases. And we also recognize this is a city where the residential numbers are flat. People are using more and more energy-efficient appliances and so that sales are flat. Our growth will come from commercial sales if we're successful at the Navy Yard downtown and a few other areas. 43 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 So simply the line's crossed at some point. Your projected revenue growth is not keeping pace with your corrected expenses. The way out of that is either -- and what many utilities do in a three-year cycle, just go in for a rate increase. Our goal and our challenge is to try to solve that hole with continued cost savings in the company. And if we're lucky, better growth in the volume of sales that we have.
What role do our uncollectible bills play in the projected revenue shortfall?
Accounts receivable. Has dropped from 170 million to 88 million last year. Part of that is a warm winter.
Yeah. That's the amount at one point in time. That's the total accounts receivable. 44 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
It goes back a number of years. After about six months, it really becomes very, very hard to collect. Gas is a commodity, one of few that you pay for it after you use it. That's not found in many other -- home heating oil, for example, when you get it, you pay for it. We pay for our gas after it's consumed. So accounts receivable becomes a big issue. The company has done a lot better with collections in the last three years, and that's shown in those numbers.
Do we get to a certain point in time where we actually write those debts off?
Or do we carry them for forever? 45 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
Very -- it's really relatively small 'cause commercial has a vested interest in paying.
Yeah. We can do that all year. The real issue is residential. A lot of it is rental properties, and we are a city with a very large low-income base and you're going to have that problem.
But you're also sitting with a very large and, well, I guess increasingly shrinking working-class base that's paying for that large low-income base. And I think part of the problem, from my perspective, in the issue of equity and in the issue of making it a more liveable and reasonably-priced city to live in, that working 46 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 class and middle class component can no longer afford to carry the poverty part of it. And I think in the end, that's what happens. Somebody's going to pay it. And if the AR stays at where it's at, we're paying at some point in time through our rate structure and through other structures to carry the company. You know, it's like running any company, that if a large portion of your customers don't pay for the products that they purchase, you're not going to be in business very long. And I would be interested in hearing, as we go forward into this year and into next, what you guys are going to do to really whip this uncollectible AR issue in shape. Because I just think it's patently unfair for people who pay all their bills and do so by scrimping and saving on others things to have to pay for everybody else. Now, some portion of that poverty group can't pay, I understand that. But I think we've got to better identify those who are truly in that situation and those who are beating us, and that's something that I'm going to pursue in the next end of this year 47 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 through next. And I really would like your cooperation and help in trying to identify that.
The Chair recognize Michael Nutter who is a member of this committee. We had a follow-up question from Councilwoman Tasco.
Thank you very much. I'd just like to say to my colleague on Council that we have been working very hard to work with PGW to implement controls to prevent those people who can pay in which we have found the number of people who can't pay don't pay, including allowing them to shut down those folks during the winter moratorium.
Customers in the past have used the winter moratorium where they did not pay their bills, went into agreements, paid a couple of dollars in the summer, went back into the agreement; it became a cycle as. And as we identify those people who know how to manipulate the system, they have the authority to 48 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 shut them down. We also want to note too that a lot of low-income people do pay their bills. That we have a large number of apartment owners who don't pay their bills, so we can't generalize about it being just people who are in poverty. We have some people who are not poverty-stricken who find a way to manipulate the system that don't pay their bills, and they have large accounts which account for that high accounts receivable.
No, I just want to make sure that there's no misunderstanding on the record or for anyone here. There's no 15 generalization about who doesn't pay. If you're not paying, for whatever reason, I am and you are and we are paying to make up for that loss in revenue. So, you know, I mean, if someone has a legitimate reason for not become able to pay, I'm as sympathetic and as charitable as the next person. I just hear anecdotal information that may or may not be true about a portion of our customer bases that, you know, likes the heat on 80 and likes the cable TV at the same time while 49 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 not paying the gas bill. And, again, I will harp on that cable TV issue 'cause, I'm telling you, we authorize those franchises and we can work with them, I think, in a very effective way to identify people who are making life-style choices for cable television as opposed to paying their utilities. And that's one of the areas I'd like to go into. But I don't think there's a general -- I'm in any way generalizing that people who are poor don't pay their bills. I know a lot of working poor who scrimp and save to pay their bills and do without certain things in order to pay what they owe. And I appreciate the Gas Commission and the Gas Company's effort to improve the situation but I think we can go a little further.
Mr. Hayllar, the Gas Commission approved about $46 million in new funds for 1999 and also which included million 22 -- plus 22 million prior-approved in prior years, which comes to about $68 million. So how much did you overspend the 1999 capital budget? 50 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
I don't believe at this point we have. But if the end of this fiscal year, I believe we are on a course to do so, and at the end of the year 2000, I believe -- if we continue spending at the current rate -- I just didn't bring the chart with me so it's from memory. Let me answer your question this way 'cause this is a number I do now know. From '96, '97, '98, and'99, if we continue to spend on the course that we are without any change or without going back and getting amended authorization, we will overspend for those -- what's it, five years? -- by about $11 million or about 3 percent of the total authorization for those years. As you know, and we know in the City, that's not permissible. But that's a projection. I mean, that money hasn't gone out the door yet; that money is projected to go out. That's why I can't be certain about where we'll end up because some of this, we can curtail.
Well what measures have you put in, what controls have you put in place to control your spending? 51 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
Well, the most obvious one is, senior management is now very aware of what the authority is and what the issue is, and they can't exceed the permission that's been provided by Council and the Commission. That eliminates really what happened. We have to go back and fix what happened. The question is, do you want to stop projects that must be done for safety or for the maintenance of the company? Y2K issues? Do we stop and wait? Because the end of the year is coming, it's not going to wait for us. Some things we may be able to defer. We may have unspent allocations that we can move in. It's a bookkeeping issue. Once we get the final number of where we think we're going to be back, we'll be before the Commission and Council, asking for an amendment to those authorizations.
Beyond the senior management having a commitment to stick to the budget, what internal mechanisms are in place to make sure that they keep that commitment? And how do you know whether you're overspending and that the budget's being overspent? 52 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
The reports were generated; they just were ignored. And my responsibility, as long as I am there, Mr. Martin's responsibility, since he's -- the operation contains most of the capital expenditures, is to make certain that those authorizations are not exceeded. One of the things that happened that wasn't projected when the original budgets were produced is, we capitalized an awful lot of the labor, quite legitimately. It was not in violation of any accounting policy. But those capitalizations of labor, which we had initially assumed would be paid for by operating funds, drove up the capital costs. And it was done because we were trying to conserve operating money to make sure make certain we made the debt covenants. You're in that very famous box. No 21 matter what you do, it's going to be wrong. The error that was made was that nobody came back to the Commission, nobody came back to Council and said, Here's what's happening, we need to amend this authorization. 53 5/11/99 FINANCE COMMITTEE - Bill 990285, 86
When the issue of deregulation came up before and the company was moving to go into other products, you geared up your marketing staff. And then, of course, deregulation was put on the back burner, and the marketing staff was -- you let those people go. Now, moving back towards deregulation again, what is the company's position relative to deregulation? If PGW is included in deregulation, what do you do to be competitive?
Do you again look at future products, do we go back into that mode again? What do you do?
I believe that the Philadelphia Gas Works will do very well in a deregulated environment simply by revising its tariffs and becoming a transportation company, that we don't need to have people buy our gas; they will use our pipes, our billing system, our liquification plants, our storage facilities. We can do quite well simply doing that and let other -- let the competition come into the market. And there are things we must be wary of 54 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 being the provider of last resort and getting stuck with the most difficult customers to get payment from. But I think there are things we can do to mitigate against that. I'm not afraid of that component, and I think we have the capability of doing that.
Well, since we do have a large -- we have the senior citizens' discount, we have the CPR customer, and as has been talked about, a number of people who fall in the category of low-income, how do you handle those people when the marketers will cream off the -- take the cream of the crop? How does PGW manage that?
Well, if it's just deregulation, we do have to manage down those costs, and that's something that the Gas Commission is going to be asked to assist us with. If it is going before the Public Utility Commission -- the other thing that the majority party wants to do in the House and the Senate -- those programs may be eliminated because they may eliminated because they may well be ruled 55 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 as discriminatory because one class is subsidizing another. I'm not sure that that's what the City wants. In fact, I'm pretty certain it's not what the City wants. But that problem might be eliminated by this move to go before the PUC. It's one of the things we are most concerned about.
So what happens, what will be the impact of deregulation if those programs are not allowed by the PUC if we're under the PUC? What happens to PGW? How do you adjust to that?
Right now, we believe that the State Supreme Court's rulings, particularly in a number of cases, would have those programs, including the government and Housing Authority discounts be ruled as discriminatory. And they would not stand in their current configures. That is of concern.
What does that do 56 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 to your budget?
It probably is financially helpful because these are discounts that we don't have to provide. It's not what the owners of the company had wanted for a good number of years.
So then you get into only -- I mean, how do you provide gas to those low-income people who are now on a budget or in some program to help them? What happens?
It will increase -- it will put pressure on increasing our rate. The specific answer, how much, we don't know because we haven't had the opportunity to look at it. But you are defining one of the great concerns about it.
For the fiscal year 1999 you have about 6.8 BCF in lost sales. This translates to a revenue margin loss of about $27 million. PGW projects 18.5 million in savings, plus 4 million in new revenue from the changes in the customer charge and rates recently approved by the Gas Commission. So you have 27 million in margin loss, 57 5/11/99 FINANCE COMMITTEE - Bill 990285, 86 you have less 22.5 million in savings or new revenues, leaving you 4.5 million uncovered. What will be done to make up this 4.5 million shortfall before August 31,1999?
I'm sorry. It might be helpful if you let me read the question that you just read because I didn't catch it all. And after I've read it, it's probably likely that I'll have to get back to you with the answer on that 'cause you've raised a number of issues, some of which I'm not familiar with.