Should Philly's public gas company be in private hands?

Mayor Michael Nutter has announced a proposed agreement to privatize Philadelphia Gas Works. The deal, which would sell PGW to Connecticut-based UIL Holdings Corp. for $1.86 billion, is enormous. And it is the most important local issue that you haven’t thought about at all. 

The largest benefit is clear: It would inject an estimated $424 million into the city’s underfunded pensions. But the deal also presents potential drawbacks and poses many unanswered questions. 

Utility Workers Union of America Local 686, consumer advocates and City Controller Alan Butkovitz have already criticized the sale. A skeptical City Council — which, along with the Pennsylvania Public Utility Commission, must give its approval for the deal to go through — has retained consultants to analyze the sale, and whether PGW could expand and improve as a city-owned utility.

So if you are a PGW ratepayer and a Philadelphia taxpayer — that’s most of you — follow closely.

1) Will it get more expensive to heat your home?

In a news conference Monday at City Hall, UIL CEO James Torgerson said his company had agreed to a three-year freeze in the base rate paid by PGW customers (expiring Jan. 1, 2018). What Torgerson didn’t emphasize is that the rate paid by consumers is made up of other factors on top of that base rate. In addition, the agreement includes numerous exceptions, including that UIL “may file to recover additional costs resulting from new taxes.” 

PGW currently pays almost no taxes. But a privatized company will pay federal and state income taxes, and city taxes. The agreement appears to reserve UIL’s right to file for a rate increase to cover these taxes effective before the three-year “freeze” is over.

“It does allow it, but what it doesn’t do is guarantee it,” says UIL spokesperson Michael West. “We would not file a request for rate increase purely because of taxes.”

But in a Monday morning conference call with investors, Torgerson played down the rate freeze. 

Torgerson also said that UIL plans to embark on an aggressive plan to replace PGW’s 1,500 miles of aging cast-iron pipe at a rate faster than PGW’s current program. Replacing pipe is expensive, and those costs will be passed on to ratepayers — while boosting earnings to UIL.“We would expect to work with the Pennsylvania [Public Utility] Commission to be able to accelerate that and, obviously, add to the rate base,” said Torgerson.

Everyone agrees that those pipes, which can pose safety risks, must be replaced. But PGW has a good safety record, and it should be examined whether the risks merit replacing pipe at a faster clip.

West says that PGW likely wants to move faster but is constrained by its limited access to capital. That’s possible — but City Council should ask. 

It is unclear what UIL rate increases will look like in 2018 and beyond, or how they would compare to what a publicly owned PGW would seek. 

2) Is this a good deal for poor people?

“Although the total sale price may be an attractive number, we are concerned that this payday may translate into higher rates (even in the short term) and more customers unable to afford service,” says public advocate Robert Ballenger, an attorney for Community Legal Services. He is concerned that the sale “presents serious risks for customers, particularly those low-income Philadelphians.”

UIL’S West counters that “all the programs that exist right now for low-income individuals and seniors, we will maintain.”

But contract language says only that UIL will make “commercially reasonable efforts” to include them or “programs similar in purpose … in its initial PUC-approved rates.” Ballenger would like to see a commitment in writing.

Finally, the agreement confers ownership of PGW’s liens to UIL. While the company could not impose new liens, it could collect debts more aggressively — or foreclose on homes and businesses. Currently, Ballenger says, PGW almost never — if ever — forecloses. West says that UIL will not do so either. But once PGW is sold — and at a later date, perhaps sold again to another company — the city will lose its control over such matters.

3) Is this is a good deal for the city?

Nutter says the deal will put $424 million into Philadelphia’s underfunded pension. But Philadelphia’s pension hole is $5.1 billion, so the sale of PGW would fill just 8.3 percent of the gap. 

The city will also lose the $18 million annual payment it receives from PGW. It may lose more.

Lazard, the Wall Street analysts hired by the city, valued the city’s net benefits from a deal at $278 million to $765 million. That figure is based on an estimate that the loss of the $18 million annual payment will cost the city only $124 million to $155 million. But observers of the deal are already asking whether Lazard’s cost-benefit analysis low-balled how much forgoing that $18 million payment will cost the city in the long run. This will likely be a matter of contention.

The second issue is PGW’s liquefied natural gas (LNG) facilities, which UIL plans to make key features of its business — especially given the city’s proximity to the booming Marcellus Shale. Currently, PGW customers benefit from the LNG facilities in at least four ways. First, PGW can buy gas when it’s cheap and store it, and does not have to purchase gas on the spot market when it is expensive. Second, PGW does not have to reserve capacity to import gas from outside of the system as frequently. Third, PGW currently makes money selling gas to third-party businesses. Fourth, PGW can assure customers certainty during a gas shortage.

At present, these savings and revenue directly benefit ratepayers. Under UIL ownership, these benefits may stop going to customers and instead be captured by shareholders. 

In addition, City Council should investigate what sort of value PGW’s LNG facilities could have if they remained publicly owned and were allowed to expand and increase sales to third-party businesses.

4) Is this good for workers?

UIL has agreed to make no layoffs and to not reduce employment (currently 1,650 workers) below 1,350 workers — but only for three years. And the gas workers’ collective-bargaining agreement expires on May 15, 2015. Employment levels, salaries and benefits will be on the line. 

“We’ll be obviously negotiating with the union on a lot of these issues,” Torgerson told investors.

UIL also agrees to maintain an office in Philadelphia — but again, only for three years. City Council should examine what impact decreased employment will have on local economic activity and tax revenues. 

Finally, City Council should examine whether it is correct to bail out the city’s pension fund — typically funded by taxpayer dollars — with the proceeds of an asset built by ratepayers. 

Last year, in the face of criticism that the city should foot the bill, the Philadelphia Gas Commission narrowly approved spending $2.34 million in ratepayer funds to pay for costs related to Mayor Nutter’s efforts to sell the company. 

The move is arguably regressive: The city’s tax base is broader (it includes suburbanites who work in the city and pay the city wage tax) than PGW’s customer base; and PGW’s fee structure is less progressive than the city’s tax structure (since taxes are assessed as a percentage of income,  and not as a flat fee for service). 

On the call with investors, Torgerson played down concerns that City Council members might block the sale. But they might do so, and the deal could expire without their approval by July 15. City Council has a non-relationship with Nutter, and Council President Darrell Clarke indicates that he’s in no hurry to sign. The privatization of PGW raises major policy and political questions, and is far from a done deal.