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?