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PGW has potential to change

November 6, 2008

Steve Wray, Donald Kimelman, and Feather Houstoun, Philadelphia Inquirer




To lower costs, the utility needs to shrink its workforce and reduce its subsidies.


Temperatures are falling, and with energy prices rising across the country, gas bills are sure to go up this winter. But nowhere will the increases hurt as much as in Philadelphia, where gas rates are higher than in any other snow-belt city.


A recent report by the Economy League of Greater Philadelphia takes an in-depth look at why Philadelphians pay more for their natural gas and how the problem can be addressed.


Most other cities meet their citizens' gas needs without owning a gas company. So it's logical to ask whether, with all its other challenges, Philadelphia should be in this business.


The report examines three scenarios: selling the Philadelphia Gas Works to a private firm, retaining city ownership, and creating a new authority.


Given the volatility in the credit markets and PGW's significant debts, a sale or conveyance to an authority would be hard to pull off. Acknowledging that, the report underscores the importance of more immediate steps to improve PGW under city ownership.


The report finds that PGW, though historically mismanaged, has taken strides in the right direction. Better billing practices and enforcement have improved collection rates that were once chronically deficient, and the additional income has allowed PGW to repay an old city loan. So there is momentum to build on.

But PGW management has the power to change only so much. While the utility has tidied up its financial house, the foundation is still cracking.


The problems that make the company difficult to sell, such as very high debt levels, seem destined to erode progress. So how does PGW turn things around?

The Economy League's report, commissioned by Pew and the William Penn Foundation, recommends some remedies, including:


Restructure social programs.


The rates for low-income customers are capped as a percentage of their income, creating no incentive to conserve. As a result, these subsidized customers use nearly 50 percent more gas than customers paying full price, who underwrite the program with a 20 percent surcharge on their monthly bills.

A restructured program could encourage conservation and reduce customers' bills.


Streamline governance.


More than 30 officials have their hands on the PGW steering wheel. The resulting "governance gridlock" complicates even mundane processes, thwarts coherent policy, and adds more than $4 million to PGW's already high operating costs.


Prepare for labor turnover.


The number of PGW employees per customer is double the national average, but nearly 40 percent of PGW's workforce is eligible to retire in three years. This represents an opportunity as well as a challenge.

PGW has the potential to prudently lower labor costs through attrition and effective planning, but it needs to prepare for the loss of institutional knowledge required to operate a gas works in an old, urban environment.

It will not be easy to restructure subsidies, shrink the workforce, and take on the status quo. But strategic steps to make the utility more cost-effective would be in the interests of customers and the city's competitiveness.

Steve Wray, Donald Kimelman,and Feather Houstoun head, respectively, the Economy League of Greater Philadelphia, the Pew Charitable Trusts' Philadelphia Program, and the William Penn Foundation.