Good afternoon, Madam President of Council and members of Council. My name is Phillip Bertocci. I am the supervising attorney of the Energy and Community Legal Services. From that position, I have for the past five years had the opportunity to observe how the Philadelphia Gas Works functions from not one, but two different vantage points. I give more detail in my written testimony than I'm going to give now in the interest of getting to the core of the matter. But basically, CLS, as most of you probably know, provides legal assistance, advice, 177 11/28/00 - WHOLE - BILL NO. 000603 referrals to hundreds of PGW clients each year -- PGW customers each year who come to us seeking some kind of relief from some kind of action by PGW. In that capacity, I'm in day-to-day contact with the front line of people that address those problems. At the same time, CLS has a contract with the Gas Commission to serve as the public advocate. And in that capacity, I have a front-row seat, an actual ability to participate in the major proceedings that appear before the Gas Commission concerning budgets and financial matters and tariff provisions and all things of that sort. So that I get a view of PGW -- I've had a view of PGW both as mostly from the point of view of customers and from the point of view of the problems involved in -- considerable problems involved in administering a business which has revenues of 550 to $700 million a year. This is a huge enterprise and a huge asset of the City, and I don't believe it has ever received the importance that it deserves. We welcome the proposed PGW governance ordinance this Bill 000603 which 178 11/28/00 - WHOLE - BILL NO. 000603 Councilwoman Tasco has introduced. It is a legislative initiative which is long overdue. As we will explain, we think that the bill still needs work but that the basic concept is sound. The basic concept is that management oversight of PGW should be exercised by a single body, not by the current two-headed management system represented by PFMC and by the Gas Commission. This has been a view which has been espoused many times by analysts looking at PGW from the outside, PGW governance going back to the mid-'80s when the Committee of 70 made this very same recommendation. And just this year the Mayor's transition committee also recommended essentially the need to consolidate, to flatten out, as the Administration says, PGW management. So the need inner consolidation of PGW, I think, is relative established in terms of the theories. In terms of actual practice, I only need to refer you to Tab 4 of the briefing book where I think in detail we can see that this system does not work. It does not work in theory and it has not worked in practice. It has failed the ratepayers of the City of Philadelphia. It 179 11/28/00 - WHOLE - BILL NO. 000603 has failed the people in City Council. It has failed the Mayor. It has failed everybody involved with the system. And I would say that this disaster which we are currently facing took place at a time when Philadelphia had a strong mayor, it had a reasonable level of cooperation between the mayor an City Council and when the PFMC board was staffed with accomplished well-respected people and when the Gas Commission was exercising its core duties with expertise and diligence. So if we have a system which doesn't make sense to experts looking at it from a pure management perspective and a system that has produced a disaster and a system which had good people operating within it trying to do their best within that system and it doesn't work, it seems like a no-brainer to everyone that we really need a change. And Councilwoman Tasco is to be applauded for taking the initiative at the first opportunity to put together a proposal to get and to initiate a debate about what we should do with this utility. Having said that, we believe the bill 25 should be regarded as the beginning and not the 180 11/28/00 - WHOLE - BILL NO.
000603 end of an effort to reach an accommodation concerning a unified PGW governance structure. The hard fact is that in order for PGW to be effectively governed as a municipally-owned utility, there has to be a high level of cooperating between the various parts of Philadelphia government, particularly between the executive and administrative branch headed by the Mayor and the legislative branch represented by Council. We expect that a reformed Gas Commission under current Bill 000603 would contain representatives of both branches of City government, but we hope that the City can reach something of a consensus on that issue. We're reserving judgment on the exact composition of that body, the exact way in which that body is appointed confirmed, things that have matter, until there's been further deliberation by Council. The bottom line for us is the result, is that the composition of that body should be designed to maximize a collaboration which would facilitate selection of a lean, non-interim, competent, professional, senior management team 181 11/28/00 - WHOLE - BILL NO. 000603 and also the development of strategic plans, budgets, and financial forecasts which will command the assent of both the City's Gas Commission and the PUC. What I might say is as you start thinking about is that at this point, the City has lost control of an essential element of the running of an municipal utility, and that's the ability to set rates. There is another element now in the picture that was not there before, and that's the PUC. And because there's that other element in the picture, you might make the analogy with foreign policy, politics is going to have to end at the water's edge. The City, if it wishes to maintain control over the Philadelphia Gas Works, is going to have to put aside the kinds of differences and deferrals of responsibility that have existed in the past. It is going to have to find a way to speak with a single voice involving PGW. The ultimate goal of Bill 000603 is to provide a governance structure which assures both the City and the ratepayers that PGW will be managed in accordance with the highest management 182 11/28/00 - WHOLE - BILL NO. 000603 practice and diligence. To accomplish this goal, Bill 000603 proposes only to change the existing management agreement in order to unify the governance structure. We do not belief that this is sufficient alone to assure that the goal will be accomplished. Two additional changes are necessary if Bill 000603 is to have a reasonable chance of achieving its goals. First, more must be done to maximize the quality, legitimacy, and credibility of PGW's budgets, financial forecasts, and strategic planning. Second, the bill should find institutional ways to maximize the incentive for the City to make good on Bill 000603's promise to provide safe and reliable service at reasonable rates. In order to accomplish the first objective, maximizing the quality and legitimacy of PGW's budgets, the bill should explicitly provide that the commission shall review PGW's annual operating and capital budgets and forecasts in a process which involves adequate notice and hearings prior to decision. With the 183 11/28/00 - WHOLE - BILL NO. 000603 passage of jurisdiction over PGW's rates and tariff to the PUC, the only way in which the City may maintain a substantial level of control over PGW's policies, programs, and priorities is through the budget approval process. PGW's budgets are more important than those of an investor-owned utility because its traditional rate-setting methodology as contained in the Home Rule Charter, the existing management agreement, and Bill 000603 and in the State and Natural Gas Choice and Competition Act directly link the base rates with normal operating expenses and debt service coverage ratios. In other words, we have a different form of rate-setting for PGW, different from any other utility in the State.
It's a form of rate-setting which is basically based on PGW's costs, not on looking at the investment that the owner has in the utility and then calculating a reasonable rate of return on that investment. So special importance has to be focused upon the strategic planning that underlies the budgets that PGW has. If the City is now to cede control of the PGW to the PUC, it must endow PGW's approved 184 11/28/00 - WHOLE - BILL NO. 000603 budgets with the highest level of legitimacy, budgets which are formally proposed and publicly reviewed by the Gas Commission will be inevitably more authoritative than budgets which do not receive formal public scrutiny. The existing management agreement and Bill 000603 surprisingly enough do not require a formal public hearing process, although such procedures for the most part have been traditional Gas Commission practice. The time has come to put those practices in the law. The Gas Commission as reconstituted should be explicitly empowered to hold hearings and investigations, to swear witnesses, to issue subpoenas in its own name and to issue subpoenas on application of parties in formal proceedings that it conducts. Bill 000603 should also specifically provide that the capital and operating budgets shall be approved only after formal proceedings, including notice, adequate opportunity for prehearing discovery, and formal hearings. In addition, Bill 603 should explicitly provide for the appointment of a 185 11/28/00 - WHOLE - BILL NO. 000603 public advocate to represent residential ratepayers in PGW's budget and other proceedings before the Gas Commission, consistent also with current practice. Precisely because Bill 000603 provides for unification of PGW's governance, ratepayers will need more than ever a public advocate to serve as an important check and balance. In the situation created by Bill 10 000603, the Gas Commission is going to be more closely linked than before to the management team because it's the Gas Commission that will have chosen the management team. A Gas Commission which has chosen the management team is going to have a harder time maintaining the necessary distance when budgets are presented by that management team to the Gas Commission, and it's for that reason that we need a strong public advocate and strong system of public hearings to get a second opinion upon the strategic direction and budgets of the Gas Works. The second objective, maximizing the incentive to manage PGW well, is equally important. Bill 000603, like the management agreement, provides that PGW shall make an annual 186 11/28/00 - WHOLE - BILL NO. 000603 $18 million payment to the City regardless of PGW's performance. In order to receive the full million, the City should have to earn it by 5 providing customers with a high quality of 6 service which the bill promises. The 18 million 7 City payment should be linked to PGW's 8 performance. This linkage should be accomplished 9 in a number of different ways: 10 First, the bill should provide that 11 any fines levied by the PUC on PGW for inadequate 12 should be paid from the $18 million payment, not 13 from capital or operating funds. When the PUC 14 fines an investor-owned utility, the fine must be 15 paid from shareholder funds, not from ratepayer 16 funds. Similarly, fines levied against PGW by 17 the PUC should come from the dividend the City 18 receives as PGW's owner and not be passed on to ratepayers. A second means of maximizing the incentive to manage PGW well is to link the payment of the 18 million annual City payment to performance standards. The fixed $18 million payment should be revised to vary with PGW performance in relation to specified standards 187 11/28/00 - WHOLE - BILL NO. 000603 such as customer service, finance, and rates. By linking the $18 million payment to performance, Council would provide a standard of accountability for both the PGW management team and the City.
Third, a means -- a third means of maximizing incentive would be simply protective, to prevent the worst from happening, to specify in the bill that the million would not be paid 11 to the extent that PGW's financial performance 12 does not generate funds sufficient over the level 13 of operating expenditures contained in approved 14 budget to make the $18 million payment. In other 15 words, the City should not be permitted to do 16 retain City payments, which has happened in 17 recent years, who were paid for with borrowed 18 money. That is probably -- the utility has to be a pretty sick puppy to get to that point, but I think it's important to try to have a number of different or to look at a number of different incentives and provide protections for ratepayers in the bill. In summary, we believe that Bill 25 000603 is based on a sound idea whose time has 188 11/28/00 - WHOLE - BILL NO. 000603 finally come, the need for a unified governance system for PGW. We urge Council to develop the idea in the legislative process, in this legislative process, and to refine that idea with the provisions we have discussed and perhaps others which have been bandied about today. On balance, the bill, if it were passed in its current form, does not assure much lasting improvement in PGW management over the existing governance system. More work needs to be done. The additional measures that we have proposed should provide critical legitimacy to the PGW budgetary and planning process, both in the City an before the PUC. And they should provide quantifiable incentives linked the $18 million City payment to ensure the appropriate performance standards are met. Our criticisms of Bill 000603 have been presented today in general terms. However, we are always available to answer questions and to work with anybody requesting our assistance in developing appropriate statutory language. I thank you very much for the opportunity to be heard. 189 11/28/00 - WHOLE - BILL NO. 000603
Thank you very much, sir. Are there any questions? The Chair recognizes Councilman DiCicco. Is Councilman DiCicco in the room? Councilman DiCicco, did you want to be recognized?
Thank you. Anyone else want to be recognized? (No response.)
Thank you. 190 11/28/00 - WHOLE - BILL NO. 000603 Same to you.
My name is Tina Nelson. I am the Executive Director of CEPA, the Consumer Education and Protective Association, a 34-year-old grassroots consumer group founded by the late Max Wiener. Over the last 30 years, CEPA has followed the activities of PGW, representing our members' interest before the Philadelphia Gas Commission, City Council, and now the Public Utility Commission. As a result of Mark McDonald's with the Daily News expose on PGW and its past management, the public hearings before the Philadelphia Gas Commission and the Public Utility Commission, it is clear that the current structure of the management of PGW and the body that is supposed to regulate, it has failed PGW, its consumers, and the City. Bill 000603 that is before the City Council, while it is an attempt to fix the problems, is inadequate. First, it turns control of PGW to the very commission that was unable to stop the past management's abuses. It was the Gas Commission that allowed PGW to pay millions 191 11/28/00 - WHOLE - BILL NO. 000603 of dollars in cost overruns for a computer system that didn't work, allowed consumers to be put on hold for hours while they called about their bills and allowed service to continually deteriorate. Why, if the Philadelphia Gas Commission was unable to regulate PGW, does anyone believe that it will be able to run the Gas Works? CEPA is not in any way recommending that go we keep the status quo. It should be clear that the Philadelphia Facilities Management Corporation, PFMC, is pathetically inadequate. The PFMC was supposedly ensuring that PGW's management ran PGW well. The past mistakes that PGW are just as much PFMC's fault as they are that of the Gas Commission. And while the Street Administration has taken steps to fix the problems at PGW, it's just not enough. The solution to this never-ending problem of PGW's unaccountability is to tie PGW's payment to the city based on PGW's productivity from this point forward. As long as the City receives $18 million a year from the Gas Works regardless of how well they run it, there is no 25 economic incentive to run PGW properly. 192 11/28/00 - WHOLE - BILL NO. 000603 The City Council knows a change is desperately needed. I urge you to take the proper steps of redoing the management agreement with PGW and tie the payment from PGW to PGW's productivity. No other change is worth making. If and only if PGW's payment to the City is tied to performance and accountability does the proposed PGW governance ordinance Bill 000603 make any sense. The accountability first and foremost is to people of Philadelphia. Thank you for your time.
Thank you very much. Are there any questions or comments from members of the committee? (No questions.)
Thank you so very much for waiting and your testimony.
Is there anyone else to testify on this bill? (No response.)
There being no other witnesses, this concludes the public 193 11/28/00 - WHOLE - BILL NO. 000603 hearing of the Committee of the Whole. - - - 194 11/28/00 - PUBLIC MEETING COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC MEETING COMMITTEE OF THE WHOLE - - - Tuesday, November 28, 2000 - - - Public Meeting conducted by the Committee on Public Property and Public Works, held in Room 401, City Hall, Philadelphia, Pennsylvania, on the above date, to consider action on the following: BILL NO. 000603 - - - PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN JANNIE BLACKWELL, Vice Chair COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - 195 11/28/00 - PUBLIC MEETING
We will now go into our public meeting. And the Chair recognizes Councilwoman Tasco.
Thank you, Madam President, I move that Bill 000603 be reported out of committee with a favorable recommendation. (Duly seconded.)
It has been moved and properly seconded that Bill No. 000603 be reported out of committee --
I'm just curious as to the need or no need for rules suspension.
It has been moved and properly seconded that Bill No. 000603 be reported out of committee with a favorable recommendation.
Point of order, Madam President. Will it have a first reading on 196 11/28/00 - PUBLIC MEETING the 7th?
I'd like that the rules of Council be suspended. (Duly seconded.)
It has been moved and seconded that Bill No. 000603 be reported out of committee with a favorable recommendation, also a recommendation that the rules of Council be suspended so as to permit first reading at our next Council Session. All those in favor will signify by saying aye. Those opposed?
The ayes have it, and the record will reflect that Councilman Goode voted nay. This concludes the public meetings of the Committee of the Whole. Thank you all very 197 11/28/00 - PUBLIC MEETING much. (Adjourned at 2:55 p.m.) - - - 198 C E R T I F I C A T E I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of Tuesday, November 28, 2000, were reported fully and accurately by me, and that this is a correct transcript of same. RE: COUNCIL COMMITTEE OF THE WHOLE BILL NO. 000603 __________________________________, JOSEPHINE CARDILLO, Registered Professional Reporter