Editor's Notebook: The Public Question

February 2012, Vol. 239 No. 2

There’s an intriguing story in Philadelphia that offers insight into whether cities should own utilities.

An article in the Philadelphia Inquirer quotes members of the Pennsylvania Public Utility Commission as being increasingly frustrated with a lagging study about privatizing Philadelphia Gas Works. PGW is the largest municipally owned gas utility in the nation with more than 500,000 private and 19,000 industrial and commercial customers. The company has been in operation since 1836.

Philly took control of the company from UGI in 1972 when newly elected Mayor Frank Rizzo flexed his powerful political muscle and ended the 75-year relationship.

What concerns the PUC is that PGW ultimately needs to replace 1,500 miles of brittle cast-iron mains that will take 85 years to replace at the current pace, said the Inquirer, which published an investigative series on PGW’s aging infrastructure in December. Last year a gas-main explosion killed a PGW worker, re-triggering the question of ownership.
Commissioner James Cawley told the Inquirer the PUC wants to avoid a repeat of that incident, claiming “it is another disaster waiting to happen. We’re talking about the health and safety of the public. It’s that serious.”

Those comments nettled PGW CEO Craig White. He said PGW is systemically replacing 18 miles of cast-iron pipe yearly and responded that “I don’t believe we’re in a situation where you can make the statement that there’s going to be a higher propensity for failure in the future.”

Other commissioners weren’t quite as outspoken as Cawley but are dismayed the city hasn’t finished a study about privatizing PGW that was promised after state regulators granted a rate increase in 2009. The city contracted with Lazard Freres in 2010 for a feasibility study on selling PGW. A spokesman for Mayor Nutter told the Inquirer the study needs more work.

Philadelphia is one of the nation’s poorest cities, a fact reflected in PGW’s nonpayment rate. According to Answers.com, PGW stated nonpayment in 2003 cost more than $100 million in lost revenues and was the most significant source of its financial difficulties. That year PGW cut off more than 10,000 customers who were persistently delinquent. Though they managed to improve their collection rate from 87% to 94% by 2004, the increased revenues did not cure the worsening deficit.

In 2005, PGW reported that more than half of its customers failed to pay their bills on time. This has forced other customers to subsidize them, leading to the highest rates in the state.

In 2006, the PUC approved PGW’s proposed $1 billion budget for 2007, which also requested $500,000 for management bonuses. By 2007, the company reported that it faced a debt load exceeding $1.2 billion. That’s when talk about private ownership began to spread among city officials and politicians.

So, that begs the question: who would want to buy a company loaded with long-term debt, delinquency, public employee entitlements, and oh yes, an aging infrastructure?
In 2008, a study by the Economy League of Philadelphia valued PGW at $1.3-1.5 billion, less than its long-term debt and employee retirement obligations. The Inquirer quoted the study as suggesting that the city would “likely have to pay another entity to take PGW off its hands.”

The study insisted that inaction was worse, causing a continued erosion of PGW’s value and ever-higher gas bills. “Truly transformational change is needed to reverse a never-ending cycle of increasing costs,” the authors said.

PGW’s White claims the situation is not so dire. He told the Inquirer that in recent years PGW’s finances have improved. He also wants to see legislation passed that would allow utilities to apply a surcharge to bills to pay for infrastructure. This would enable PGW to replace 12 more miles of gas mains yearly at a cost of $3 or more a month per customer, he said. PGW has also resumed annual $18 million dividends to the city that had been suspended, leading some to suggest that as one reason the city is lagging on the Lazard study.

This is not to say municipal ownership of utilities is bad. It just doesn’t work everywhere. Some of his cronies should have told that to Frank Rizzo.