Pa. muni must be fixed before it's sold

October 22, 2008

Rodney White, Gas Daily

© Copyright 2008 McGraw-Hill, Inc.  

Fixing Philadelphia Gas Works' financial ailments won't be easy, but it must be done if the city ever hopes to unload the utility, theEconomy League of Greater Philadelphia said in a study released Tuesday.

"PGW remains too troubled for the city to profitably sell, yet keeping it will require difficult decisions about reducing subsidies to low-income customers, seeking even higher rates, allowing its work force to shrink, and spending tens of millions to improve its efficiency," the study said.

"If the city declines to make fundamental changes, it will continue to forgo any return on PGW's considerable assets, PGW's debt will keep mounting, and residents will be saddled with ever-higher gas bills," it continued. "The city would lose money by selling PGW in its present state" and in fact "would likely have to pay another entity to take PGW off its hands."

The study was commissioned by the Pew Charitable Trusts and the William Penn Foundation. The Economy League is an independent, nonpartisan, nonprofit organization that conducted a similar study of PGW 13 years ago.

The nation's largest municipally owned gas utility with 500,000 customers, PGW has been plagued by delinquent payments and low collection rates for years. Saddled with debt, it has been struggling with credit-related issues as well. The Pennsylvania Public Utilities Commission and former Philadelphia Mayor Dennis Street wanted to sell PGW but were unable to agree on how to proceed (GD 9/17/07).

The Economy League study took note of what it called the muni's "labyrinthine governance structure." More than 30 elected and appointed officials "have their hands on the PGW steering wheel" and convolute "even mundane operational processes, thwart coherent policy and increase already-high operating costs."

A streamlined structure would improve management flexibility and "should be considered a prerequisite to continued city ownership," the study maintained.

The utility is vulnerable to the city's "shrinking population and high concentration of poverty," the report said, adding that one out of four customers receive "highly subsidized service." To address that issue, it said the muni should create incentives for customers to conserve energy.

Meanwhile, PGW's staffing ratios "are far out of line with industry standards," according to the report, though it acknowledged that the muni must contend with the "unique demands" of distributing gas in a wholly urban environment.

The staffing issue should be addressed through succession planning, which would "mitigate the deleterious consequences of losing institutional knowledge and leverage labor attrition as a way to reduce operating costs," the study said.

PGW spokesman Wade Colclough said "we hope that this report will begin a conversation on PGW and we look to the mayor's administration on how to proceed next."

Doug Oliver, a spokesman for Philadelphia Mayor Michael Nutter, said the study authors "deserve credit for taking such a detailed look at the options that are available. It's no secret the city is facing severe financial challenges, but we have not forgotten about the stable yet delicate condition of PGW. We look forward to reviewing the details of the study, and working closely with PGW's board, the leadership team at PGW and other stakeholders toward finding a long-term solution."