Committee Hearing, November 28, 2000

COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING AND PUBLIC MEETING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, November 28, 2000 10:32 a.m. - - - BILL 000603 - an ordinance authorizing the City of Philadelphia to terminate an agreement by and between the City of Philadelphia and the Philadelphia Facilities Management Corporation relating to the operation of the Philadelphia Gas Works and establishing powers, duties and responsibilities of the Philadelphia Gas Commission with respect to the Philadelphia Gas Works. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN JANNIE BLACKWELL, Vice Chair COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 I N D E X BILL NO. 000603 PAGE STEVEN SCHACHMAN, Public Affairs .......... JOYCE WILKERSON, Chief of Staff ........... 21 KENNETH TRUJILLO, City Solicitor .......... 34 KUMAR KISCHINCHAND, Phila. Gas Works ...... 77 STEVEN HERSEY ............................. 84 JANICE PARRISH, Phila Gas Commission ...... 141 JOHN FOULKES, Office of City Controller ... 169 PHILLIP BERTOCCI, CLS ..................... 176 TINA NELSON, CEPA ......................... 190 3 11/28/00 - WHOLE - BILL NO. 000603 P R O C E E D I N G S

Good morning, everyone. This is a public hearing of the Committee of the Whole regarding Bill No. 6 000603. I would ask Mr. McPherson to please read the title of the bill.

Bill No. 000603, an ordinance authorizing the City of Philadelphia to terminate an agreement by and between the City of Philadelphia and the Philadelphia Facilities Management Corporation relating to the operation of the Philadelphia Gas Works and establishing powers, duties and responsibilities of the Philadelphia Gas Commission with respect to the Philadelphia Gas Works.

Our first witness is Joyce Wilkerson. I'm sorry, Councilwoman, did you want to make a statement?

Thank you very much.

Mm-hmm.

Just a second. Thank you. Thank you, Madam 4 11/28/00 - WHOLE - BILL NO. 000603 President. Good morning.

Good morning.

By now, we are all tired of hearing about of PGW's many problems. But you know what they say, if you're not part of the solution, you're a part of the problem. So today we are taking the next step towards a solution. As you know, I have been Chair of the Gas Commission since 1992, but Bill 000603 is not about me. It is not about a power grab, as some people have suggested. It is about PGW and what we need to do to fix it. Bill 000603 streamlines PGW's governance to create the accountability for PGW's performance that is lacking under the current management agreement. The Gas Commission has a track record of requiring PFMC's proposals to have a sound business footing, substantial financial impact, and a supporting cost benefit analysis. What the Gas Commission doesn't have is the power to enforce its directives and orders. Bill 000603 5 11/28/00 - WHOLE - BILL NO. 000603 changes that. Let me be perfectly clear. The purpose of Bill 000603 is to, one, streamline PGW's governance structure in order to, number two, create accountability for PGW's performance, and in doing so, number three, protect both the City's interests and the ratepayers. Over the years, I have discussed with many of you the Gas Commission's concern regarding the very complex PGW oversight structure created by the 1972 management agreement. In researching this issue further, we have found that we are not alone in our concern. Both the Committee of Seventy in a 1995 study and the Pennsylvania Economy League in a 1995 report have conclude PGW's governance structure must be streamlined to provide a single direct line of accountability for PGW's performance. Mayor Street's transition committee reached the same conclusion in March of this year. These concerns are still valid today as they were 15 years ago. In fact, if anything, with the addition of the PUC as another layer of 6 11/28/00 - WHOLE - BILL NO. 000603 oversight, it has become even more imperative to streamline PGW's governance. It is important that you be aware that the Gas Commission staff and I met with the Administration twice in recent weeks about this bill. They also agree it is time to streamline PGW's governance. They have told us their concern with the bill, but frankly, apart from one legal issue, we really do not think their concerns have much substance to them. They claim that under Bill 000603, there will still be too much politics around PGW. But at the same time, they criticize the bill for delegating too many responsibilities to the Gas Commission, which they see as functioning too independently from the City. Well, you can't have it both ways. As to the other concerns they have expressed, no bill is 100 percent perfect in its initial draft, and we are certainly not opposed to refining language where necessary to clarify any ambiguities or amplify the intent. In fact, we specifically invited the Administration to suggest to us any amendments they thought were 7 11/28/00 - WHOLE - BILL NO. 000603 needed, but we have not received any. These hearings are an opportunity for the Administration, City Council, and the public to provide their input. As to their major legal objection that the Mayor must also agree to terminate the management agreement, we realize that the Mayor must be a partner with City Council in this decision. So the question remains, why wouldn't the Mayor want to terminate the management agreement and do what is best for PGW and the ratepayers? The PUC's recent decisions on rate relief for PGW, copies attached to this testimony which you all have, clearly show the immediate need to finally resolve the governance issue. Let me explain what I mean. Under the current management agreement between the City of Philadelphia and the PFMC, the Gas Commission has had both regulatory functions, such as the authority to set PGW's rates and charges and management oversight functions, albeit without any enforcement powers. The state gas deregulation 8 11/28/00 - WHOLE - BILL NO.

000603 law transferred the Gas Commission's regulatory powers to the PUC, effective July 1, 2000. We now have the opportunity and the responsibility to delineate more clearly the Gas Commission's management role as well as the appropriate governmental role with respect to the PGW. This is what Bill 000603 attempts to do. In the absence of this clarity as to how the Council will oversee PGW's operations and ensure its accountability for performance, the PUC has felt empowered to weigh in on this urgent matter. As you'll note in my letter to Mayor Street, which is attached to my testimony as Exhibit B, I shared with him my concern that the PUC's decision to make its approval of interim rate relief subject to certain preconditions was improper. In particular, the PUC encroaches on the City's exclusive areas of authority with respect to the Gas Works by dictating that PGW retain a permanent manager under the terms they stated. The City's power in this regard were specifically preserved under the state gas deregulation law. In general, I do not disagree with 9 11/28/00 - WHOLE - BILL NO. 000603 the substance of the PUC's recommendations, including the need for stable management, the need for credible financial statements and projections, and the need for vast improvements in customer service. The Gas Commission has repeatedly urged both Mayor Rendell and Mayor Street to hire permanent qualified management at PGW. Now, it is also critical that the Mayor act to preserve the City's authority and challenge the PUC's effort to interfere with local governance decisions. What will be different under Bill 14 000603? Here are a few examples: One, there will be a single entity that will articulate the strategic direction and definitive goals and objectives for PGW. Two, there will be a single entity that will have the power to hold PGW's management accountable for performance. Specifically, the Gas Commission will have the authority to hire PGW's top management, set their performance standards, and fire them if they don't meet those standards. Under the current structure, PFMC hires the top three executives subject to the Gas 10 11/28/00 - WHOLE - BILL NO. 000603 Commission's approval, but once those executives are hired, the only one who can fire them is PFMC. Three, like City Council, the Gas Commission conducts its business and makes its decisions in public, unlike PFMC which conducts its business in private. Under the current structure, PFMC is not accountable to the ratepayers for any of its decisions. Conducting business in public fosters more responsible decision-making and ultimately makes you directly accountable for those decisions. Four, the Gas Commission, unlike PFMC, will be structured and staffed as appropriate to provide quality control over PGW's management decisions and actions. Five, the budget approval process for PGW will be made more efficient by eliminating redundant reviews by PFMC. And finally, six, a single entity will be held accountable for PGW's successes and failures. I would like to show you graphically how Bill 000603 will drastically improve PGW's 11 11/28/00 - WHOLE - BILL NO. 000603 accountability. In addition to the charts in front of the room, copies are attached to my testimony as Exhibit C. PGW is currently accountable to no one entity or branch of government. Each entity is like a spoke of a wheel. PGW is at the center where it can play each other one against the other and control and manipulate the information flow. Under the current structure, each of these entities can pass the buck with no one ultimately responsible for PGW's performance. But we can stop that wheel from spinning out of control. Bill 000603 takes the three main components of government oversight, the Mayor, City Council, and the City Controller and puts them into one box, some might call it a lock box, of accountability. PGW will answer to just one entity, thereby minimizing conflicting demands on PGW and its personnel.

This will save time and money, making PGW a more efficient operation. It is time to cut the redundancy and make the Gas Commission directly responsible for oversight of PGW's operations by implementing an oversight structure that will protect the City 12 11/28/00 - WHOLE - BILL NO. 000603 and the ratepayers which are not being protected by the current governance structure or by PFMC. This is not the first time an effort has been made to overhaul PGW's governance. It's ironic that Mayor Street opposes Bill 000603. " That's ends the end of quote. 13 Another quote, "Then it is clear to 14 me that the system we have is superfluous in all 15 of its ramifications. Maybe what we need to be 16 doing is eliminate PFMC. " And those quotes were taken from testimony as noted at the end of my comments at a hearing held in 1983. In essence, we've been here before. But unlike before, we must resolve this matter. I urge you to fix PGW now. I urge you to protect the ratepayers now. And I urge you, my 13 11/28/00 - WHOLE - BILL NO. 000603 colleagues, to support the passage of Bill 000603 now. Thank you very much.

Thank you.

Will Mr. Schachman please come to the stand. (Witness comes forward.)

If you don't mind, we'll give time for your testimony to be circulated. May I have a copy, please. (Copies of Mr. Schachman's testimony circulated.)

Good morning. Kindly identify yourself for the record and proceed with your testimony.

Thank you. My name is Steve Schachman, and I am managing director of Public Affairs Management. Public Affairs Management is a government relations management consulting firm. My testimony today is based on almost years' experience in utility business. 23 To put testimony in context, I should briefly 24 outline my background. I served as president and 25 CEO of PGW for over five years from 1977 till 14 11/28/00 - WHOLE - BILL NO. 000603 1983. I was a senior officer of Bell Atlantic Cellular Company during its start-up period. I was responsible for the turn-around of the Pennsylvania Gas Distribution Company that when I joined the company required back-to-back rate filings each on average an excess of 30 percent and at the time could only access its customer records manually. I served for over years on 10 the Board of the Natural Gas Distribution 11 Company, which is part of a publicly traded 12 company. I have been involved in electric and 13 telephone deregulation in the Commonwealth of 14 Pennsylvania. Also, I serve on the board of 15 several publicly traded companies. Obviously, I operated the Gas Works under the management regulatory scheme that existed prior to the recent transfer of certain functions to the Public Utility Commission. The system was cumbersome, but worked. Demarcation of responsibility between the board and the commission should have been more clearly stated. Adding a second regulatory body, the PUC could only make a poor situation worse. First, I will take a few minutes to 15 11/28/00 - WHOLE - BILL NO. 000603 explain why I believe the system worked prior to the change and when I was involved in management of the Gas Works and then make a few suggestions as to Bill No. 000603. I will be happy to answer any questions when I'm finished my remarks. The board of directors and their management must bear the major responsibility for making a management and regulatory scheme work. No matter how well qualified a regulatory body is, it cannot properly discharge its responsibility unless it receives accurate, understandable information and the underlying supporting data. Similar, the ownership, in this case, the Council and the Administration, cannot make intelligent decisions without the proper input from the people charged with responsibility to operate the Gas Works. When I was at the Gas Works, my board demanded of me the same level of professionalism and disclosure as is demanded in publicly traded company. The board and senior management were always cognizant that they were charged with the trust and safety of the citizens. The other driving factors were equally simple and 16 11/28/00 - WHOLE - BILL NO. 000603 straightforward. We were spending the money of the consumers and taxpayers and we had an obligation to our employees to treat them with respect and fairness. Fiscally, I was required to report at the board's monthly meetings on the most recent month's results. Any deviation from budget over percent had to be explained and I was to 10 present an actual estimated result for the fiscal year and, likewise, compare that to budget. Additionally, each month I report on capital budget and was required to explain any deviation. In presenting my annual budget to the board for approval, they expect to have a minimum three-year projection. Of course, in setting forth the assumptions underlined the budget was required. Although I did not meet every month with the other parties, that being the Council and Administration, I was expected to meet regularly with the Director of Finance, the Chair of City Council's Finance Committee, and a representative of the Controller on behalf of the 17 11/28/00 - WHOLE - BILL NO. 000603 Commission. My board wanted to know what the reaction of the other part was prior to approving a budget. The Board's decision was independent, but informed. It also should be noted that those periodic meetings allowed me to discuss nonfinancial matters as well.

Once a budget approved, I was to ensure the company adhere to that budget. If I thought a modification was to be made during fiscal year, the board required that I first convinced them, and if received their approval, then and only then could I make the change. If regulatory approval had been required for an item being changed, then I was to seek such approval before spending any monies. Of course, I was given discretion to deal with emergencies, however, I was to inform my board as soon as possible such emergency in the action taken. This does not mean to wait until the next meeting. Similarly, I was to inform commission and the owners. My board did not want anyone surprised. They expected that the parties would not need to rely on the press for their 18 11/28/00 - WHOLE - BILL NO. 000603 information and where appropriate input before the decision was made. In some, based on my experience with other regulated companies, my board at PGW ran it as a well-managed private company. The board fully accepted its responsibility for management of the company while ensuring it kept the regulatory body informed, and where appropriate, sought its feedback. Likewise, it dealt with its shareholder in an open and responsive manner. Does 603 accomplish the purpose of putting back PGW on the right track? Yes, 603 with certain modifications creates the proper framework. The framework is only part of the answer. The people are the second part of the equation. And all of this must be viewed in context to the changing times. Today, all businesses must be run more efficiently, fewer people are utilizing the most appropriate technology. The manner in which supplies are purchased and services delivered are changing constantly. Now more than ever, management must be cognizant of the environment in which they operate and plan for the future. 19 11/28/00 - WHOLE - BILL NO. 000603 As management adjusts for change, it cannot ignore the basic rules of business. As an example, utilizing monies borrowed from capital projects to pay for day-to-day operating costs is a beginning of a debt spiral that may be never been reversed. The bill in question would eliminate the confusion as to management responsibility. However, the commission should not be the board of directors. The board should be vested with all management responsibility and the commission should be reserved for regulatory oversight, keeping in mind rate-making may be returned to it. City Council should appoint two members of the board and the Mayor would appoint two, with the City Controller appointing a fifth. This would ensure the board and management be responsive to all owners. All powers transfer the commission per 603 should be with the exception of rate-making be placed under the newly formed board appointed, as I have described. These board members appointed by City 20 11/28/00 - WHOLE - BILL NO. 000603 Council would be hard pressed not to insist that city management meet on a regular basis with your designated representatives and provide the type of information which was regularly transmitted to Council when I served at PGW. As important as ensuring the Gas Works is responsive to this and other oversight bodies is ensure it is efficiently run. Then and only then will it be able to meet its social obligations and begin to work itself out of the burdensome debt structure now encumbering PGW. To this end, I would hope that all of the interested parties would find a way to work together for the good of all. All there are numerous individuals and entities trying to do what they believe is the best interest of PGW an ultimately its consumers, because at the end of day if we are not serving the best interest of the consumers and citizens of Philadelphia, we are not doing our jobs.

Therefore, it is imperative that the matter be put in place that not only has professional skill and experience to manage PGW, but also has the local knowledge, respect, and ability to bring all of those 21 11/28/00 - WHOLE - BILL NO. 000603 parties together in order that PGW can again be a contributing factor to the well-being of this City and its citizens. Thank you. If there are any questions, I will be happy to answer them.

Thank you. Are there any questions from members of the committee? (No questions.)

Thank you very much.

Thank you.

Our next witness is Joyce Wilkerson, please. (Witnesses come forward.)

Good morning.

Good morning. My name is Joyce Wilkerson. I'm Chief of Staff to Mayor Street, and thank you for this opportunity to present testimony on behalf of the Administration concerning Bill 000603. The solution to PGW governance is anything but obvious. This is not a new problem. 22 11/28/00 - WHOLE - BILL NO. 000603 The first -- I'll skip over some of the testimony. It draws on a lot of the information that others have relied on then talks about the history of the company. Since its beginning, though, the company has been through many governance iterations. It's been managed by a quasi private enterprise. It's been municipally owned under trustee management. It's been municipally owned with municipal operation. The company's been municipally owned with private management and it's been municipally owned with management by private nonprofit corporation. In subsequent years, attempts have been made to change the governance. As was pointed out previously, the Mayor when he was a Councilmember proposed several dramatic changes in the governance that would have expanded the Gas Commission to include the City Finance Director and Chairman of the Council's Committee on Commerce, Transportation, and Public Utilities. It would have removed the City Controller to the position of independent observer. It would have replaced the Controller 23 11/28/00 - WHOLE - BILL NO. 000603 by a non-elected Philadelphia citizen. It would have require Council approval of both PGW's operating budget and gas rates. It would have given the Public Property Commissioner the power to set rates based on standards drawn up by Council. And it would have established a graduated senior citizen's discount. These bills that would have given City Council increased control over the operation were met by unanimous hostility by City organizations. There was concern that to expand the control of the Gas Commission were viewed as costly, time-consuming and at risk of jeopardizing the company's credit rating. It was also argued that it would further politicize the Gas Works and lead to the downgrading. Since the State's 1999 enactment of legislation deregulating the sale of natural gas and the July 2000 transfer of jurisdiction over PGW to the PUC, the City has entered into unchartered waters that test perhaps more than ever the apparatus currently in place for governance and management of the City's natural gas assets. 24 11/28/00 - WHOLE - BILL NO. 000603 I want to thank Councilwoman Tasco for initiating the governance discussion. The framework that for years appeared to suffice now seems sorely inadequate. The solution to the current quagmire, however, is anything but obvious. The Administration agrees with what it understands to be the primary goal of 000603, streamlining the governance of PGW and enhancing PGW accountability. The Administration, however, opposes the method chosen to accomplish these goals. The Administration's response is divided into several parts. The legal issues raised by Bill 000603 as well as policy, structural, and practical concerns. I have circulated to members of City Council the opinion of the City Solicitor that concludes pertinent part that 000603 is illegal. The City Solicitor will provide testimony or respond to questions explaining the basis for his opinion. The fact that Bill 000603 does not comply with the law gives the Administration independent basis for opposing the bill. I will address some of the other concerns that the 25 11/28/00 - WHOLE - BILL NO. 000603 Administration has with the legislation. Bill 000603, in effect, creates a board of directors, the Gas Commission. It would be highly politicized, but would lack the kind of industry expertise which was unanimously being considered essential to provide effective board oversight and guidance for PGW management. There's no requirement or provision made for a board of directors that would have gas industry experience or even utility experience.

No 12 provision is made for board member who would have experience at managing large organizations. Although the Finance Director is accorded right to attend commission meetings, they have no 16 control over any decisions made by the commission. In short, the Gas Commission model suffers from the same faults of the current system which exists now, that PFMC could be staffed with people who have relevant experience. If we want PGW to succeed, it must have the expertise that is available to private companies with whom PGW will be competing. In addition, Bill 000603 effectively severs all City responsibility for and control 11/28/00 - WHOLE - BILL NO. 000603 over PGW by dispersing authority for the commission appointments among the Mayor, City Council, and City Controller with none of the appointing authorities having responsibility for or control over a majority of the commission members. Ironically, a similar lack of accountability for the School District prompted City Council to propose charter amendment vesting in the Mayor complete responsibility for School Board appointments. The most significant contribution of Bill 000603 is the recognition to eliminate the multiple layers of oversight that result, in part, from PUC regulation. Currently, traditional regulatory functions such as rate-making and customer service are governed by the PUC. Responsibility for actual management of the company is vested in PFMC. However, the existing management agreement preserves for the Gas Commission approval of the PGW budget as well as oversight and management to the extent not exercised for PFMC. The result is a very confusing and inefficient web of control and oversight that frequently puts PGW at odds with 27 11/28/00 - WHOLE - BILL NO. 000603 both PGW and PUC. Bill 00603 would eliminate the confusion, but accomplish this goal by forfeiting all City oversights of its Gas Works with no 6 accountability to the city. Under Bill 000603, which the Gas Commission would assume all authority currently exercised by both the Gas Commission and PFMC as well as authority constantly not exercised by either. It accomplishes this through two expansive delegations of authority. Section 5 of Bill 000603 provides that the Gas Commission shall have all power and authority as necessary and convenient to conduct business of and to ensure the effective operation and management of the Gas Works. Bill 000603 at Section 18 provides that the Gas Commission shall represent the interests of the City and appear before the PUC Federal Regulatory Commission and all other regulatory agencies on behalf of City in any and all matters related to the Gas Works. As a consequence of these two provisions, the City would lose its authority to 28 11/28/00 - WHOLE - BILL NO. 000603 review and approve or reject even basic decisions concerning PGW. A few specific example are illustrative. Under the gas competition act, Act 1999-21 which mandated the deregulation of the sale natural gas and placed PGW under PUC jurisdiction, PGW must file with the PUC for its approval of a plan for restructuring the Gas Works no later than July 2002. In preparing that plan, basic decisions will have to be made about what kind of company PGW will become and what types of service it will provide. These questions that will be answered will have fundamental impact on PGW, the City, its residences, and businesses. For example, should the PGW continue to perform its current functions, buying gas and delivering it to PGW customers? Should PGW allow other customers to buy gas for its customers while PGW does nothing more than deliver gas, maintaining its pipes, and billing separately for the delivery of gas? What provisions would the City make for those customers who do not choose another company from which to buy gas? What provisions would the City make for those customers who are unable to find a 29 11/28/00 - WHOLE - BILL NO. 000603 gas supplier? Should PGW continue to repair gas home appliances?

Should PGW expand the appliance business itself and install gas appliances? Should PGW engage in other activities such as joint marketing of electricity or any other number of other endeavors common to today's utilities? Under Bill 000603, the Gas Commission would have the sole authority to make all of these decisions as well as many like them without any review approval by either the City or City Council. A second example underscores the problem that arises because of the interconnectedness of the City and PGW. On Tuesday November 21, the PUC issued an interim order -- entered an order in the interim rate proceedings filed by PGW. The order provides PGW with woefully inadequate rate relief, and at the same time imposes conditions precedent to PGW's receiving that relief. The order provides in part that the company shall commit -- basically requires that the City by September 30 identify and retain an independent, professional 30 11/28/00 - WHOLE - BILL NO. 000603 experienced management company and enter into a long-term management agreement with the company to operate the Gas Works. Under Bill 000603, delegates to the -- Bill 000603 delegates to the Gas Commission the sole authority to represent the City before the PUC and would give the Gas Commission the sole authority to decide in matters that clearly encroach upon the City's prerogative under the home rule laws and would have an impact on the City's General Fund. Such an expansive delegation of responsibility is simply not acceptable. Other aspects of Gas Commission control would be similarly unchecked. Bill 000603 eliminates the current requirement that the City's Finance Director approve PGW operating budget and forecasts requiring only that the Gas Commission consult with the Director of Finance. With regard to PGW's capital budget and forecast, the current requirement that the City Director of Finance make a recommendation to City Council along with the Gas Commission also eliminated leaving the Gas Commission as the sole 31 11/28/00 - WHOLE - BILL NO. 000603 body submitting a recommendation to Council. The current requirement that the City Finance Director approve both short- and long-term loans prior to City Council review is also eliminated. As long as the City's finances remain even potentially intertwined with PGW, the City must retain the right to review and approve PGW's operating budget and be involved in the development of PGW's capital budget. Bill 000603 would give the Gas Commission sole authority to negotiate labor agreements with PGW's union without any input from the Administration in a matter that perhaps moving forward challenges more directly the company's viability. It's critical to note that the Gas Commission has shared management responsibility with PGW since 1972. During this period, the Gas Commission has provided an additional layer of oversight to that provided by PFMC. Yet, both of these layers of oversight have not served to protect the organization from many of the management mistakes which now have become painfully obvious. 32 11/28/00 - WHOLE - BILL NO. 000603 It is difficult to see how the situation will be improved by removing PFMC and leaving unchanged the Gas Commission. Instead, there should be a new reconstructured and depoliticized governing body to provide professional oversight over PGW. Finally, should the City prove successful, should City Council prove successful to its challenge of Act 21, Bill 000603 would create a completely unworkable scenario. Bill 12 000603 would result in the Gas Commission with the authority of both a board, PFMC, and the a regulator, the old Gas Commission, somehow implying that the new Gas Commission would maintain a distance of regulator without repeating the faults of PFMC. The truth is that in tis function as both the board of directors, the Gas Commission would lose that separation that is essential to wield the authority of a regulator.

The Gas Commission would establish PGW's operating budget, propose a rate increase, and then decide what rates need to be put in place to support operating costs. This commingling of functions represents a independent 33 11/28/00 - WHOLE - BILL NO. 000603 oversight that would not serve the City or customers well. The governance model proposed in Bill 5 000603 would also deprive PGW of the operating flexibility that other City enterprise funds, the airport and the Water Department have long sought cumbersome, burdensome, and expensive charter constraints instead would limit PGW's ability to operate like a real world business. Bill 000603 would require PGW to conform its operations to City requirements in a management that will make PGW less efficient and more costly to customers. It will impose new obligations on PGW employees. And the testimony recites several of those constraints. There will be difficulty of meshing the residency requirements that are different at PGW. The management contracts that currently exist with the executive staff of PGW would become impossible. The union relationships with PGW would impose new challenges. There are challenges that the City Solicitor will address concerning the pensions and procurement. There are also problems that would result in the 34 11/28/00 - WHOLE - BILL NO. 000603 procurement of gas that currently is at odds with the requirements of the Home Rule Charter. My testimony is expanded in more detail in the written form. I can ask the City Solicitor to come up and comment on his opinion.

Thank you. (Witness comes forward.)

Good morning.

Madam President, good morning, members of Council. My name is Kenneth Trujillo. I'm the City Solicitor, and I understand that members of City Council have been provided with copies of the opinion that was requested by the Chief of Staff of me. I have not prepared testimony, and I am here largely to respond to any questions with respect to the opinion. I would like to note a couple of fundamental principles before going any further, however. The opinion that was requested of me was not intended to be an opinion that is answering any and all questions with respect to 35 11/28/00 - WHOLE - BILL NO. 000603 the governance issues for the Gas Works. Rather, it is an opinion that was about a specific piece of legislation, Bill 000603. So to the extent that it is a roughly nine-page document that responds to and looks at these specific provisions, it clearly was not meant to answer the many, many questions with respect to the governance of PGW. Secondly, the scheme of the Home Rule Charter with respect to the Gas Commission' role is relatively clear. At the time of the adoption of the Charter, the Gas Works was then being operated by private operators. The Gas Commission was granted the authority to exercise such powers and perform such duties as made from time to time be provided in contracts between the City and the operator of the City Gas Works or in the absence of a contract by ordinances. Secondly, it's important to keep in mind that the Gas Commission is a departmental commission. It is not the alterego of the Department of Public Property. Under the charter, each commission, each board or commission connected with the department shall 36 11/28/00 - WHOLE - BILL NO. 000603 exercise its powers and perform its duties independently of the department head and officers but shall account to the department for the expenditure of money. In other words, largely for administrative purposes. And so the Gas Commission is no more the alterego of the Department of Public Property than the Zoning Board of Adjustments is the alterego of the Department of Licenses and Inspections. Those were just a couple of the principal bases which are in my mind as we prepared this opinion, and I'd be happy to take any questions from members of Council.

I have a question or two at this time. If Bill 000603 were enacted and the Gas Commission took over the management and operations of the Gas Works, would Gas Works employees have to come within the City's Civil Service system? And if so, how would that transition to Civil Service be managed for existing Gas Work employees?

Madam President, as I think you're aware, for years there has been essentially different views, varying views of the 37 11/28/00 - WHOLE - BILL NO. 000603 role of the Gas Works employees if they were to come into the City. I think that that is one of the fundamental issues. I believe that there is a substantial probability that the Gas Works employees would be viewed as City employees. And as to part two of your question in terms of how they would be folded into the City, we have not looked at that in any extensive way. But part A of your question as to whether or not they would be considered City employees, it is my opinion that in all likelihood they would be considered City employees.

In that event then, if the bill were enacted and the gas company took over the management operation of the Gas Works, could the separate PGW pension system now maintained by the Gas Works employees be continued? If not, how would PGW pension fund and plan be merged into the City's pension fund and plan.

I will tell you, I do not have an answer to that yet. We have spent the last several weeks looking at that precise issue because, as you know, there are the PGW 38 11/28/00 - WHOLE - BILL NO. 000603 pension plan has a substantial amount of assets. And, in fact, is slightly overfunded. So that the issues with respect to it being, quote, merged into the City pension plan is not one that I have an answer to. But we are researching that issue and I'd be happy to get back to you, Madam President, on that issue.

How many employees would that encompass?

The number of employees?

How many employees would be affected?

I believe there are currently 1700 PGW employees.

If City Council should decide to vote its approval of Bill 000603, what would the Administration's response be? Would it be a veto? Would it be simply declared as illegal? What would the Administration's position be?

The Administration will veto the bill.

Okay. And 39 11/28/00 - WHOLE - BILL NO. 000603 can you tell us if this Bill 000603 is not doable, does the Administration have a proposal of its own?

The Administration doesn't have a final proposal. One of the things that I think is particularly constructive out of this, you know, that comes from Bill 000603 is an honest exploration of the issue. As Councilwoman Tasco has said, you know, that this is a difficult exploration, that she has been willing to -- and we have engaged in dialogue about how the company ought to be managed. We've had meetings where we've raised these kinds of concerns, you know, concerns about what is the City's retain prerogative moving forward, because, you know, it's not obvious what the solution you ought to be. The Administration plans to, you know, listen carefully and hope that out of this process will come a consensus about how the company ought to be managed, one that eliminates the redundancy and oversight of the company, yet retains the accountability back to the City that is essential because this does remain a City asset and must be accountable back 40 11/28/00 - WHOLE - BILL NO. 000603 to the City in some respects. But to answer you, no, there is no 4 concise proposal by the City at this point.

What actions does the Administration intend to propose in light of the fact that the recent PUC rate increase only covers approximately percent of 9 the requested base rate increase and 66 percent 10 of the requested gas cost increase? 11

The Administration is 12 reviewing with its lawyers the decision, the 13 memorandum and order of PUC that was issued last 14 week. I think it came down in two parts. One 15 part authorized GCR increase of $97 million. It 16 imposed certain conditions precedent to the 17 receipt of that. We have been advised that we 18 are entitled to file and have that effective as 19 of the 22nd of December and we're reviewing, you 20 know, what is involved in trying to secure the GCR increase. It has a profound impact on the company's financial viability moving forward. The second part of the PUC's opinion is much more troublesome. We have lawyers reviewing, it but it raises concerns about PUC's 41 11/28/00 - WHOLE - BILL NO. 000603 interpretation of the deregulation law. It raises concerns about the company's ability to meet its bond covenants and raises substantial concerns about the City's prerogative as owner and as a Home Rule Charter City. So we're reviewing that carefully. We have a number of alternatives available. We can ask for reconsideration or we can appeal those decisions, and we are in the process of reviewing the possible scenarios now. And we'll brief Council concern before any decision is made. I it's one of those issue that impacts not just the company, but has a profound impact on the City and potentially the General Fund. I'm sorry, I said the GCR will be in effect the 22nd of December. It would have been the 22nd of November.

Are the approved rate increases sufficient to cover PGW's needs?

It is our position that the gas company had asked for a $52 million rate increase, not an $11 million rate increase. And I think the memorandum by the PUC is 42 11/28/00 - WHOLE - BILL NO. 000603 interested. Even it notes that its own staff had proposed a larger rate increase than the PUC was prepared to grant. It's our position that they are not adequate, while at the same time they limited the company's relief to only $11 million. It ordered that the company maintain its pipe replacement program. It ordered that the company repair the L and G facility. A lot of the more specific orders by the PUC become much more complicated if the interim rate relief is restricted to $11 million. I think it's substantially below what it is that the company needs moving forward.

Thank you.

I mean, you know, I think that it surfaces, I think, the interconnectedness between the company and the City, you know, that if in fact we're to move forward and implement all of the things that we have to do in order to have a safe company operating within the City of Philadelphia, the funds have to come from someplace. And we're concerned that the PUC has presumed the availability of the General Fund. That's not 43 11/28/00 - WHOLE - BILL NO. 000603 what was ever intended in the deregulation legislation.

I never knew you to speak so rapidly.

I will slow down.

Okay. The Chair recognizes Councilman Mariano.

That was a mistake.

I beg your pardon?

I don't have it on.

Thank you. The Chair recognizes Councilwoman Krajewski.

Thank you. Joyce, in your testimony you state that there should be a new governing body to provide professional oversight over PGW and that these people should have experience in the gas industry. Weren't the people currently on the board of PFMC appointed by the Mayor? And number two, could you tell me 44 11/28/00 - WHOLE - BILL NO. 000603 what experience the current board members have in gas industry-related issues?

Yes, the current board was appointed by the Mayor and the board was constituted with an eye towards accomplishing several things and the people appointed to the board have, you know, bring certain traits to the position. I think one of the things the Administration wanted to do was to increase the level of City oversight over the company and so the Mayor appointed the Finance Director and me to the board of PGW. The Finance Director has previous experience operating utilities. I believe it's water utilities. And I forget what the second utility was. It was not a gas utility. I think that the Mayor also appointed Mr. McPherson to the board of PFMC. The thought was that there is a very direct interconnectedness between the gas company and the City and that Mr. McPherson brought invaluable experience and insight into navigating that course between, you know, the City's interests and the gas company's interests. Joe Rouscher, who is president of the 45 11/28/00 - WHOLE - BILL NO. 000603 AFL-CIO is a member of the board. Mr. Rouscher brings particular labor expertise. One of the things that is essential is that the company develop a closer relationship with the men and women that staff the organization, and I think that his input has been invaluable in helping the company understand and develop positions with respect to the labor issues that probably loom larger than any other issues confronting the company. The board of directors also has Hal Sargenti (ph). Who was previously an executive with the ARCO Corporation. Mr. Sargenti has brought an understanding of operating a private business that has been invaluable. I think when we think about operating the company moving forward, you know, our knee-jerk reaction is almost to go out an find somebody to run the company. You know, we do national searches. We look everywhere. We bring in people that look good on paper that barely know entrust them with the operation of the company. I think one of the things that Hal Sargenti has helped us understand is that we need 46 11/28/00 - WHOLE - BILL NO. 000603 to first figure out what kind of expertise we have in the company, and PGW has some wonderful expertise. We have some of the finest gas purchasers in our region in the company. We have people within PGW that we can grow. And I think Hal Sargenti has helped us understand how it is that you develop expertise within a company and to some extent has encouraged us to do that first before we begin looking all over the country and perhaps making the same mistake that we've made before. He's also been helpful and has been one of the people that has encouraged a larger role for the unions on the PFMC board. He has brought his expertise in management and helped us understand better how that increases the effectiveness of a board of directors. We also have Reverend Ritter on the board. Reverend Ritter has brought a certain understanding of a lot of the labor issues. PGW is also an organization that has profound racial conflicts within the organization, and as a result of Reverend Ritter chairing a committee and his involvement, we've created -- we've identified additional EEOC officers and have 47 11/28/00 - WHOLE - BILL NO. 000603 begun to grapple head-on with some of the racial problems within the company. And so while it's an organization that does not have gas utility expertise, we were unable to find anybody that was willing to serve on the board of PFMC that had that particular expertise, it's a board that was chosen with an effort to serve various needs. I think that we do not need to minimize the need, though, to have utility expertise.

And in thinking about how the company or how the City might better operate the company, it seems imperative to me that either we develop expertise within the City, perhaps within the Finance Director's Office, you know, somebody that actually knows gas industry so that you can have somebody within government that has the capacity to figure out whether or not the proposals coming from the company makes sense. About three years ago, the company proposed that it engage in the sale of electricity. And what the City really had was nobody within government that could exercise any kind of independent evaluation of whether or not that makes sense. Someplace in the constellation 48 11/28/00 - WHOLE - BILL NO. 000603 of governance, you have -- I think the City does have to have adequate expertise in order to better oversee the operation of the company. I think at the same time, the company cannot be micro-managed. When I think about Bill 7 000603 and how it plays out and notice that there are provisions that would create a staff for the board ,I worry about there being micro-management of the company. And if the company hires expertise, those people have to have enough authority to run the company and I would be concerned about having staff that micro-manages the company. But once again, I do think it's imperative that somewhere within the constellation of oversight, either at the City level or someplace, there has to be expertise that allows for there to be appropriate oversight of the company, particularly as we go forward and as the company, you know, as the City will be asked to make decisions about what the company ought to be, you know, as we go through this whole deregulation process. We have to have the capacity to think through and project where the company ought to be going, what it should be. 49 11/28/00 - WHOLE - BILL NO. 000603 Should it be the same kind of company, you know, only a pipes company. Those are very difficult decisions and we have to have the horsepower to make those decisions.

Thank you.

Mm-hmm.

The Chair recognizes Councilman Nutter. He left the room?

Oops.

The Chair recognizes Councilwoman Brown.

Thank you, Madam Chair. Good morning.

Good morning.

It's clear and evident to me that all sides agree that the performance of PGW is abysmal and you acknowledge, in fact, Paragraph 2, of your testimony that you understand the primary goals of 000603. And either for better or for worse, it's 000603 that forces us now to reckon with the fact that the status quo is unacceptable. You mentioned, however, that you, quote, oppose the method chosen to accomplish the goal. In 50 11/28/00 - WHOLE - BILL NO. 000603 acknowledging that, then, is the Administration prepared to present an alternative or alternatives for consideration today? And in not, why; and if not, when? Since we now have to reckon with where we are going to fall on this bill?

The Administration has proceeded slowly with this issue for a number of reasons. That we have been grappling with crises at PGW, quite frankly, that have been inordinately time consuming. And in our assessment, as difficult as the governance problem is, it is not the most pressing crisis facing the company. That's some of it, you know. I think that it is, you know -- I mean why not now? You know, now is perhaps as good a time as any. I think that Bill 000603, the strength of Bill 000603 is that it gets rid of a lot of the redundancy. I think the mechanism is problematic because in placing everything under the Gas Commission, you then end up in all of those side issues. You know, you end up having to answer procurement questions. You have to grapple with the pension. You have to figure out whether or 51 11/28/00 - WHOLE - BILL NO. 000603 not the employees are City employees in flattening out the oversight. The Administration, you know, we were listening to what's being said today, but it would seem that it makes sense to collapse it into an oversight nonprofit, changing the composition of that board so that you perhaps retain some of the attributes that the Gas Commission has. You have more involvement in the appointment of the board of directors without having all of the downside of having the Gas Commission in the position of oversight so you don't end up running into the question of whether or not these are now City employees. You don't end up running into questions of, you know, the whole procurement set of questions. But clearly, you know, the notion of flattening out the oversight is critical. I think the other thing that is very, very difficult is figuring out when it really is appropriate to have City making decisions. As look at what the PUC has done, as we look at deregulation, it occurs that there are certain fundamental City issues that have to be grappled with. And I think trying to identify when it's a 52 11/28/00 - WHOLE - BILL NO. 000603 legitimate City interest that ought to be represented or protected is one of the bigger challenges. I know that in sitting around the board at PFMC board meetings trying to figure out, you know, whether or not the City has an interest that needs to be represented or does the company need to be left alone to make regular business decisions are, the kinds of questions that are some of the more difficult questions to make. And I would encourage City Council to, you know, step back and figure out what its appropriate role is in overseeing the operation of the company. There is nothing in the legislation that would require that the company ever come back to City Council and be accountable. There's a lot that's said about accountability, but it's not clear. Accountable to whom? The City owns these assets. In my opinion and the Administration's opinion, at some point, the company ought to be accountable to the City. Simply tightening up the day-to-day control isn't enough. There ought to be some mechanism for being accountable back to the City. And I think 53 11/28/00 - WHOLE - BILL NO. 000603 those attributes are missing from Bill 000603.

What I've learn indeed my limited time here is that the accountability as it currently exists is simply not working. And this bill puts forth an option, if you will.

I think the current situation doesn't work for a number of reasons. One, it sets up a very confused delegation of responsibility to the Gas Commission to begin with. The Gas Commission as it was initially structured was responsible for oversight and management to the extent not operated by PFMC. So you start out with something that's very confusing. You get rid of the regulatory function. You're still left with, you know, some sense of oversight. I mean, that role to begin with is very confusing. And so getting rid of, you know -- I mean, that needs to be cleaned up. You know, and that's I think one of the challenges operating currently.

In your -- why don't you just outline potential alternatives? Why can that not then be reduced to writing so 54 11/28/00 - WHOLE - BILL NO. 000603 that we as members of this body have an alternative to look at and consider if we all agree that what currently exists is simply not working?

The Administration can develop, you know, a proposal. I think that we have -- you know, it has evolved slowly for us. I think that it's become clearer in just the last two weeks as we've seen the PUC exercise jurisdiction that we feel is substantially beyond what it is that the law anticipated. You know, some of the issue that I think didn't seem so important, you know, in terms of the day-to-day interaction with the PUC, for example. Three weeks ago, I might said, yeah, why not have the company responsible for the interaction with the PUC. Some of those kinds of decisions, though, have come into much sharper focus in the last period of time. As difficult as it is to operate the company currently, I think that we are moving in new waters and that we need to proceed carefully so we don't create a situation that is in fact worst than it is currently.

My only final 55 11/28/00 - WHOLE - BILL NO. 000603 comment would be six weeks ago or four weeks ago we were pressed as a body to consider and act on the loan for PGW.

Mm-hmm.

When does the governance issue become a priority? Recognizing that the loan was a priority four or six weeks ago.

It's a priority now.

Sorry?

Without being flip about it, I think that one of the things that Councilwoman Tasco has done is really, you know, forcing to us deal with this. And we'll grapple with this and come up with a solution. You know, I mean, I think we'll all grapple with it and come up with a solution.

Okay. Then thank you very much. Thank you, Madam Chair.

Thank you very much. Councilwoman Tasco?

Miss Wilkerson, 56 11/28/00 - WHOLE - BILL NO. 000603 on your first page of your testimony, you mention that since this early beginning more than 150 years ago, PGW has been managed by quasi-private enterprise, been municipally owned under trustee management. Municipally owned and municipal operation, could you tell me how that operation took place? And when the City municipal operated it, did the employees come under the Civil Service and was the pension -- part of the City's plan?

I don't know the details of that. I can provide further information. I was pulling from scholarly works on that. I don't know the details of how that operated.

I think that would be very important for us if someone could get that information for us. On of your testimony at the bottom you said 603 creates a board of directors, the Gas Commission, which would be highly politicized but would lack the kind of industry experience which has unanimously been blah-blah-blah. Could you compare the recent 57 11/28/00 - WHOLE - BILL NO. 000603 political impact of both boards, comparing the PFMC board in its actions and non-action and comparing it with the Gas Commission board?

I think when I was referring to politicized, I'm referring to having elected officials on the board of Gas Commission. I think that is a matter that needs to be considered carefully.

But the legislation doesn't say that the appointees by the Council are elected officials. It says the Council will have two appointments.

Part of the problem is that with 603, it's not sufficiently specific, that a lot is left up to chance and I think that -- you know, I'm not defending the current situation, but perhaps if we take the step, what we need to begin to do is identify exactly what kind of expertise we want to have in managing the company moving forward. You know, if we want to have individuals with an expertise in gas utility, we ought to say that, we ought to require that. We do that kind of thing with our Historical Commission. It shouldn't be something 58 11/28/00 - WHOLE - BILL NO. 000603 that's left up to chance. If in fact a determination is made that we want to depoliticize the Gas Commission, then I and the Administration believes that, you know, we ought to try to professionalize and try to put as much distance between politics and the operation of the compete. We ought to go on and say that that, you know, although City Council appoints, perhaps there should be no elected officials. The Mayor shouldn't be serving on the Gas Commission, Councilmembers shouldn't be serving on the Gas Commission, that what we want is a Gas Commission, you know, that brings expertise to the table. And the current situation is not adequate, and I don't believe that Bill 000603 creates the level of assurance that we ought to have moving forward.

It seems to me, having worked on this board since 1992, that the Gas Commission Board has exercised independence even though there were elected officials on the board to the point where, as opposed to PFMC which was appointed solely by the Mayor and we heard testimony during the course of the request 59 11/28/00 - WHOLE - BILL NO. 000603 for $45 million, how the board members would not make a decision without the approval of the Mayor, particularly around the finances relative to a rate increase. The Gas Commission Board appointed two by the Mayor, appointed two by Council, just happens that two happen to be on Council, made a lot of independent decisions to the point where the two Mayor's appointees, one was not reappointed because he did not follow the dictates of the Mayor and one was removed at a meeting because he wouldn't take the dictates of the Mayor. So seems to me that board has been the most independent board of the two boards in making the decisions relative to what PGW is all about. So I don't -- I think that has been less politicized than the other board.

Councilwoman, may I also add that it seems to me that if the Council's appointees to the board are people who wanted to be on the board and it seems to me that if Council can represent 1.5 million or some 180,000 people, I think they're professional enough to certainly serve on any board, any board that deals with the gas company 60 11/28/00 - WHOLE - BILL NO. 000603 or the ratepayers' money. If we're entrusted, certainly, with the welfare of the public, I think we can serve on any board in this City or in this country. Sorry, I had to say that.

Thank you, Councilwoman. And it's been -- there is nothing in the legislation that says that the Mayor can't appoint qualified people with gas industry experience to the board. It doesn't say anything where the Council can't appoint someone with gas experience or business experience to the board. The board independence is certainly better for the ratepayer in the end because their decisions are based on the information -- that's why we run into trouble with the Mayor sometimes because as we receive the information before us, we act on the information that is before us based on documentation based on information. You could call this entity anything you want to, but what we want to do is make it independent. And we're in the business of politics, so you're not going to ever take politics out of anything. But at least we need an independent board that can act independently and make decisions on the company 61 11/28/00 - WHOLE - BILL NO. 000603 without the political influence of the Administration. A rate increase was needed for PGW sometime ago. It didn't get made because of the political will of the leadership that is identified here as you say the City. So that's one of the questions I had. And I certainly would like to know how it operated when it was a municipally owned. Evidently it was okay and the employees did not become civil servants and the Pension Board did not -- the City did not deal with PGW's pension board 'cause all of that has been separated from time beginning.

I think the answer may lie in the charter that was in place at the time, but we will get you additional information. Just in terms of looking at the board composition, I think that as long as, you know, we're talking about changing the governance, what we want to do is try to institutionalize requirements that accomplish what it is that we want to achieve. If we want a professional oversight, I don't think it ought to be left to chance that we have professional oversight. I think we ought to go on and mandate that we have 62 11/28/00 - WHOLE - BILL NO. 000603 professional oversight. If we think, you know, that the Finance Director ought to be on the board, I think we ought to go on and require that not leave matters like that to chance. You know, and that's what, you know, as long as you have two members appointed by two members and then one and don't impose any kind of requirements on who it is that you want to have serving as the board of directors, it is simply left to a matter of chance. And we are vesting so much responsibility or you would be investing so much responsibility in the board, I think that it's a mistake to leave something like that to chance.

We'll accept a friendly amendment. I'm finished.

The Chair recognizes Councilman Kenney.

Thank you, Madam President. Good morning. I want to go back a moment to the issue of politicalization of the board, which is the concern of the Administration now in this particular bill. It's my understanding, and this 63 11/28/00 - WHOLE - BILL NO. 000603 is kind of moving forward with Councilmember Tasco's comments and questions, that the Philadelphia Gas Commission at least twice in seven or eight-year period recommended a needed rate increase that was apparently ignored by the PFMC board. I guess the question I have is if you take a board of the Gas Commission which is composed of elected officials or elected officials' appointees and they, in fact, recommend raising rates, which is the last thing that any elected official wants to do, it's tantamount to asking for a tax increase, if they saw the problem and had the courage to ask for the increase, do you have any speculation as to why the PFMC Board would not have gone along with that and did what was necessary then which may have avoided today the dire fiscal situation of the board as we sit here or lending them $45 million which we'll never see again and having inadequate increases in the PUC requests for a rate increase? Could you speculate as to why politicians would argue that they should raise rates when needed but non-politicians who were supposedly apolitical would deny that rate 64 11/28/00 - WHOLE - BILL NO. 000603 increase request?

I think it goes back to -- I think it was -- I don't know why it was. It could have been -- it could have very well been a political decision because you do have -- you have the relationship between the City and the company- that does not always work to the interest of the company. I think that what the challenge is, is to create a board that is sufficiently independent of any political consideration and I think you do that by clarifying the relationship between the City and the company, you make the delegation of responsibility very clear and would do that by limiting the City's ability to impact something like rates through impact over the budget so that the actual decision about rate increases is made -- you know, the City's opportunity to impact that is made through the budget and make it clear that the City has no role in impacting on the rate cases.

It would seem to me that that political decision was made by the Mayor, who at that time I guess was Ed Rendell. 65 11/28/00 - WHOLE - BILL NO. 000603 I don't know whether it was in consultation with Council President or not because I know we had a very close co-executive at that point. That political decision not to do the right thing then is the exact thing, I think, that the Administration is now arguing that this bill will do. I mean, one of the problems I think with PFMC has been there insulation. They've been insulated from everybody but the Mayor. And my understanding, in addition to rate increase requests, there are other orders issued by the Gas Commission that were simply ignored, not carried forward not even responded to. To me, independence is good; insulation is terrible. And if you're insulated from everybody but one elected official in the City, I think that's a recipe for disaster and I think based on the overall cost of gas that we're faced with, but that other $52 million number on the base I think is a result of mismanagement by people who were appointed by a mayor who apparently had extensive utility experience. The guys who have been indicted, I understand, have tremendous utility 66 11/28/00 - WHOLE - BILL NO. 000603 experience. Looked great on paper and independent of all politics and all of that stuff, and we wind up with a company that is basically bankrupt. And I've said from the beginning, and I'll say it again, I think at some point in time -- and I do support this particular effort. At some point in time, we need to look at selling this utility under the right circumstance in the right way with the right protections for employees and for seniors and everybody else. But at some point in time, there's got to be utility -- before looking for utility expertise to run it, why don't we just get people who run utilities to run it as opposed to find somebody to continue to put their fingers in this dike that's going to collapse eventually. If you have any comment, I'll be happy to...

When I look down the road at some of kinds of decisions that are going to be paramount for the company and try to figure out what kind of governance, what kind of management do you want, I mean, you just think 67 11/28/00 - WHOLE - BILL NO. 000603 about something like that labor agreement and -- and, you know, -- you know, I mean, that is going -- that is probably the most challenging issue that the company's going to have to face moving forward, you know. And it's -- it's -- it's, you know -- you know, I think you want a board that is independent that's going to be isolated from a lot of the kind of, you know, the political pressure that is going to be inherent in that whole process.

I would agree isolated but, again, not insulated because if you're isolated and insulated from any other elected official but one, I think that that -- they say, what is it? Power corrupts -- absolute power corrupts absolutely. If there's only one elected official, whether this mayor or the next mayor or two mayors ago, three mayors ago. The problem was in '72 when they took UGI out, created PFMC and insulated them from everybody but one elected official, one politician.

And I don't see how 603 by simply having the appointing authority how you end up with accountability. I think that's 68 11/28/00 - WHOLE - BILL NO. 000603 one of the shortcomings, that you don't have anybody responsible for a quorum of the board, you don't have anybody that at the end of the day you can point to and say, you know, The company's going astray, the company's making the wrong -- you know, who's responsible for the company. And that's what you don't end up with when you spread the responsibility as thinly as it's spread with 603 and have no link back to the City. I mean, there is no day of reckoning when the company comes back to the City or City Council and says, you know, "This how performed." There's no 14 mechanism for that. And while you may end up with -- you may end up with a board that has more people appointing, I don't see any attributes of accountability.

The one way I think the company becomes accountable is if PFMC gets out of the way and if it's the Gas Commission or some other entity, the responsiveness has come back to that entity. I think the frustration -- the reason that we're here with 603 today, in my opinion, is because the commission attempted to do the right things 69 11/28/00 - WHOLE - BILL NO. 000603 in a number of different areas, including rate increases. PFMC basically thumbed their nose at them and said, "We're not doing it because you can't do anything to us because we only answer to the Mayor." And I think the frustration level at the Gas Commission became such that this is product of that frustration, and I can't see, frankly, how doing this could be any worse than what's been done to that company over the last 30 years. Let me ask you a question about employee residency issue. How did PGW employees get the opportunity to become nonresidents in the first place?

I don't know the answer to that.

I suspect --

It's probably like every place else in this City, it was not thought to be important. Eventually when it was decided that it was important, a residency requirement was imposed. People were grandfathered in. And so you end up with a residency requirement and 70 11/28/00 - WHOLE - BILL NO. 000603 people's residency that's all over the board. It probably happened the same way that the School District --

That's my point. Where leading to this is that we may have maybe 40 percent, 35 to 40 percent of our school teachers or school employees who are not City residents. When it was reverted back to being required to be a City resident, as at the Gas Works, it was reverted back to be city resident, as I understand, need to be a City resident now to work at the Gas Works?

Mm-hmmm.

All of those people were exempted who had moved in the first place, so the issue of residency, from my perspective, you would never be able to force a 15- or 20-year employee of Gas Works to move back into the City. I can imagine a court that would allow that once it was challenged to require that person to move from Springfield or Bucks County Montgomery County or Jersey into Philadelphia after 15 or 20 years of employment. So it would be my suspicion that if 603 passes and the 71 11/28/00 - WHOLE - BILL NO. 000603 provisions that the Solicitor and the Administration are concerned about on residency, it would be for employees going forward, which I don't necessarily think and maybe Councilman Clarke or a couple others who have expressed concern about this, might be a good thing that everyone who comes into the system needs to be a City employee. I can't imagine a scenario where we would require long-term employees of this utility that have been allowed, I think mistakenly, to move out of the City to be required to move back into the City. And I think in some ways that argument is a bit specious as far as the opposition to this bill.

The charter requirements are what they are. And I think the Councilman raises a very good point, but the requirements don't change. If they do become City employees, they become City employees an all charter applications that apply to a City employee would apply to those employees.

Theoretically. Theoretically, not necessarily practically.

If -- 72 11/28/00 - WHOLE - BILL NO. 000603

Hypothetically, if we were to move forward with this bill and the employees union was told by the new governance body that everybody who works for this company now has to sell their homes and move back into the City, I can't imagine a circumstance where a judge, whether it's a Common Pleas Court judge or a federal judge would require that to happen and then, therefore, there would be some line of demarcation with the old employees and the new employees. So when those kinds of arguments are raised, to me, it's like kind of taking shots in the dark that this is the reason why we can't do this, and I think that it's weak. You may be correct -- you may be correct as the charter states, but I think in practicality, that would never happen and that all future employees going forward would be City residents. And I don't necessarily think that's a bad thing. Thank you, Madam Chair.

The Chair recognizes Councilwoman Tasco.

I'd just like to expound on that, Councilman Kenney, for your 73 11/28/00 - WHOLE - BILL NO. 000603 information. We're going to have some testimony to respond to this issue of residency and pension and Civil Service, which we do no agree. But in any given case, there a residency requirement for PGW employees now. They have to live in the City. Prior to 1993, there was a domicile requirement, and I think all of this came about as a result of Councilman Street at that time in 1983 raising the issue of residency. They implemented a domicile requirement and grandfathered those people who were employed with PGW at that time that they did not have to move in the City, they were grandfathered in. But as of 1983 on, all employees had to live in the City of Philadelphia, not just residency because of a -- and then in 1993 when there was an attempt to hire a CEO that did not live in the City but said she would have a residence in this City, which became in very strong argument at that time, the City, the Mayor decides to eliminate the domicile requirement and make it a residency requirement again. So now if you have adequate funding, you can live someplace else but have a residence in Philadelphia still be employed by PGW. That's 74 11/28/00 - WHOLE - BILL NO. 000603 how it was interpreted with the past administration, although we as part of the City review residence as meaning living in the City of Philadelphia. So, again, because of the one entity in control, it did flip back and forth and in opposition and over the objection of the Gas Commission relative to the issue of domicile or residency. But, again, we made our point against changing it from domicile to residency but, again, without having any teeth could not enforce it to be a domicile issue.

Point of information. What is the current situation now; is it domicile?

All employees as of 1983 have to live in the City of Philadelphia.

Domicile.

Well, as of 1996, it became back to a residency issue. If you can afford to live someplace else, you can live someplace else.

You can use an apartment in South Philly and a home in... (Off the mike). 75 11/28/00 - WHOLE - BILL NO. 000603

Right. That's the way it's interpreted.

PFMC decision or --

That was a Mayor's decision, PFMC decision.

That was an issue, as I recall, that was a hotly disputed issue back at the time in '96, '97. And we can, you know -- somebody was, you know, did not -- ended up not working for the company because they weren't willing to move into the city or establish -- and it was at that time City negotiated with PFMC what the requirement was going to be.

I just have another one. What's the current -- do we have it broken down now by employee complement as to who is domiciled from the City and who is a resident of the City technically? I mean, do we have any idea who actually plays that is game?

We can get that information.

Is that higher-level employees. I mean, do all of our 76 11/28/00 - WHOLE - BILL NO. 000603 current management employees domiciled in Philadelphia?

I will get that information, try to get it by the end of the week back to you exactly who lives where, if anybody's gotten any kind of waiver.

And the waivers would be for?

I don't know if that there are any. I will get you whatever the information is.

Because I remember back at the School District waivers were for teachers of chemistry and music and Greek. And then all of a sudden we had bus drivers who were living in New Jersey with waivers that were given to them, custodial workers who were given waivers to move out of the City. So I would be really interested in knowing who actually goes home and puts their car in front of house every night in Philadelphia and who plays the game. Thank you.

Thank you. The Chair recognizes Councilman 77 11/28/00 - WHOLE - BILL NO. 000603 Clarke.

Thank you, Madam Chair. I want to ask a question that I kind of get asked on the street, and it relates to the Water Department and the gas company and I think -- and I know Kumar will agree with me that we think that we have probably one of the better run water companies in the nation from what I've been told; is that right, Kumar?

Exactly.

I knew who to ask that question. I want to get a sense of what the similarities are and the differences are between the Water Department and the gas company and what would have to be done to the gas company to make it a well-run company such as the Water Department.

Let me ask Kumar to come up as an expert witness. (Witness comes forward.)

Good morning my name is Kumar Kischinchand. I'm the interim CEO 78 11/28/00 - WHOLE - BILL NO. 000603 at Philadelphia Gas Works. Councilman Clarke, the difference is essentially related to the charter conditions that apply to the Water Department that do not apply to PGW because it is run by the nonprofit board. The primary differences are procurement. For instance, anything that we purchase within the City above $11,000 has to be an open bid --

I don't think they can hear you.

Anything that we purchase above $11,000 has to be advertised, it is an open bid and it takes a long time to purchase. The gas that we purchase is bought on stock market on many occasions. These are millions of dollars worth that we invest into the purchase of gas so we can lock up the prices. Under the City Charter under the procurement rules that I am familiar with where you would not be able to have that kind of a flexibility. The Procurement Department would have to go through their processes. In personnel, for instance, the gas company requires special expertise particularly 79 11/28/00 - WHOLE - BILL NO. 000603 when it comes to purchasing of the gas, the supply of the gas, the transport of the gas. That kind of expertise is very difficult to get under the Civil Service constraints that we work with where you pick either number one or number two from a list of people. So many of these things impact us. And PGW, for instance, we do not have to maintain a huge inventory of materials and supplies and equipment as we do in the Water Department. And the reason for that is, it takes about 150 days to get a large purchase order through the procurement system, whereas, at PGW it's a matter of about days or so. So our inventory costs 16 are reduced a great deal. Our warehousing costs 17 are reduced a great deal. Our advertising costs 18 are reduced. Right now, I think we looked at 19 advertising for everything that we purchased 20 above $11,000, our costs for advertising would go 21 up to about $1.8 million. Whereas, now we spend 22 about $50,000 or so. 23 So there are incremental costs 24 associated, with it, the inefficiencies 25 associated with the gas -- with the City 80 11/28/00 - WHOLE - BILL NO. 000603 processes that are not associated with PGW.

So in spite of those numerous burdensome regulations, the water company is still able to run an efficient organization. Why is that?

If you recall, back in 1990, the Water Department was under three consent decrees because it could not operate efficiently. And one of the reasons -- I should say, perhaps some of the reasons were as a result of procurement and personnel issues. We worked with the Procurement Department so that we got special dispensation on how we purchase. In fact, they set up a special -- I remember a petty cash account that was twice the amount that any other City agency had and it was segregated that we could go there and get that. Our purchasing processes were streamlined to the point that we could go out and do the repairs, contract out much more rapidly because there were specific constraints placed on us by EPA under those consent decrees to meet certain deadlines, and that's one of the reasons -- that's one of the ways that we got out of it. And we during that 81 11/28/00 - WHOLE - BILL NO. 000603 time worked out processes. And, of course, the procurement process has improved a great deal since the early 1990s. I think Commissioner Applebaum has done a marvelous job in turning those things around so that I understand that the Water Department does not have the number of significant problems that they used to have in the late '80s and early '90s.

So are you essentially saying that it may require a charter change or consent decree to create a similar environment at PGW if we wanted to run it as a municipal department?

You would have to develop a great deal of flexibility. I think one of the biggest ones will be purchase of gas would be a very difficult one to -- and I'm not sure how you could do that on the stock market when you are trying to lock up prices, low prices, and continual costs.

Okay. I think Councilman Rizzo.

Madam Chair, may I follow up? 82 11/28/00 - WHOLE - BILL NO. 000603

Yes. The Chair recognizes Councilman Rizzo.

Thank you, Madam Chair. Commissioner, Councilman Clarke introduces an interesting concept. In the utility industry, I think we are all aware that many utility companies have gas/electric utilities. Are there any municipally or privately owned gas/water companies that you know of that run as one organization?

I know of the water and electric utility on the West Coast that's Los Angeles Water and Power. I don't know if there's a combined gas-water utility.

Well, if there was ever a natural relationship, it's water and it's gas because they're both underground, they both run through pipes. Could there be -- in your opinion, could these two companies join hands in any way, even if it's just in a management arrangement? Is there a way that the water and the gas company could become one but really be somewhat separate? 83 11/28/00 - WHOLE - BILL NO. 000603

Certainly, there are options available, various different governance structures that you could develop that would allow that to occur, and there would be sharing of costs associated with running those companies. Both have pipes, both of them have meters. We have, in fact, the same automatic meter-reading devices in water as we do in gas. We could share that, for that matter, have a partnership developed on that. So there are similarities and it could be done, yes.

So in other words, do you think that there should be some exploration to that possibility or you don't think that's even a realistic possibility?

I'll leave that to Joyce Wilkerson to respond .

I think that there are a lot of things that deserve exploration. For example, the Call Center is one thing that comes to mind. The water company has -- the Water Department has a Call Center. PGW has a Call Center. That, you know, if we look at how we could do business better moving forward, 84 11/28/00 - WHOLE - BILL NO. 000603 something like collapsing Call Center operations. If the rest of the structure were put in place, that might be the kind of thing you might want to investigate. Fleet Management, you know, PGW has it own fleet of vehicles. You know, the City has a Fleet Management operation. I mean, if you were going to talk about a completely different governance operating structure, you know, you would look at a lot of those kind of issues that 10, years ago might have seemed unwieldy are 13 the kinds of thing that folk are looking as you 14 try to figure out what the right size of 15 government is. I think Mr. Hershey wanted to talk a little bit more about companies that manage different functions.

Thank you. My name is Steven Hershey. Councilman, with regard to the one question on whether there are municipal utilities that provide both gas and water, Memphis is one example where they provide both -- they provide gas, electricity, and water in a 85 11/28/00 - WHOLE - BILL NO. 000603 municipally-owned environment. With regard to the question of combining PGW with the Water Department, I think there are interesting issues to explore and may very well one may find efficiencies that could be realized. In terms of actually combining the two, there are major hurdles that would have to be looked at very carefully. For example, the differences between the pension systems, the union representation, just to name the first two that come to mind. Not to say that they are completely insurmountable, but they would be very difficult. In terms of combining certain functions, and Miss Wilkerson mentioned Call Center, billing operations, things like that, that's certainly something that could be explored. My recollection is that about ten years ago there was a conversation which explored the possibility of installing joint automatic meter reading equipment that would read both gas and water meters. That slipped by, and now both companies have separate automatic meter reading. There's still potential and we need to explore that possibility. You're correct. 86 11/28/00 - WHOLE - BILL NO. 000603

Well, thank you. I guess my final comment is to the Chief of Staff. Rather than in many occasions just talking about things here and never seeing anything ever occur after we talk about it, what can you, Miss Wilkerson, tell me today a serious look at all of these various scenarios before we talk about selling the gas company, before we talk about a private management company. Apparently, we already have a very good management company in place, all the management of the water company. So what I'd like to know, all of this that we just discussed, what's going to be the follow-up to have a serious discussion about some of the possibilities of collapsing the Call Center, about combining fleet management, and all the other things that we do. When we do an excavation to replace water pipe, do we also at the same time kind of take advantage of the economies and replace gas mains and services? So I'd like to know rather than just talking about it today, are we really going to do something to look at this and look at it seriously?

In some of those 87 11/28/00 - WHOLE - BILL NO. 000603 instances, Councilman, we already work together with the gas company. I have a hard time whether I'm with water and gas. But anyway, both water and gas work together. In fact, we have a utility committee which looks at all of the underground infrastructure that needs to be replaced, includes electric, gas, water Streets Department is a participant in that, as well as Bell Telephone. So we do work very closely, so when water is going to go and replace a sewer or water main, we always check with the gas company and the other utilities to see if they have any underground work. So there is a great deal of coordination already that goes on. But you're right, there are other functions that could perhaps be combined, yes.

What you're asking for is what's the Administration's proposal to come back with the structured evaluation of different management or different operating scenarios. And we're currently looking at different alternatives. We can come back with a proposal, you know, to review in a systemic way a lot of these issues. I think some of them are 88 11/28/00 - WHOLE - BILL NO. 000603 going to come up as a result of the PUC's involvement with the company. It has been undertaking management audit and looking at how company does business, but we can get back to you. There are any number of scenarios. There's has been a proposal that the company be placed in an authority. I mean, there are any number of alternatives that are under review.

I appreciate that because we are always talking about the extreme before we take some steps to make it a better place, so I would appreciate that really truly being considered. Thank you, Madam Chair.

Thank you. I believe that Councilman Clarke yielded to Councilman Rizzo.

I just wanted to follow up to get some clarity.

Mm-hmm.

Under one of the scenarios, absent a lease, the Department of Public Property has jurisdiction over the gas company. If somehow that were to happen, I need 89 11/28/00 - WHOLE - BILL NO. 000603 to get some clear understanding of what would have to happen in order to operate with the level of efficiency that would be required for the gas company as it relates to the procurement process and as it relate to the hiring process. Would that require a charter change, would that require some kind of consent decree, an executive order? Because those appear, based on Kumar's testimony, to be the two primary concerns as it relates to PGW running a company similar to the Water Department, your inability to purchase gas under the procurement process and your inability to hire people who are qualified to the degree that you would need to run that company efficiently under the current Civil Service process. Could you tell me what would have to happen from a legal perspective?

From a legal perspective?

Let me first clarify. And there was earlier some discussion about the residency requirement and I wanted to clarify with Councilman Kenney. The residency requirement is not an issue that is some 90 11/28/00 - WHOLE - BILL NO. 000603 insurmountable issue. The residency requirement is a charter-created requirement as to exempt employees. So the residency requirement as it relates to Civil Service employees is something that comes from the personnel director and, in fact, there is an exception that can be made. So that's not an issue that is -- it's an issue, it's not an insurmountable issue, and I had clarified with Councilman Kenney. I think one of the significant issues is the issue of competitive bidding. The charter, Section 8-200 mandates competitive bidding and that's not limited simply to issues or with respect to money coming out of the City treasury, it requirements competitive bidding. And so that, I think, is the issue that Kumar was speaking to. And my understanding is that the kinds of purchases that have to be made by the gas company on the market right now requires them to act much more quickly than the procurement process currently allows.

My question is, what would have to happen to allow them to do that? 91 11/28/00 - WHOLE - BILL NO. 000603

Well, from a legal perspective, I will tell you, we have to take -- we have not looked at that issue in terms of looking at the that 8-200 and would can be done to -- we've looked at a number of different issues, but we've not looked at how you can get to spot bidding or the 21-day or the kinds of time periods that Kumar has been talking about in terms of whether it requires a charter change. My initial reaction is that you got to look at the charter first because that's the most significant legal impediment is the fact that you do have the competitive bidding requirement. Mr. Hershey reminds me that there's also long-term contracts that are beyond the four years, that are in place that are beyond the current charter scheme.

And on the hiring?

I think in both long-term gas supply contracts and in employment, particularly top-level management.

Maybe I'm not being clear. I'm just trying to get a sense for 92 11/28/00 - WHOLE - BILL NO. 000603 what would have to happen legally, charter requirement, in order for us to do that. We have a company right now, the City of Philadelphia, that most people say is well run, particularly, Kumar, right? And it has these regulations that, at best, are burdensome. And in spite of that, we are able to run that company relatively well. I'm trying to get a sense of if we were able to run the company similar to the Water Department, what would be required legally, charter-wise or whatever, executive order, to allow us to run that company similar to the Water Department.

We can develop that. What it would look like if we wanted to bring the company back into City ownership, you know, what are the various charter amendments that would need to be proposed, what are the legal issues. You know, we would have to flush out in more detail how the pension comes back into the City. I think that if that's a proposal that you want to have analyzed, we can do that and come back to you with specifics rather than just trying to, you know, identify issues that are a problem, come back with what a proposal would entail, an 93 11/28/00 - WHOLE - BILL NO. 000603 actual implementation proposal would entail.

Yeah, I'd like to see that for a number of reasons.

Mm-hmm.

We talk about the politics involved in the gas company. As a ward leader, I've never been able to get a job in the Water Department for one of my committee people, so it is definitely not political over there. So I would like to look at all aspects of the possibility of doing something like that.

As Miss Wilkerson said, the other constraint that would be imposed on PGW is that there would not be a long-term management contract. So if you want to do bring somebody from the outside to run the company as a CEO, CFO, et cetera, most people would like to have contracts that extend beyond just one year, which is what you are limited to at this .Point and I'm told that, in fact, there were issues raised by some other agencies, independent agencies, that were limited. Those are some of the other issues that need to be looked at.

Just to put this in 94 11/28/00 - WHOLE - BILL NO. 000603 perspective, the Water Department doesn't need to worry about spot market purchases of water or long term. They get it out of River so --

No, I understand that. I just need to know what we'd have to do, what flexibility we'd have to have as a company.

But that issue kind of is very much related Councilman Rizzo's question about why do we have this dramatic difference. Well, there are some inherent differences between the Gas Works and the Water Department in terms of the type of service that they provide and where they get their basic material that they're supplying.

I understand. We have a lot of water. I understand. Thank you. Thank you, Madam Chair.

You're welcome. The Chair recognizes Councilman Nutter.

Thank you, Madam President. I wanted to try to understand -- 95 11/28/00 - WHOLE - BILL NO. 000603 well, maybe first I'll ask, they're a little far from me now, but I did go over to take a look at them. Is there agreement on at least the chart on the right in terms of its accuracy of the portrayal of what we're currently facing in terms of oversight and involvement?

I didn't hear the explanation. Well, I didn't have the chart in front of when the explanation was given. I think that if -- I mean, what it depicts to me are, you know, players that have an impact or some say over how it is that the company operates. I think this does identify in schematic form a lot of those influences. I think it minimizes some, I think. For example, saying simply PUC impact minimizes, you know, the levels of State involvement in the kinds of decisions that are made at the PUC level. And so I think it, you know, it simplifies some of...

I mean, it certainly is not a minor thing in terms of the PUC. I mean, their authority is over rates; is that correct?

Rates and customer 96 11/28/00 - WHOLE - BILL NO. 000603 service.

And customer service.

I think one of the things we'll be exploring in the coming weeks is the exact nature of their authority.

But they're not directly involved in the general day-to-day operations of the entity.

Well, that's one of the things that we'll be exploring in the coming weeks. I think that if you look at the order that was issued last week, one of the things it indicates is the companies to comply with the management audit. The management audit is not complete yet, but it will go to a lot of the kinds of, you know, how the company actually does business kinds of issues.

What do you mean? What management audit are we talking about?

Part of what was required by the deregulation law is that the PUC undertake a management audit of PGW. I believe it started last May. It is supposed to be 97 11/28/00 - WHOLE - BILL NO. 000603 completed in December and --

This December?

That's right.

Who's doing that?

The PUC has a master contractor, various subcontractors that have looked at Call Center operations, you know, virtually every aspect. Mr. Kischinchand can talk more specifically about that.

There's a consultant that was hired, Barrington Wellesley, that's a management consulting firm. They've been doing it under the direction of PUC, although PGW is paying for that particular audit. PUC did involve our management in the selection process, and it was very amicable at the time.

Well, we'll see how it all works out. So they're doing that and you're saying that the PUC issued an order last week saying that you have to be in compliance with whatever comes out of this management audit which has not been completed? 98 11/28/00 - WHOLE - BILL NO. 000603

That is correct. One of the requirements is that if we do accept this rate increase that they have allowed, which is only $11 million, that one of the conditions would be that we carry on with the recommendations that come out of this particular audit.

Do we have any sense today of what recommendations might be or what they're looking at or what they care about?

The staff has received a few draft chapters in that audit, so it's not complete at this point. At this point, the little that I have seen in that draft form doesn't give us heartburn, but we don't know. There are a number of chapters that we have not seen. We don't know what will be in that.

Do you anticipate such an audit would lay out in general terms or detailed terms about certain operational aspects of PGW or that you might have to change how you do X versus Y? I mean, do you anticipate any monetary costs to be in compliance with this audit or to change the nature of business? 99 11/28/00 - WHOLE - BILL NO. 000603

There is likely to be monitoring implications to any new initiatives that we may have to take as a result of that. We have not analyzed that because we don't know what that might be. For instance --

What kinds of new initiatives could we be possibly talking about at PGW.

Could be expanded safety requirements, expanded examination of our underground infrastructure for safety purposes, leak detection, it could be a number of things of that nature that could affect us operationally.

And has there been any indication that if there are additional monetary costs for compliance that there would be additional monetary resources available for such compliance?

The last rate increase order which came out a few days ago would not give me any comfort that we would get more consideration than we have received so far.

Okay. In your view, what would be the difference -- I'm just 100 11/28/00 - WHOLE - BILL NO. 000603 really trying to understand all of this. What would be the difference between PFMC oversight as presently exists versus PGC oversight as envisioned by the bill? What would be the difference in terms of what would happen down there or who does what or who has responsibility to whom?

I think if the PGC were a nonprofit and not City commission so you could take all of the procurement issues off the table -- I don't know if that makes any sense. You know, if you had a PFMC board, two members were appointed by City Council, two by the Mayor, and one by the Controller and you got rid of the Gas Commission and had that be the governance mechanism, I think you would end up with a lot of the multiple layers of oversight eliminated. I think you would end up with a very problematic accountability back to the City.

Why is that? I don't understand. All of those players are members and components of the City. They all have responsibility to somebody. We all work for somebody. I mean, why -- 101 11/28/00 - WHOLE - BILL NO. 000603

I think something as simple as the memorandum that came down last week, I think that if you take away the issues about --

What memorandum?

The order, the PUC order that came.

I'm sorry. I wasn't on the distribution list.

That was, I believe, distributed to members of City Council. That was what Mr. Kischinchand was just discussing. There were to orders issued by the PUC last week. One in the interim rate case, the City had asked for $52; the PUC awarded $11 million and established various conditions precedent that required that by September 2001, there was to be identified a management entity and a five- to ten-year agreement entered into with the entity and all responsibility for budgeting and operation of the company be turned over to the management entity. It also required compliance with some of the things, you know, with the management audit that is to be promulgated shortly. It required, you 102 11/28/00 - WHOLE - BILL NO. 000603 know -- and then it had a number of other requirements. The second part was an order that granted the $97 million increase in the GCR, subject to certain conditions.

Now, you said that there was a request in for 52 million and you only got 11?

That's right.

Why was that? And I thought in some previous testimony we had been told that the staff in Harrisburg or somebody in Harrisburg had suggested that we even ask for more. I mean, I don't -- were they mistaken? I don't understand how you ask for 52, you get 11, and the folks said you should have asked for more. I mean, if we had asked for more, would they have given us 15?

Councilman, there were two separate cases. One was an interim rate case in which asked for $52 million and got 11 million. The 11 million in that case --

What was the 52 103 11/28/00 - WHOLE - BILL NO. 000603 for?

Base rates as opposed to gas cost rate.

All right.

The $11 million granted by the PUC in the interim rate case was substantially lower than we had asked for and substantially lower than, for example, the state consumer advocate and the Commission trial staff had recommended.

I thought you had all of those politics worked out.

It's been a challenge. The second case was the gas cost rate in which we had initially when we first for a whiled asked for $97 million increase. Subsequently, the gas costs continued to rise as the hearings were going on and the Commission trial staff and other parties recommended that we ask for substantially more, up in the neighborhood of 150 to $160 million. In our final brief, we changed our request to reflect the changes in gas costs, increased our request from 97 million to 120 million, and the 104 11/28/00 - WHOLE - BILL NO. 000603 Commission gave us only 97 million, with some opportunity, though limited, to file a request to have our gas cost rate more accurately reflect the gas costs that we're experiencing in purchasing our gas today.

What's the $41 million shortfall in terms of $52 million rate relief request? What does that do to your financials and how does that impact and have you made new financial projections and how impact on the Council-approved $45 million loan?

We're finding all of that. I would like to have the opportunity to put that together and perhaps set up a briefing later on this week with Councilmembers to talk about, you know, to talk with the lawyers about what the assessment is of the situation currently to talk about, you know, what the picture looks like if we just get the 97, if we get the 97 and the 11, and what the various strategies are for addressing the various scenarios.

Just to refresh my recollection, the projections that we received, did they anticipate both the 97 and the 105 11/28/00 - WHOLE - BILL NO. 000603 52?

I believe we were -- the worst-case scenario we gave anticipated, I believe, anticipated $27 million in the base rate, in the interim rate, and projected $97 million on the GCR.

So even there, you're short. 10

Yeah, but, you know, 11 as we've indicated, receipt of the $11 million 12 was made contingent upon the City's acceptance -- 13 not the City's acceptance. The company's 14 acceptance of the whole management scenario, the 15 provisions of the management audit. If in fact 16 there is not agreement with that, the $11 million increase would not be available.

The 11 million will what?

Would not be available, will not be available.

If?

If the company does not agree to the conditions precedent which include compliance with a management audit, 106 11/28/00 - WHOLE - BILL NO. 000603 identification by September 2001 of a management entity, and I think there are probably about 4 conditions altogether. If those are not -- if 5 there is not an indication of acceptance of those 6 conditions precedent by letter, then the $11 7 million interim rate relief would not be 8 available to the company. 9

Okay. Let me go 10 back to some of the items raised in the opinion, 11 because I'm still trying to understand much of 12 this. 13

Can we take a short 14 break before? 15

No. This is one of the few opportunities I get to say that. It's not my call, actually. (Laughter.)

I'm just asking questions. I'm taking advantage of the president being out of the chair, so you have to ask the majority leader, otherwise, I'll just keep asking questions. There's been an appeal made to the Chair. 107 11/28/00 - WHOLE - BILL NO. 000603

Since the president is in the room, I will defer to her. Madam President?

There's a crisis pending.

There's been a request for a short break. You're interested in a short break?

Yes.

All right. How about a ten-minute break? All righty, a ten-minute break, everyone. (Break taken.) - - - (Proceedings resume.)

I believe Councilman Nutter had the floor.

Thank you, Madam Chair. It's my understanding that Councilman Rizzo has a follow-up to some questions I was asking so I will yield to him.

Councilman Rizzo.

Thank you. In 108 11/28/00 - WHOLE - BILL NO. 000603 reference to the PUC's -- and I guess the word, if it's not correct, the oversight that the Public Utility Commission has over the PGW, the oversight, you mentioned earlier that -- I believe the question was asked of the Chief of Staff about the PUC's involvement in the day-to-day operation of the company. It surprised me when I talked to some people at PGW that they don't really understand the impact that being regulated by the Public Utility Commission means to the way the company runs on a day-to-day basis. Now, correct me if I'm wrong, coming from the electric company, a Pennsylvania utility company has some reporting requirements. Give you an example of something that surprised me that supervisory people, management people -- and I don't blame them. I blame the fact that maybe the communication isn't good. They're not aware that the Publish Utility Commission has certain rules an regulations. A person pays their bill, as an example, could someone from PGW tell me how long, according the Public Utility regulation, you have to restore that service? Is there a restoration timeline on restoring a person's 109 11/28/00 - WHOLE - BILL NO. 000603 service. If a person is shut off for nonpayment and they get down the to gas company to pay their bill -- in the electric utility industry, you have x-numbers of days to turn the service back on or you're in violation and have to justify why you didn't meet the timeline. Do you have any day-to-day regulations since the Public Utility Commission has come into the picture that has been communicated? If there's been no changes or there are no directions, I'd like to know that. But from what I understand, there are regulations that the PUC have that you some adhere to, and I'd like to know if that is the case, are we following the direction of the Public Utility Commission?

Councilman, the PUC does have clear standards on issues like that one. I'm not personally familiar with the specific requirement they have as to how long the company has to restore after a bill has been paid. It's promptly. And it's my understanding that all of those rules have been made clear to the responsible parties at PGW.

I think you better 110 11/28/00 - WHOLE - BILL NO. 000603 double-check that. I would hope that that's the case, but in my day-to-day contact, I find that that is not the case and I would hope that when a person, even though they're turned off for nonpayment, that a response at least the one that's required by the Public Utility Commission be followed because, again, there are people out there waiting four, five, six days that have service contracts. You have a service contract with PGW, you're waiting four days to get your heater repaired. And I know December 15th or some internal policy that you get something back if you don't get your utility, your appliance repaired within the first day. And again, I know the problems the utility's experience with the cold weather, the first snap of cold weather, the backlog. But again, if we are now regulated by the Public Utility Commission, I think we should be playing by the game.

We can clarify that. I don't recall exactly what the regulation might be in terms of turning the delinquent customer on once they've reached an agreement. We do it as promptly as we can. I have not heard 111 11/28/00 - WHOLE - BILL NO. 000603 of any violation notices that have been given to PGW as a result of the oversight the PUC has, but I will check into that.

I don't think it's a matter of -- I think that we have to self-report. I think there's cases where -- again, the gas business might be different than the electric business. But I know that there are some self reporting that's required if you don't make a timeline. I believe that there's information that many utility companies send out daily, if not on weekly basis, to the Public Utility Commission when their outside the parameters that the Public Utility Commission mandates. So, again, I think if you have a person on staff -- the word I'm looking for, the --

What the guidelines are.

The person who watches the rules, I forget what exactly they call that person, the oversight person. The compliance person. So I think that really if we're under this regulation that we should be 112 11/28/00 - WHOLE - BILL NO. 000603 following it because people --

Right.

People are calling and calling and calling about the lack of service from PGW.

We will do that.

Madam Chair.

Councilman Nutter, do you want to yield to Councilwoman Tasco?

All right.

I guess the question is when the Gas Commission was regulating PGW, we had a series of tariffs haves which the company clearly understood which they have been operating under for many, many years. Now, what happened to those tariffs? Are we under the PUC tariffs? And does the staff understand the change, that they're no longer under the Gas Commission tariffs and now they're under the tariffs set forth by PUC and are they aware of all those tariffs? And what has been the education process to inform the staff members of the change and the impact? I think that is 113 11/28/00 - WHOLE - BILL NO. 000603 the question.

The staff has been informed. In fact, we have a vice president of regulatory affairs who is responsible for making sure that the PGW staff responds in accordance with the tariffs that we are now subject to. The customer service people have been trained. The training ongoing on those issues and the staff that regulatory affairs department has. Has another attorney who oversees the day-to-day operations on that issue.

Okay. I think that's what Councilman Rizzo was asking you in terms of the new regulations, because they are no 16 longer under the regulations of Gas Commission.

That's correct. I apologize that I don't know the details. And that's what I suggest that I would find out and pass it on to Council.

Councilwoman, the PGW continues to operate under the tariff and requirements of the Gas Commission. The PUC insisted on a number of changes, but the bulk of the tariff that PGW worked under when the Gas 114 11/28/00 - WHOLE - BILL NO. 000603 Commission regulated those issues remains in place.

Thank you.

Councilman Nutter, are you ready?

Thank you. Thank you, Madam Chair. My earlier question before the break was going to be one of the areas of the opinion on . And I wanted to try to get a better understanding of that and then, Madam Chair, I just have a couple of other questions. It has to do with -- I guess it's going into . It talks about the City Charter places the power and duty of operating the Gas Works within the authority of the Department of Public Property unless the City contracts with another entity to operate the Gas Works and that then references the City Charter, Section 5-900 (D). And it continues and says, "Therefore, under the charter PGW is to be operated either, one, by lease to a private operator under contract with the City, or two, by private property if there is no private operator. 115 11/28/00 - WHOLE - BILL NO. 000603 Now, in looking at the references, both in the opinion and in two sections on in the middle, there's a quote from Chapter 5 3-100. It talks about the Gas Commission shall exercise such powers and duties and perform such duties as may from time to time be provided in contracts between the City and the operator of the City Gas Works or in the absence of a contract by ordinances. And then later in this 5-900(D), it talks about it shall operate and itself contract maintain repair and improve City gas, electric, and steam facilities not under lease to others and when authorized by the Council acquired, design and construct additional such facilities. Mr. Trujillo, what I was trying to understand is I never in any of that saw words or the phraseology in the charter language, private operator. It only talked about operator or it talked about others. Can you tell me about your determination at the top of that it was either one or two, and one by being lease to a private operator?

Certainly. The 116 11/28/00 - WHOLE - BILL NO. 000603 annotations to Section 5-900 speak -- the annotations that I've looked at were and 8, and 4 it talked about the history of the Gas Works 5 being operated by private operators, Both with 6 respect initially to transit facilities and then 7 shortly after that in annotation number 8 considerations similar to those applications, the transit facilities govern gas, electric, and steam facilities.

What does the term --

I did not mean to suggest that the only kind of entity with which can be contracted is a private entity. I think that it could be an authority. Certainly there could be another municipal entity.

For the non-legally trained, you would leave the average person to believe -- I mean, you know how I feel about City opinions, City Solicitor opinions. I mean, this is a weighty document here of the heaviest proportions, and your conclusion is, I mean, in very direct language, "Therefore, under the charter, PGW is to be operated either, one, 117 11/28/00 - WHOLE - BILL NO. 000603 by lease to a private operator under contract." What I'm trying to understand is nowhere in the chart language is the private operator phrase used. Once it talks about operator with regard to the Gas Commission and then in the section 7 that seems to control all of this, 5-900(D) it is, quite honestly, of the most general terms when it talks about "It shall operate and itself or by contract maintain repair and improve City gas electric and steam facilities not under lease to others." I mean, "others" is a fairly broad category of people, isn't it?

Again, the use of the term "private entity" comes from essentially annotations 7 and 8 an from the history of the way that the Gas Works has been operated. I do not mean to suggest that a private entity is the only entity with which the Gas Works could be managed by.

What's the legal weight of annotations? Tell me about that concept.

Well, annotations are used to explain the intent of the drafters, 118 11/28/00 - WHOLE - BILL NO. 000603 whether it's in the charter or in any other similar document. It's to explain the intent when the actual language was drafted.

Okay. And you're saying that somewhere between and 8, there is 7 either kind of this associative property or --

Yes.

Or by this annotation concept direct relationship between how City transit facilities of treated versus gas facilities?

Yes. Annotation 7 says, "City-owned transit facilities are operated by private operators pursuant to leases and contracts with the City."

Mm-hmm.

And then it goes on and speaks about some of those issues.

Right.

Then in Annotation 8, it states, "Consideration similar to those applicable to transit facilities, govern gas, electrical, and steam facilities."

Right. 119 11/28/00 - WHOLE - BILL NO. 000603

And then goes on to speak about public safety and other issues.

And you take the considerations phrase in to encompass the 6 private operators language in 7 related to the 7 City-owned transit facility; is that how you're 8 connecting the two?

Yes.

Okay. Just to go back, though, your now direct testimony, notwithstanding the opinion, is that you do not mean that it could only be affected by a lease to a private operator; is that what you're saying?

That's correct.

Would that then preclude a lease with the Gas Commission?

Yes, it would preclude a lease with the Gas Commission.

Okay. Tell me why.

The Gas Commission is the City; the City cannot contract with itself.

Okay. Now, does PGC make contracts? 120 11/28/00 - WHOLE - BILL NO. 000603

Does PGC make contracts?

Yes. Does it have any contracting relationship with --

I'm certain that it does. Sitting here, I'm not aware of what they are, but I'm certain that it does.

Are any of them with the City.

I'm sorry?

Maybe an unfair question, since you already indicated that you didn't know. I just wondered if any of them are with the City.

Again, I'm not aware. I'd be surprised if that were the case.

Okay. Let me go back to the first question, and then I think I just have two more. Miss Wilkerson, I think you, in reference to my initial question, I asked about the difference between PFMC oversight versus PGC oversight as per of bill, and I think you laid out that there was a structure that might be more 121 11/28/00 - WHOLE - BILL NO. 000603 workable which was -- sounded like virtually a blending of the two, is what I took from that, which was, I guess, a scenario in which you would have, whether it's called PFMC or some other entity, it would be something that would allow for appointment of two people by the Mayor, two people by the City Council, and one by the City Controller. Is that a preferred model of a new governance structure? Is there another or other models of preferred governance and oversight.

I think that in terms of board appointment, there are a number of different alternatives that we have talked about within the Administration. One would be similar to what was proposed and actually implemented for the appointment of the School Board. I think that, you know, that was done at a time when it was thought appropriate to try to tighten up accountability and so there was, you know, a mechanism put in place to do that. I think that in trying to create a governing body that had some sense of buy-in you could have nominations made, you know, the Mayor proposed with City Council confirmation. That would be an 122 11/28/00 - WHOLE - BILL NO. 000603 alternative that would have more participation than simply having the Mayor unilaterally responsible for appointing the board. You could have the same composition, you know, the same appointing authority that you have with the Gas Commission but have it be appointments to a board of directors. I think what you would get out of that is the elimination of the old function of the Gas Commission and the elimination of some of the overlap, but what it is that folks find attractive, I suppose, about the composition of the board of gas company, I think you still have outstanding some of the issues of control. I think you still have outstanding some of the questions about what our decisions that ought to be retained by the City as the City's prerogative as oppose to something that is appropriately delegated to whatever the new governing entity is. I think you also have outstanding the whole question of the budget. You know, I think that is one of the difficult questions. At what level, you know, who ought to have approval of the company's budget, is that something that is simply between the management entity for the 123 11/28/00 - WHOLE - BILL NO. 000603 company and the PUC or is that something over which the City ought to have some kind of input? And I guess under the proposal in 603, it's something that is up to the Gas Commission. There's input solicited from the Finance Director, but it ultimately is something that is decided unilaterally by the Gas Commission Board. But that would be the kind of issue that --

Yeah, but I mean as we talk about the Gas Commission Board, I mean -- I mean, let us not talk about it in whether the present composition or a future composition. I mean, it's not like it's some completely detached independent entity that, you know, meets at some secret location somewhere and no one, you know, on a day-to-day basis knows the composition of the entity. I mean, we know all of these people. We know where they live. We know what they do. They actually work for the City of Philadelphia. I mean --

Well, I think until you actually require that, you don't know any of those things. You're talking about if it were composed as it currently is or how it might be 124 11/28/00 - WHOLE - BILL NO. 000603 composed. I think part of the problem is you don't know what the Gas Commission will be. There is nothing in 603, if you use the 603 model that identifies who it is that's going to be serving on this board and, you know, I think that is the source of some of the concern, that you don't know, you know, there is no assurance of a nexus back to the City. And I think those are the kind of mechanisms --

I thought the appointing powers were two by the Mayor, two by Council, one by the Controller.

I don't think that issue --

Aren't appointees at a minimum responsible to their appointing body? Tell me what the concern is. I mean, that there will be five people from Kansas or something? How do you get any more connected to the City of Philadelphia if the major elected either officials or bodies of the City are making all of the appointments? I mean, where do you get the --

I think you end up 125 11/28/00 - WHOLE - BILL NO. 000603 with a different level of scrutiny of the budget. For example, if you were to have City Council approving the budget, I think that suggests a different level of oversight than simply relying on somebody reporting back to the appointing authority. I think if you have the Finance Director of the City of Philadelphia approving the budget, I think you're going to have a different level, a different kind of oversight than if you simply are relying on the relationship between the appointing authority and the actual appointee to the board. I think those are decisions that have to be made, whether or not it's appropriate to have City Council deciding the budget. Historically, the budget review for the gas company has been a very detailed process. There are hearings that go on for a protracted period of time. There are witnesses that are brought in. Folk have an opportunity --

Wasn't that done by the Gas Commission?

Pardon me?

Wasn't that done 126 11/28/00 - WHOLE - BILL NO. 000603 by the Gas Commission?

That was done by the Gas Commission. The nature of the relationship changes, though, once you begin to put the Gas Commission in the role of a board of directors that ultimately is responsible for creating the budget, I think you end up with a much different kind of oversight than you had when the Gas Commission was sitting as an independent third party evaluating, taking testimony. If you are now talking about having a board of directors that's going to conduct hearings, call in witness, I mean, you're talking about a much different -- and perhaps that's the kind of conversation that has to happen.

Let me say this at least. And I understand where you are and even the line of where it might be going, but, I mean, I am hard-pressed to not say, with every due respect to the current board, the current board, I don't have any issue with. I mean, at some level, you know, thank goodness that at least the Gas Commission was paying attention to what was going on down there because apparently 127 11/28/00 - WHOLE - BILL NO. 000603 the other operation was asleep.

That's right.

So, I mean, somewhere in all of that, there must be a benefit to what that operation was to what the Gas Commission operation was about and at least trying to do.

The question is, what do you lose when --

Can we have the microphones on, please? Mr. Hershey pulled the plug on the microphone. He didn't like the question. (Laughter.)

I think the question is, what do you lose when you merge the oversight function and the management function? The Gas Commission will no longer sit as an independent party overseeing the operation of the company. It becomes responsible for the operation of the company, and that, I think is --

Is that a bad thing?

I think what you 128 11/28/00 - WHOLE - BILL NO. 000603 don't have is the independent oversight anymore and that, I think, is what has historically been very valuable about having the Gas Commission out there.

It appears -- and I'm not an expert on PGW or PFMC or any of those entities. But it appears, notwithstanding the independent entity, going through a whole process, making determinations, issuing directives, order, pieces of paper, you know, send a note home to mom, we'd like you to do something, it does not appear to the outside observer that they paid any attention to it. Time and time again. I mean, I guess part of my anxiety in all of this is, I mean, what is it that we're either trying to preserve? Who are we trying to protect from us or you or somebody else? I mean, what is the game plan here?

I think the goal -- from the Administration's perspective, the goal is to try to flatten out some of the control mechanisms. Currently you have the PGC that has dual responsibility remaining the oversight and the management to the extent it's not exercised. 129 11/28/00 - WHOLE - BILL NO. 000603 You have the management responsibility within the PFMC, and you have something else yet again coming out of the PUC. And I think one goal ought to be to simplify some of that so that it's clear to whom the company must respond on what kinds of issues. I think there are some set of issues that ought to be retained to the City. I think there are some issues that are the responsibility of the PUC. And then clearly, some things are just left to -- but I think that for something like the budget, for example, there ought to be some kind of oversight of the proposals that come from the company. And I think that when you get -- that the Gas Commission role is going to change, it's no 17 longer going to have the oversight, you know, stand back, take it from another perspective with respect to the company. It will be involved in the development of the budget for the company. It will be involved in evaluating the assumptions that go into the budget. It's no longer going to be there as a different entity taking a third-party look at what the proposal is. It will be involved in a very integrated way. 130 11/28/00 - WHOLE - BILL NO. 000603

But I guess I need to ask a fundamental question. One, do we need that? And two -- because that seems to be part of old model, old mindset. And two, I mean, to some extent isn't that independent oversight third-party person back off, you know, just kind of watching what all is going on. I mean, maybe that is something that we'll ultimately end up doing anyway.

Yeah.

I guess --

That's right, but I think that's the kind of thing that we ought to plan --

Part of my frustration here is do we have to be wed to any of the major components of the past, given that we all seem to agree that much of that has led to where we are today; we do not like it, and I just want to try to fundamentally understand why do we want to repeat any of it and how do you get to a new model? I mean, I didn't have anything for the most part to do with the current model. It's 131 11/28/00 - WHOLE - BILL NO. 000603 been around for a long time. So, I mean, I don't have fingerprint on it. It wasn't my idea. Maybe it was a great idea then. Doesn't necessarily seem to be working now. Why are we doing it? I mean, I just really want to get to all of the fundamentals of questioning why. Why are we doing X and why are we doing Y and why are we doing Z? And if we have good answer for those, then fine; then it doesn't matter. But if we don't, let's try to figure out something else. I guess, which will lastly lead to, do you have a sense of your best estimate of a timetable for a new model and for a different structure and answers to many of the questions that are outstanding about what the new relationship will be or what the new model would be?

I don't have a timetable. I can develop a timetable. I can sit back, develop a timetable. I think that realistically if the Administration were to come forward with a timetable or with a proposal, you know, or work with the Councilwoman on a 132 11/28/00 - WHOLE - BILL NO. 000603 proposal, it would be introduced -- I mean, it could be introduced before the recess and then moved when Council resumes in 2001.

Well, okay. I mean I guess the last thing I do want to say is to the extent that we can get movement on even changing some of our individual mindsets about, well, if the Administration wants to do X and so-and-so wants to do something else -- I mean, it seems fairly consistent all the way around the board that the Councilmembers and the Mayor 13 and so a total of 18, and I'm not exactly sure 14 where the Controller is, just because I haven't 15 really talked to him much about this, that there 16 should mean hopefully be one proposal or one idea 17 and that this is what the government has decided to do as opposed to continual lines of division about, well, that's so-and-so's thing and I can't deal with that and that's the other one's thing and I'm not trying to deal with that. And we ultimately end up in these kind of situations where it's just, you know, rapid fire scud activity going back and forth as oppose to working it all out, coming in, and this is what 133 11/28/00 - WHOLE - BILL NO. 000603 it is that we're trying to do and show a greater level of a united front about trying to get something done. Obviously, I'd be glad to participate in that, but the Chair of the Gas Commission and Councilwoman Krajewski as another commissioner are obviously in the forefront of this effort and I'm trying to play a supportive role. Does the PFMC have any staff other than its contractual obligation to provide for, I think it's CEO, CFO, COO?

No, the PFMC has no 14 staff. What we have done from time to time is drawn City employees and so for some of the budget issues or IT issues or risk management, for example, is handled in connection with the City so we've drawn on City resources. But the short answer is the PFMC has no staff to the board that assists in oversight of the company.

Well, I guess just -- I mean, how do you run a place like this and not have staff? I mean, for me, while kind of chewing on that one, part of my problem with the 134 11/28/00 - WHOLE - BILL NO. 000603 current model is you have a group of very well-intentioned, very well-meaning people who all do something else. They really have other jobs and responsibilities. That doesn't mean that busy people can't serve on boards and stuff, but this is not, you know, the board of making people happy. This is like the board of a serious company. And it has always perplexed me as to what that thing is about, what it's supposed to be about, and it technically employs three people, has no staff, the board itself is composed of all busy people who really have something else to do with themselves and they're stuck relying on the people in the shop. And in the previous example, we clearly saw that didn't work under any circumstance.

Mm-hmm.

The result of which is, you know, five lawsuits and folks in serious trouble.

I think that --

What is it about that that we liked?

I think that the 135 11/28/00 - WHOLE - BILL NO. 000603 whole staff question is an important question. I think figuring out what the appropriate role of the staff so that it's not micro-managing the activities of the company but provides sufficient board it support so that you can have active and effective board. I think from my experience as a PFMC board member, it is very clear that you can't do it on a volunteer basis unless you have support. If I didn't have --

You're kind of busy from time to time, right?

There's a contract with Mr. Hershey. You know, he looks at some issues for me. I have members of my staff that do work in connection with the company. I think the whole question of how it is you get adequate support to whatever the board is is important. I think there is a balance, though. I think that it is possible to micromanage the company in a way that is deleterious to how the company operates. So I thing that --

Under the current circumstances, again, having nothing to do with the current entity or folks that are in place, 136 11/28/00 - WHOLE - BILL NO. 000603 this is a company that's crying from some level management and could have used a little on the micro side when they were, you know, approving $9 million for IT and on their way to spending 30. I mean, you know, if somebody maybe around had said, "You know, hey, we're spending like 8 a little more than we thought we were." I mean, 9 you know, but we don't need to go down that path. 10 It's too bizarre. 11

I think you're right 12 about that. I think that the board currently meets twice a month or more frequently and that it is an enormous demand on board time and that allocating adequate resources to have an effective level of oversight and I think it could happen in a number of ways. I think the City could have institutionalized adequate staff perhaps within the Finance Department so that its role can be more aggressive. I think another model would be staffing the board of the organization so that it could be more aggressive in terms of trying to keep up with what's going on in the company. I think somehow you have to develop that capacity. Exactly how you do it I 137 11/28/00 - WHOLE - BILL NO. 000603 think is important because I think ultimately it impacts on who it is that you can bring in -- nobody wants to come, be CEO, and then not have some kind of flexibility with respect to the company.

I understand. Thank you, Madam Chair.

Thank you. Councilman Kenney.

Thank you. Councilman Nutter, I wasn't around in 1972 here either when, I believe, that was the year that this whole scheme or governance scheme came into being.

I was a sophomore in high school. I was minding my business.

I can probably give you some idea as to why, and I think it's pretty obvious. The Mayor at the time wanted to control by bypassing Council by bypassing the Gas Commission the company. The reason that they want to control the company was because of the contracts associated, both legal and nonlegal and the patronage involved with running that company. 138 11/28/00 - WHOLE - BILL NO. 000603 And as time went on, it became a very comfortable thing for any executive to have that kind of control to bypass this legislative body and that independent commission. And I think it's clear that was the reason why it was instituted and probably clear to me, at least, today why any chief executive of the City would be fighting to keep control of it. And that's what, I think, we've come down to now is that it's been controlled basically by the Mayor of the City for the past 30 years. Despite the efforts of the Gas Commission to put it in the right direction, to do certain things, to make recommendations, basically they've been ignored. And Council has been out of the loop because it was assumed that if members of Council were a part of the Gas Commission, then that would placate that group a little bit. But the problem is no one listened to members of the Council who a part of the Gas Commission. So basically what we had was a dictatorship of a company for reasons other than distribution of gas and the service of customers. That's, I think, the reason why sitting here today. 139 11/28/00 - WHOLE - BILL NO. 000603 I think some of the misunderstanding, however, is what a board of directors does. I served on a number of boards and we don't run the company. The board of directors is responsible for overseeing the people who run the company. And when you have a board meeting, those executives come in and talk about their various areas of responsible and they have someone that they need to be responsive to, and that's the board. And the board then in turn has the authority to fire those executives or that executive if, in fact, they don't perform up to the board's expectations by running the company in the right way. If the Gas Commission wanted to fire the last crew that basically drove this company down to its knees, they would have no 18 authority to fire the last crew. They could explain about things. They could point things out, but when it came to removing A, B, or C member of that executive board -- the executives in that company, couldn't do a thing. I think what Councilwoman Tasco and Councilwoman Krajewski and the other people who sponsored this bill are asking for is the ability 140 11/28/00 - WHOLE - BILL NO. 000603 to act as the board of directors of this company, to hire the people that are necessary, to oversee the people that are necessary, and I don't really think that this request for a change in this governance scheme is a threat at all to this company. If anything, it's probably more of a breath of fresh air. Frankly, I don't know whether or not the company can be saved, frankly. I don't know. It remains to be seen whether or not this company can be drawn back. It's kind of over the precipice now and you got to kind of pull it back from there and I don't know if there's the strength to do that. But I tell you what, the current system that's there now just doesn't work and hasn't worked for quite, quite some time; and I think if we have a real board of directors, despite the fact that they're appointed by people who are elected the ratepayers and the citizens of this city, I think we're going to be in much better position than we are today because no one seems to want to be in control despite the efforts of this particular new group executives which we admire and wish well. I do think that there needs to be a board 141 11/28/00 - WHOLE - BILL NO. 000603 in place that has some power to remove people in the event that they don't perform the way that they're supposed to.

And I think that's the misunderstanding here is that what this bill is asking for is a board of directors with some power as opposed to an oversight board that basically people can ignore. Thank you.

Thank you very much. Any more questions? (No further questions.)

We thank you. Janice Parrish, Esquire, Senior Hearing Examiner for the Philadelphia Gas Commission is next. (Witness comes forward.)

Thank you for your patience. Would you introduce yourself for the record and begin.

Yes, thank you. I see I have two microphones, but I think I'll only use one. My name is Janet Parrish. I am the Senior Hearing Examiner for the Philadelphia Gas 142 11/28/00 - WHOLE - BILL NO. 000603 Commission and I appreciate the opportunity to address the Council on Bill 000603. I have submitted my testimony in written form, and in the interest of time, I will not read that to you at length, but what I would do with your indulgence is try to go through and address a few key points outlined in the testimony and, as well, I'd like to respond to some of the discussion that has occurred as I've been sitting here listening. Before I do that, if I can just briefly inform those of you who don't know me as well as others of my perspective on PGW. I have been involved with PGW in one form or another since 1978, initially as an attorney with Community Legal Services and its energy project, then as the Executive Director of the Utility Emergency Services Fund, and then finally most recently in my capacity as Hearing Examiner at the Gas Commission since 1993. My general responsibilities are to -- or have been to review and conduct the annual proceedings regarding PGW's operating budget, changes to its gas cost rate, changes to the tariff and regulations as 143 11/28/00 - WHOLE - BILL NO. 000603 well as decide the various formal customer complaints. So just to give you a little sense of the various hats I have worn over the years. Now, I'd like to cut to the chase here, I guess, and say, well, I don't really want to say I'm sitting here contradicting the City Solicitor, but I guess I'm going to sit here and contradict the City Solicitor at least just a tad. As we've indicated in our written testimony, we agree with some of the points that had been made by the Solicitor in his memorandum and in his testimony here today. But there are some issues that have been discussed here already this morning that we do have a different take on, a different conclusion on. Let me just address the issue, if I may, of the Department of Public Property and its role. The point has already been made that it's really only in the absence of a lease agreement that the Department Public Property under the charter is charged with the operation of the Gas Works. And it's important to note that this startling discovery was also made back 144 11/28/00 - WHOLE - BILL NO. 000603 in 1983 by then-Councilman Street when he sponsored the PGW governance bills that were referred to earlier by Councilwoman Tasco. And also these bills are referred to in Ms. Wilkerson's testimony. Now, Councilman now-Mayor Street, of course, is a very good lawyer and he was very emphatic and he had other good lawyers backing him up at the time in the conclusion that the PFMC agreement is not a lease. It does not grant any type of leasehold interest to that company. Rather, it's a contract for management services. Based on this, he charged that the Gas Commission at that time didn't really have the authority to fix and regulate PGW's rates. Really, it was the Department of Public Property that had that responsibility. Now, as we know, Councilman Street's bills did not pass, and for 17 additional years, the Gas Commission continued to fix and regulate PGW's rates and charges without any objection, without any legal challenge that said, Well, wait a minute, there's not a lease here, it's really the Department of Public Property that should be doing this. So we don't really find this to be 145 11/28/00 - WHOLE - BILL NO. 000603 terribly surprising because as has been pointed out, the Gas Commission is a departmental commission of the Department of Public Property. And while it may not be the alterego of the department, as the solicitor has identified, it certainly has been the long-standing practice to treat the Gas Commission as a surrogate for the department itself.

The management agreement delegates both rate-setting and management oversight powers to the Gas Commission effectively ratifies this practice. And I think we must also note that there's really nothing in the charter itself which precludes the Department of Public Property from effective exercising its powers through the Gas Commission. Now, in the written testimony, I have referred you to in 1992 Commonwealth Court decision whose language shows that the Department of Public Property and the Gas Commission have essentially been regarded as one in the same, and I won't recite that to you again. But the language is very interesting because, again, it also shows that even where the city has a management contract as it does with PFMC and not 146 11/28/00 - WHOLE - BILL NO. 000603 a lease, it's the Department of Public Property (slash) the Gas Commission which retain responsibility for operation of the company. And point has already been made earlier I think by Councilman Nutter that there is no language in the charter that requires that the lease or contract be with a private party. Now, what the bill, Bill 000603 attempts to do, and I think this is a subtlety that perhaps may have been missed so I'd like to underscore it. The bill is attempting to acknowledge both the Department of Public Property's role as specified by the charter and at the same time to recognize the unique legal standing of PGW that existed prior to passage of the state gas deregulation law in 1999 and really has been effectively codified by that legislation. The State law says now that PGW shall be deemed an instrumentality of the city that owns it. That is why the bill itself provides that the City, that is the Mayor acting through the Department of Public Property, would enter into a contract with the instrumentality known as the Gas Works. And then these would be 147 11/28/00 - WHOLE - BILL NO. 000603 the various provisions of the contract itself. And the solicitor's memorandum does not directly discuss or opine on this particular approach. But let me focus a little bit now on the Civil Service and procurement issues that have been much of the focus here this morning or this afternoon. In terms of the procurement issue, I think let me deal with that rather quickly. The Solicitor's memorandum refers to Section 8-200 of the charter on procurement, but doesn't discuss Section 6-500A, and that's the section we were really focusing on. We think that section is clear by its terms in saying that the City's procurement requirements apply only to purchases made with funds appropriated from the City treasury. Now, if one thing has been drilled into my head over the years is that PGW's revenues and the City's revenues are not to be commingled. PGW has a whole separate revenue stream. It is the ratepayer funds that fund all PGW purchase, and that is why to this point in time both PGW and, in fact, the Gas Commission whose whole budget comes from ratepayer funds have operated outside of the City procurement 148 11/28/00 - WHOLE - BILL NO. 000603 requirements. Now, the Civil Service issue, I think, requires a little more discussion or attention, although it's really relegated to just a footnote in the Solicitor's memorandum. Having looked at this very carefully, we really cannot agree that direct City management or responsibility for PGW employees through the Gas Commission would somehow make those personnel City employees subject to city service requirements. Let me explain why. There are a number of reasons for that, and we discussed this somewhat in the briefing that we held with Councilmembers a couple weeks ago. PGW is a unique entity, a unique legal entity. I think there's no question about that. On the one hand, we have numerous courts saying it is part of the City. They phrased it all different kinds of ways, but what comes down to is PGW is an integral part of the City.

It's an entity which has the ability to sue and be sued, so it's got existence even though it's also been called just a name for the assets owned by the City. But what's really important to note 149 11/28/00 - WHOLE - BILL NO. 000603 and, in fact, the previous City Solicitor discussed this issue in the opinion that we have cited to you in our materials, there is a 1992 Commonwealth Court case which, as the previous City Solicitor indicated, expressly addressed the fact that PGW is managed by a private entity when reaching the conclusion that PGW was still a part of the city. In other words, the presence of PFMC, a private nonprofit corporation as a manager of the assets, did nothing to change, to alter, to lessen PGW's status as a City entity. It already exists. So to argue that putting the Gas Commission in charge of PGW, if you will, will somehow increase PGW's status as part of the City is just a fallacious argument. Now, what's also very strange an anomalous is that at the same time, PGW's has been recognized repeatedly under both under State and local you law as an employer who is separate and distinct from the City. And we've cited in our written testimony several provisions and several decisions which are not at all addressed in the City Solicitor's memorandum, and I commend them to your attention. The state law, state gas 150 11/28/00 - WHOLE - BILL NO. 000603 deregulation law, as I previously alluded to, provides that individuals who work for PGW shall be deemed employees of that city natural gas distribution operation as a distinct entity from the City. This is really not a big surprise if you look at the fact that Council for many years has enacted a pension ordinance for PGW employees which specifically provides that it is applicable to the employees of the Philadelphia Gas Works, not the employees of the City, not the employees of PFMC. PGW has been recognized as an employer by the courts who it's been sued for employment discrimination. PGW, as you know, has its own separate union, the Gas Works Employees Union, which has been around, if I'm not mistaken, since 1937; so it well predated both the current charter and the current management agreement. And that union, as we understand it, is the duly authorized collective bargaining agent for all nonexempt employees of PGW, not the City, not PFMC. PFMC, as you know, has three employees a CEO, a CFO, and a COO. 151 11/28/00 - WHOLE - BILL NO. 000603 Let me then turn to one last area which we think is relevant and also was not discussed in the solicitor's memorandum, 1and that is section 2-305 of the charter which clearly provides that Council has the authority by ordinance to add to the powers and duties of commissions like the Gas Commission as long as those new powers and duties are not inconsistent with the scheme of the charter. Now, as the Solicitor has recognized in his opinion, there is an unusual setup vis-a-vis the Gas Commission, and that is that it's unlike all of the other commissions referred to in the charter, its composition not spelled out in the charter, it's not mayoral appointees plus designated appointed officials. Its composition is left to the contract between any operator of PGW and the City or, in the absence of a contract, to ordinance by Council. That is unusual. Similarly, the Gas Commission's powers and duties are left to contract or ordinance. So in other words, what we have concluded is that City Council clearly has the authority by ordinance to add to the Commission's 152 11/28/00 - WHOLE - BILL NO. 000603 powers and duties as is proposed by Bill 000603. It would be nonsensical to say that just because the Commission's current powers and duties are spelled out in a contact and not in ordinance 6 that the City Council would lose its authority to add to those powers and duties. Now, if I can turn just for a moment to a few of the points that had been made by Ms.

Wilkerson in her testimony and in some of the meetings and try to clear up a couple misconceptions. We've already had some discussion of the Gas Commission under the Bill 14 000603 being too highly politicized as a board and the concern about there being no requirement of industry expertise for board membership. Now, I think point has already been made that it really depends on your view of how trustworthy or how capable the Mayor and Council and the Controller are of appointing people with the necessary breadth of experience to serve on such a board. But I'd like to add that the School Board example which cited by Ms. Wilkerson is one where, at least as far as I'm aware, there wasn't any particular requirement that the members 153 11/28/00 - WHOLE - BILL NO. 000603 appointed to the School Board have specified expertise in public education, finance, or other related fields. However, presumably, the Mayor did make appropriate appointments to that board. And as or more importantly with the School Board has now done is to work to bring in the top management that had the necessary expertise and experience, and I think that's a parallel to what's envisioned in Bill 000603. Now, as to the request of the Finance Director no longer having approval over PGW's operating budget only the Gas Commission, as has been asserted by Ms. Wilkerson, I'd like to note, it's not a change in the Finance Director's role from what is currently provided in the management agreement, rather it's a change in the wording or the language, because if you look at the current management agreement, only the Gas Commission actually is charged with approval of PGW's operating budget. The role of the Finance Director is twofold: One, to assist PFMC in preparing that budget; and two, to confirm that the budget itself and the words that are used is it's in form and extent satisfactory. In other 154 11/28/00 - WHOLE - BILL NO. 000603 words, the format is fine and there's sufficient detail in the budget. So again, contrary to what has been stated, this is really not a change from the current situation. Now, the point has been made or the charge has been made that we really need to build in a way for the City, as opposed to its representatives through the Gas Commission, to make some of the big policy decisions that might be facing us with respect to PGW, such as restructuring under the gas deregulation law, issues like sales of electricity and whether PGW would branch into that. Now, we don't disagree and the bill 16 does not attempt to block the City or City Council from having the appropriate role on major decisions regarding the disposition of the assets. For example, Council still has approval of PGW's capital budgets, real estate transactions, long-term borrowing, short-term borrowing, temporary advances like the $45 million advance that was approved recently by Council. All of this is provided for in the bill, so there's no change from the current 155 11/28/00 - WHOLE - BILL NO. 000603 situation. I would also like to note that the bill only provides authorization to deliver safe and reliable gas service, not unlike what the current management agreement looked like before it was amended to permit PGW to engage in electricity sales. So clearly, any issue about branching into another form of business such as electricity sales would have to come back to the Council. Now, some of the other decisions that Ms. Wilkerson says would have to be made regarding PGW in an unbundled environment are really not necessarily going to be City decisions anyway. For example, she says, Well, what should the City do about customers who either can't choose or could not find another gas supplier if PGW were not to continue to want to be in the business of purchasing gas? Under state law, PGW would have to serve as what's called the provider or supplier of last resort to those customers anyway. It's not necessarily a decision that the City would have to make; it's been made for us.

Again, I think if there are policy areas, other policy areas that the Council feels 156 11/28/00 - WHOLE - BILL NO. 000603 very strongly would need to be carved out or specified to assure some other form of control over those decision, those are issues that obviously can be laid on the table, but no one has come forward to this point with any specific language or specific suggestions. Let me also address the point that if the City Council were to prevail in its litigation challenging the validity of the state gas deregulation law that this bill is problematic because the Gas Commission would be both the manager and the regulator of PGW. Obviously, there's a point to that objection, but it seems that that's a bridge that we would need to cross when we get to it. If in fact the City Council does prevail, we would obviously have to look at revising the setup because the Gas Commission would then have its regulatory functions restored. We're not there right now and this bill attempts to address the situation where we have lost, the Gas Commission has lost those regulatory responsibilities. One last point that has not been discussed in much detail this morning, and that 157 11/28/00 - WHOLE - BILL NO. 000603 is advantages an disadvantages of a nonprofit model versus the Gas Commission. Now, putting aside the charter questions or the issues about Civil Service and procurement because we really think those are non-issues, it should be recognized that the Commission, the Gas Commission is an entity created by the charter. It exists. It's left to Council to provide it with responsibilities. And as Councilwoman Tasco pointed out in her opening statement, the Gas Commission, as a City entity, is subject to sunshine requirements, unlike PFMC or unlike any other private nonprofit corporation. So on balance, we would submit that bringing the oversight and management of PGW into the public light is preferable to keeping those decisions behind closed doors. Now, I wanted to come back, if I can, to one last point. Councilman Rizzo had asked some questions earlier regarding whether PGW was in compliance with the PUC's customer regulations, and what I initially heard Mr. Hershey indicate to you and Mr. Kischinchand that, yes, PGW's employees have been made aware 158 11/28/00 - WHOLE - BILL NO. 000603 of the rules and it's not a problem. And Councilwoman Tasco followed up with some questions about PGW's tariff, at which point Mr. Hershey said, Oh, yes, most of the tariff is still in place. I'd just like to take a moment to underscore that. Under the state gas deregulation law, Act 21, it's very clear that PGW's preexisting tariff, and that is the rules and regulations that were adopted by the Gas Commission regarding customer rights and responsibilities stay in place until the PUC about two years from now would enter its final order with respect to restructuring PGW unless in the intervening time, PGW asks for an amendment to the tariff and the PUC approves it. That's what the State law says. And so it's been our understanding and our position that the tariff is the law. Now, what is occurring, however, is that in the absence of a single entity accountable for PGW and the obvious vacuum of leadership that the PUC has perceived if you look at the decision on PGW's rate request, what has 159 11/28/00 - WHOLE - BILL NO. 000603 occurred is that PFMC, as outline indeed my written testimony, has entered into deals, agreements with the PUC which we believe are not in either the City's, PGW's, or the ratepayers' interest. And as part of these deals, they have dismantled long-standing customer rights, made changes to the regulations contained in PGW's tariff, as I said, rules that were duly adopted by the Gas Commission in a public forum after notice, after hearing, and so forth. This was a behind-closed-doors deal, no notice to the public, no opportunity to participate or comment.

And ironically, Councilman, many of the rules that the PUC has are actually quite similar to the Gas Commission's rules. The Gas Commission's rules were basically modeled on the PUC's initially. Now, in some respects they're a little different. In some respects they might be -- one set might be more favorable to customers and the other might be slightly less, but generally they try to accomplish the same thing, such as putting a time on when service must be restored. That's spelled out in PGW's tariff. It's got to be within 48 hours and there 160 11/28/00 - WHOLE - BILL NO. 000603 are some conditions on it where it can be faster and that's still the law. That hasn't changed, and that's the standard PGW should be complying with and it's the standard that they should know that they should be complying with. But what is of concern is that some of the commitments that are being made without input from the Council or the Gas Commission are committing PGW to conditions that are not in the company's interests. For example, different payment requirements to get service restored which, while an individual customer may like them because they can get service restored for $200 instead of $2,000, that at a time when PGW is in desperate financial straits, this has to be of grave concern. At a time when PGW's ability to the repay the $45 million advance is being questioned, this has to be of concern. So, again, I apologize if I went through these points rather quickly. Just in the interest of time, I wanted to try to hit each of them and certainly will be available to you for any questions that you may have. But thank you again. 161 11/28/00 - WHOLE - BILL NO. 000603

The Chair recognizes Councilman Clarke.

Thank you, Madam Chair. Good afternoon, Miss Parrish.

Good afternoon.

Miss Parrish, how many staff members are on the current Gas Commission?

Currently there are a total of eight full-time staff at the Gas Commission. Four of those are professional staff, what you might call professional staff, the Executive Director, myself, and two others two other analysts, and there are two customer investigators and two clerical support staff, so that's a total of eight.

Okay. And I'm assuming, based on the small staff you have, you from time to time have to out-source work?

There are some consultants to the Gas Commission, if that's what you're asking, yes.

I received this 162 11/28/00 - WHOLE - BILL NO. 000603 document at a briefing. I think the Councilwoman had it about a month ago, PGW briefing, this yellow document here, and it referenced certain orders and advice that go back in this particular section to 1997.

Mm-hmm.

And my question is, given that, my understanding, the commission approves the operating budget of the Gas Commission?

That is correct.

And you make a recommendation to City Council on the capital budget?

That's right.

At any time did you, the commission, either question the last of response to your recommendations as a result of the approval of these various operating and capital budget issues?

Yes and no. I mean, there's been a number of orders and recommendations over the years, so that in some instances -- let me just step back a second. 163 11/28/00 - WHOLE - BILL NO. 000603 Normally what would happen in that operating budget review process is that we would conduct hearings, public hearings, on both the operating and capital budgets. And at the end of that process, the hearing examiners, myself and Carlton Williams, a former commissioner of the Gas Commission who has served since then as a hearing examiner for the capital budget.

Mm-hmm.

We would issue written recommendations, and all of the parties, PGW, the Public Advocate and whoever else might be participating, would have the opportunity to state any objections to the recommendations; and they have. And sometimes it's PGW and sometimes it's the Advocate and sometimes it's no one and sometimes it's both. And then the Gas Commissioners, of course, would then make their final decision. Now, at that point in terms of the operating budget, the order is basically final. In terms of the capital budget, if the question is, has PGW differed from a recommendation that the Gas Commission made to 164 11/28/00 - WHOLE - BILL NO. 000603 City Council? Is that what you're asking?

I guess, the question is, if there were some concerns with respects to, say, the capital budget because there's been allegations that there have been expenditures from the capital budget to pay operating costs. I think during the discussion you may have referenced that. And my question is, did you not recommend that we authorize the capital budget based on that or did you recommend that we authorize the capital budget and not bring that issue up? I'm just trying to get a sense of --

I see what you're saying.

Because in here there are a number of things -- and they all make sense to me and I don't understand why we couldn't get a response to that. But you then subsequently recommended authorization of the capital budget and yourself as a commission authorized the operating budget in spite of all of these thing things that you recommended advised and were essentially ignored. And I'm 165 11/28/00 - WHOLE - BILL NO. 000603 just trying to understand. I'm a new councilperson so I wasn't around for a lot of this discussion.

I think it did come out on occasions. I know when I've sat in this room 7 and heard that conversation and certainly it came out in the recommendations of the hearing examiners questioning why spending was not in accordance with approved budgets and there was actually considerable debate about that, and I think Councilman Kenney may have made the comment earlier regarding the fact that, well, PFMC essentially thumbed their noses at the Gas Commission; and in effect, I think that is what occurred.

So why would you recommend that we pass the capital budget and yourself authorize the operating?

So that the -- what was recommended was the budget as approved and not the spending or the overspending that PGW felt free to engage in.

So you authorized the budget, and after the fact, they 166 11/28/00 - WHOLE - BILL NO. 000603 inappropriately spent money in various categories.

Right. And the flip side of that, I think it's important to note as true as well, and that is that both the Gas Commission by recommendation and City Council by ordinance approved levels of funding, for example, on main replacement as we discussed earlier which were higher than what PGW management had proposed because we felt essential that additional spending occur in that area and then those funds were underspent, so that was the flip side.

I guess I could ask you a question in retrospect. Given where we are today, had you held fast on maybe authorization of the operating budgets maybe back in '98, the capital budgets maybe back in '98, we may not be in this position today because I'm assuming that Council essentially adhered to your recommendation particularly on the capital side?

I think commission did what it could do and Council did what it could do in setting the parameters. And this really 167 11/28/00 - WHOLE - BILL NO. 000603 points to the failure of the system where there is really no one entity that is accountable. And as the point that was made earlier, again, the Gas Commission didn't have the power to come back and fire management if that were appropriate. You're not doing the job, you're not complying with the budgets, this is a problem, either you're going to clean it up or you're not going to be here.

But the next time around --

That's the purpose of the bill.

We potentially hold up the budget authorization until that advice is adhered to.

Council could hold up a budget authorization, but hopefully what the board of directors would do would be to hold the management accountable for performing.

My limited time here, I've seen situations where some things may have happened in the prior fiscal year and some Councilmembers have some very long memories and 168 11/28/00 - WHOLE - BILL NO. 000603 in the subsequent budget hearing, that is brought up to that particular department and we have held things up until that has been rectified. My questions is, did you not feel the need to do that on PGW's side?

Well, again, I guess the question is -- and I don't know if you had success in doing that. PGW, we have put restrictions on spending. We have limited spending for various purposes, and so you're not authorized to do so this, you're not authorized to purchase weather insurance, for example, and management proceeded to do it anyway. So what do you do? The money's been spent.

All right, okay.

The enforcement powers to really enforce those orders is what has actually been lacking.

Okay. I've heard the same thing around here in this Council as it relates to some departments. We authorize money and it doesn't necessarily get spent the way we'd like to see it get spent. Okay, thank you.

Thank you. 169 11/28/00 - WHOLE - BILL NO. 000603

Thank you, Madam Chair.

You're welcome. Are there any other questions or comments from members of the committee? (No further questions.)

Thank you very much.

Thank you.

Do we have any other witnesses to testify? Would you approach the witness table, please. (Witnesses come forward.)

Kindly identify yourself for the record.

My name is John Foulkes. I'm Director of Legal and Financial Affairs in the Office of City Controller. I have submitted Jon Saidel's testimony, his written testimony, and I'm available to read some of it and summarize some of it for you and also to answer questions if that's your pleasure.

Did we 170 11/28/00 - WHOLE - BILL NO. 000603 receive copies of the testimony?

Yes.

Okay.

Do you have the copies now? I apologize that Mr. Saidel can't be here today, and I'm going to try to summarize some of his testimony and his testimony begins with a historical view of PGW to try to explain how we got here today. And I think it's sufficient just to say that the City of Philadelphia has owned the Gas Works for 159 years and the management problems that we're having today are not the first time. There have been a number of crises over the years, and just to pick out a couple of points in the history that were raised by Councilmembers earlier, that if we look at just the last 103 years which was going back to when UGI first began to operate and manage the Gas Works, the employees of PGW were not City employees and they were not employees of the operator UGI or later PFMC. They were employees for what PGW was worth, even though its legal starts has been somewhat nebulous. There's 171 11/28/00 - WHOLE - BILL NO. 000603 always been a separate pension plan ever since employees were in a pension plan. And as Janet Parrish mentioned, since two years after collective bargaining was made a right in this country under the Wagner Act, the gas workers have been represented by the Gas Works Employees Union. As you know, although Philadelphia's a Home Rule municipality, it's the management agreement and not the Home Rule Charter which lays out PGW governance. Under this agreement, PFMC, like UGI before it, manages an operates PGW pursuant to ordinances of City Council and resolutions of the PFMC board of directors. PFMC is a Pennsylvania nonprofit corporation incorporated by the City for the stated purpose of operating PGW. Under PFMC's articles of incorporates, the Mayor appoints all seven members of PFMC's board of directors. PFMC's responsibilities under the management agreement are as follows: It manages and operates PGW assets for the sole and exclusive benefit of the City, applying the highest standards of management 172 11/28/00 - WHOLE - BILL NO. 000603 practice and diligence. It hires the CEO, COO and CFO subject to Gas Commission approval and supplies them to PGW. It prepares operating and capital budgets and multi-year forecasts. It submits plans for capital projects to Council. It furnishes PGW's interim finance reports and audited annual financial statements to the Mayor, Director of Finance, City Solicitor, City Council, City Controller, and Gas Commission. That's probably one of the sources of the chart to the right in the front of the room. It keeps the Gas Commission fully apprised of its business plans and it pays the City $18 million annually. In the past, the governing board for PGW, the PFMC Board, has not been able to fulfill these responsibilities in a day-in, day-out, hands-on basis. This is because the board is a group of volunteers who historically have not been able to devote enough time, despite what may 173 11/28/00 - WHOLE - BILL NO. 000603 be good intentions. In fact, to the extent that the duties specified in the management agreement were fulfilled, it was done by PGW executive staff. For example, it has been years since 6 the CEO, COO and CFO were employees of PFMC as 7 specified in the management agreement rather than 8 PGW itself. One need only to have read the 9 Daily News in recent years to learn that the 10 highest standards of practice management practice 11 and diligence, to quote from the management 12 agreement, were not being applied. And also, as 13 you've heard today from people who testified 14 about compliance with Gas Commission orders, 15 budgets and other required filings have typically 16 been made late or perhaps not at all. 17 That being said, Mr. Saidel want to 18 point out that the current PGW Board meets each 19 week. I believe trying to do a job, however, as 20 many corporations have found, a group of even the most well-motivated volunteers has difficulty keeping up with normal enterprise oversight.

That is why many boards have at least some professional directors who can summon the requisite skills and time. When we move beyond 174 11/28/00 - WHOLE - BILL NO. 000603 normal oversight where we have an organization like PGW having profound problems, we can only expect that a board will have a difficult time keeping up. Therefore, I recommend that there should be a permanent governance structure put in place such that the board will always have the necessary time and skills. Bill No. 000603 seeks to do this to do this. Under the Pennsylvania Natural Gas Choice and Competition Act, the Pennsylvania PUC assumed regulation of municipally-owned gas utilities, including PGW, beginning July 1, 2000. This state deregulation legislation transfers rate-making and resolving customer complaints from the Gas Commission to the State PUC. As the comes back is already in place with an experienced and professional staff well-versed in PGW's operations and problems, it makes sense not to lose them, but rather to transfer them from the regulation side to the management side. In closing, I would like to deliver a commercial message from the Controller's Office. Under the current management agreement, we have the right to do annual financial and special 175 11/28/00 - WHOLE - BILL NO. 000603 audits of PGW. Currently, we appoint an outside CPA firm to do the annual audit and PGW pays for this audit. There have also been special audits done by outside firms. We want to hire all auditing firms directly and have them report directly to us. In this way, we will have more control over ensuring meaningful findings. As alternative to hiring outside firms, the Controller's Office could do most PGW post-auditing, including the annual financial audit. City Controller staffers used to do PGW's annual financial audit, but the shift to an outside firm was made in the mid-1960s. We would be willing to bring this function in-house once again; however, we do not have the staff to do it. Please give us the staff and make it possible for us to pay them competitively. Finally, when we use Controller staff to do special audits of PGW as we did to back up the Grand Jury investigation, we want to be reimbursed from PGW through Council. Thank you.

Thank you. Are there any questions from members of the 176 11/28/00 - WHOLE - BILL NO. 000603 committee? (No questions.)

Thank you very much. Our next witness is Mr. Phillip Bertocci. (Witness comes forward.)

Good afternoon. Thank you for your patients. Please identify yourself for the record and proceed with your testimony.

Good afternoon, Madam President of Council and members of Council. My name is Phillip Bertocci. I am the supervising attorney of the Energy and Community Legal Services. From that position, I have for the past five years had the opportunity to observe how the Philadelphia Gas Works functions from not one, but two different vantage points. I give more detail in my written testimony than I'm going to give now in the interest of getting to the core of the matter. But basically, CLS, as most of you probably know, provides legal assistance, advice, 177 11/28/00 - WHOLE - BILL NO. 000603 referrals to hundreds of PGW clients each year -- PGW customers each year who come to us seeking some kind of relief from some kind of action by PGW. In that capacity, I'm in day-to-day contact with the front line of people that address those problems. At the same time, CLS has a contract with the Gas Commission to serve as the public advocate. And in that capacity, I have a front-row seat, an actual ability to participate in the major proceedings that appear before the Gas Commission concerning budgets and financial matters and tariff provisions and all things of that sort. So that I get a view of PGW -- I've had a view of PGW both as mostly from the point of view of customers and from the point of view of the problems involved in -- considerable problems involved in administering a business which has revenues of 550 to $700 million a year. This is a huge enterprise and a huge asset of the City, and I don't believe it has ever received the importance that it deserves. We welcome the proposed PGW governance ordinance this Bill 000603 which 178 11/28/00 - WHOLE - BILL NO. 000603 Councilwoman Tasco has introduced. It is a legislative initiative which is long overdue. As we will explain, we think that the bill still needs work but that the basic concept is sound. The basic concept is that management oversight of PGW should be exercised by a single body, not by the current two-headed management system represented by PFMC and by the Gas Commission. This has been a view which has been espoused many times by analysts looking at PGW from the outside, PGW governance going back to the mid-'80s when the Committee of 70 made this very same recommendation. And just this year the Mayor's transition committee also recommended essentially the need to consolidate, to flatten out, as the Administration says, PGW management. So the need inner consolidation of PGW, I think, is relative established in terms of the theories. In terms of actual practice, I only need to refer you to Tab 4 of the briefing book where I think in detail we can see that this system does not work. It does not work in theory and it has not worked in practice. It has failed the ratepayers of the City of Philadelphia. It 179 11/28/00 - WHOLE - BILL NO. 000603 has failed the people in City Council. It has failed the Mayor. It has failed everybody involved with the system. And I would say that this disaster which we are currently facing took place at a time when Philadelphia had a strong mayor, it had a reasonable level of cooperation between the mayor an City Council and when the PFMC board was staffed with accomplished well-respected people and when the Gas Commission was exercising its core duties with expertise and diligence. So if we have a system which doesn't make sense to experts looking at it from a pure management perspective and a system that has produced a disaster and a system which had good people operating within it trying to do their best within that system and it doesn't work, it seems like a no-brainer to everyone that we really need a change. And Councilwoman Tasco is to be applauded for taking the initiative at the first opportunity to put together a proposal to get and to initiate a debate about what we should do with this utility. Having said that, we believe the bill 25 should be regarded as the beginning and not the 180 11/28/00 - WHOLE - BILL NO.

000603 end of an effort to reach an accommodation concerning a unified PGW governance structure. The hard fact is that in order for PGW to be effectively governed as a municipally-owned utility, there has to be a high level of cooperating between the various parts of Philadelphia government, particularly between the executive and administrative branch headed by the Mayor and the legislative branch represented by Council. We expect that a reformed Gas Commission under current Bill 000603 would contain representatives of both branches of City government, but we hope that the City can reach something of a consensus on that issue. We're reserving judgment on the exact composition of that body, the exact way in which that body is appointed confirmed, things that have matter, until there's been further deliberation by Council. The bottom line for us is the result, is that the composition of that body should be designed to maximize a collaboration which would facilitate selection of a lean, non-interim, competent, professional, senior management team 181 11/28/00 - WHOLE - BILL NO. 000603 and also the development of strategic plans, budgets, and financial forecasts which will command the assent of both the City's Gas Commission and the PUC. What I might say is as you start thinking about is that at this point, the City has lost control of an essential element of the running of an municipal utility, and that's the ability to set rates. There is another element now in the picture that was not there before, and that's the PUC. And because there's that other element in the picture, you might make the analogy with foreign policy, politics is going to have to end at the water's edge. The City, if it wishes to maintain control over the Philadelphia Gas Works, is going to have to put aside the kinds of differences and deferrals of responsibility that have existed in the past. It is going to have to find a way to speak with a single voice involving PGW. The ultimate goal of Bill 000603 is to provide a governance structure which assures both the City and the ratepayers that PGW will be managed in accordance with the highest management 182 11/28/00 - WHOLE - BILL NO. 000603 practice and diligence. To accomplish this goal, Bill 000603 proposes only to change the existing management agreement in order to unify the governance structure. We do not belief that this is sufficient alone to assure that the goal will be accomplished. Two additional changes are necessary if Bill 000603 is to have a reasonable chance of achieving its goals. First, more must be done to maximize the quality, legitimacy, and credibility of PGW's budgets, financial forecasts, and strategic planning. Second, the bill should find institutional ways to maximize the incentive for the City to make good on Bill 000603's promise to provide safe and reliable service at reasonable rates. In order to accomplish the first objective, maximizing the quality and legitimacy of PGW's budgets, the bill should explicitly provide that the commission shall review PGW's annual operating and capital budgets and forecasts in a process which involves adequate notice and hearings prior to decision. With the 183 11/28/00 - WHOLE - BILL NO. 000603 passage of jurisdiction over PGW's rates and tariff to the PUC, the only way in which the City may maintain a substantial level of control over PGW's policies, programs, and priorities is through the budget approval process. PGW's budgets are more important than those of an investor-owned utility because its traditional rate-setting methodology as contained in the Home Rule Charter, the existing management agreement, and Bill 000603 and in the State and Natural Gas Choice and Competition Act directly link the base rates with normal operating expenses and debt service coverage ratios. In other words, we have a different form of rate-setting for PGW, different from any other utility in the State.

It's a form of rate-setting which is basically based on PGW's costs, not on looking at the investment that the owner has in the utility and then calculating a reasonable rate of return on that investment. So special importance has to be focused upon the strategic planning that underlies the budgets that PGW has. If the City is now to cede control of the PGW to the PUC, it must endow PGW's approved 184 11/28/00 - WHOLE - BILL NO. 000603 budgets with the highest level of legitimacy, budgets which are formally proposed and publicly reviewed by the Gas Commission will be inevitably more authoritative than budgets which do not receive formal public scrutiny. The existing management agreement and Bill 000603 surprisingly enough do not require a formal public hearing process, although such procedures for the most part have been traditional Gas Commission practice. The time has come to put those practices in the law. The Gas Commission as reconstituted should be explicitly empowered to hold hearings and investigations, to swear witnesses, to issue subpoenas in its own name and to issue subpoenas on application of parties in formal proceedings that it conducts. Bill 000603 should also specifically provide that the capital and operating budgets shall be approved only after formal proceedings, including notice, adequate opportunity for prehearing discovery, and formal hearings. In addition, Bill 603 should explicitly provide for the appointment of a 185 11/28/00 - WHOLE - BILL NO. 000603 public advocate to represent residential ratepayers in PGW's budget and other proceedings before the Gas Commission, consistent also with current practice. Precisely because Bill 000603 provides for unification of PGW's governance, ratepayers will need more than ever a public advocate to serve as an important check and balance. In the situation created by Bill 10 000603, the Gas Commission is going to be more closely linked than before to the management team because it's the Gas Commission that will have chosen the management team. A Gas Commission which has chosen the management team is going to have a harder time maintaining the necessary distance when budgets are presented by that management team to the Gas Commission, and it's for that reason that we need a strong public advocate and strong system of public hearings to get a second opinion upon the strategic direction and budgets of the Gas Works. The second objective, maximizing the incentive to manage PGW well, is equally important. Bill 000603, like the management agreement, provides that PGW shall make an annual 186 11/28/00 - WHOLE - BILL NO. 000603 $18 million payment to the City regardless of PGW's performance. In order to receive the full million, the City should have to earn it by 5 providing customers with a high quality of 6 service which the bill promises. The 18 million 7 City payment should be linked to PGW's 8 performance. This linkage should be accomplished 9 in a number of different ways: 10 First, the bill should provide that 11 any fines levied by the PUC on PGW for inadequate 12 should be paid from the $18 million payment, not 13 from capital or operating funds. When the PUC 14 fines an investor-owned utility, the fine must be 15 paid from shareholder funds, not from ratepayer 16 funds. Similarly, fines levied against PGW by 17 the PUC should come from the dividend the City 18 receives as PGW's owner and not be passed on to ratepayers. A second means of maximizing the incentive to manage PGW well is to link the payment of the 18 million annual City payment to performance standards. The fixed $18 million payment should be revised to vary with PGW performance in relation to specified standards 187 11/28/00 - WHOLE - BILL NO. 000603 such as customer service, finance, and rates. By linking the $18 million payment to performance, Council would provide a standard of accountability for both the PGW management team and the City.

Third, a means -- a third means of maximizing incentive would be simply protective, to prevent the worst from happening, to specify in the bill that the million would not be paid 11 to the extent that PGW's financial performance 12 does not generate funds sufficient over the level 13 of operating expenditures contained in approved 14 budget to make the $18 million payment. In other 15 words, the City should not be permitted to do 16 retain City payments, which has happened in 17 recent years, who were paid for with borrowed 18 money. That is probably -- the utility has to be a pretty sick puppy to get to that point, but I think it's important to try to have a number of different or to look at a number of different incentives and provide protections for ratepayers in the bill. In summary, we believe that Bill 25 000603 is based on a sound idea whose time has 188 11/28/00 - WHOLE - BILL NO. 000603 finally come, the need for a unified governance system for PGW. We urge Council to develop the idea in the legislative process, in this legislative process, and to refine that idea with the provisions we have discussed and perhaps others which have been bandied about today. On balance, the bill, if it were passed in its current form, does not assure much lasting improvement in PGW management over the existing governance system. More work needs to be done. The additional measures that we have proposed should provide critical legitimacy to the PGW budgetary and planning process, both in the City an before the PUC. And they should provide quantifiable incentives linked the $18 million City payment to ensure the appropriate performance standards are met. Our criticisms of Bill 000603 have been presented today in general terms. However, we are always available to answer questions and to work with anybody requesting our assistance in developing appropriate statutory language. I thank you very much for the opportunity to be heard. 189 11/28/00 - WHOLE - BILL NO. 000603

Thank you very much, sir. Are there any questions? The Chair recognizes Councilman DiCicco. Is Councilman DiCicco in the room? Councilman DiCicco, did you want to be recognized?

No. If my light's on, it's by mistake.

Thank you. Anyone else want to be recognized? (No response.)

Thank you very much, sir.

Thank you.

Tina Nelson. (Witnesses come forward.)

Good afternoon.

Happy holidays, Madam President and City Councilmembers.

Thank you. 190 11/28/00 - WHOLE - BILL NO. 000603 Same to you.

My name is Tina Nelson. I am the Executive Director of CEPA, the Consumer Education and Protective Association, a 34-year-old grassroots consumer group founded by the late Max Wiener. Over the last 30 years, CEPA has followed the activities of PGW, representing our members' interest before the Philadelphia Gas Commission, City Council, and now the Public Utility Commission. As a result of Mark McDonald's with the Daily News expose on PGW and its past management, the public hearings before the Philadelphia Gas Commission and the Public Utility Commission, it is clear that the current structure of the management of PGW and the body that is supposed to regulate, it has failed PGW, its consumers, and the City. Bill 000603 that is before the City Council, while it is an attempt to fix the problems, is inadequate. First, it turns control of PGW to the very commission that was unable to stop the past management's abuses. It was the Gas Commission that allowed PGW to pay millions 191 11/28/00 - WHOLE - BILL NO. 000603 of dollars in cost overruns for a computer system that didn't work, allowed consumers to be put on hold for hours while they called about their bills and allowed service to continually deteriorate. Why, if the Philadelphia Gas Commission was unable to regulate PGW, does anyone believe that it will be able to run the Gas Works? CEPA is not in any way recommending that go we keep the status quo. It should be clear that the Philadelphia Facilities Management Corporation, PFMC, is pathetically inadequate. The PFMC was supposedly ensuring that PGW's management ran PGW well. The past mistakes that PGW are just as much PFMC's fault as they are that of the Gas Commission. And while the Street Administration has taken steps to fix the problems at PGW, it's just not enough. The solution to this never-ending problem of PGW's unaccountability is to tie PGW's payment to the city based on PGW's productivity from this point forward. As long as the City receives $18 million a year from the Gas Works regardless of how well they run it, there is no 25 economic incentive to run PGW properly. 192 11/28/00 - WHOLE - BILL NO. 000603 The City Council knows a change is desperately needed. I urge you to take the proper steps of redoing the management agreement with PGW and tie the payment from PGW to PGW's productivity. No other change is worth making. If and only if PGW's payment to the City is tied to performance and accountability does the proposed PGW governance ordinance Bill 000603 make any sense. The accountability first and foremost is to people of Philadelphia. Thank you for your time.

Thank you very much. Are there any questions or comments from members of the committee? (No questions.)

Thank you so very much for waiting and your testimony.

Thank you kindly.

Is there anyone else to testify on this bill? (No response.)

There being no other witnesses, this concludes the public 193 11/28/00 - WHOLE - BILL NO. 000603 hearing of the Committee of the Whole. - - - 194 11/28/00 - PUBLIC MEETING COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC MEETING COMMITTEE OF THE WHOLE - - - Tuesday, November 28, 2000 - - - Public Meeting conducted by the Committee on Public Property and Public Works, held in Room 401, City Hall, Philadelphia, Pennsylvania, on the above date, to consider action on the following: BILL NO. 000603 - - - PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN JANNIE BLACKWELL, Vice Chair COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - 195 11/28/00 - PUBLIC MEETING