City should sell PGW, PUC says

And it nixes $75M of utility's $100M plea

By MARK McDONALD 215-854-2646
The chairman of the state Public Utility Commission said yesterday that the real cure for the debt-ridden, city-owned Philadelphia Gas Works is to sell it.

"This is a classic case of a company that needs to be acquired in order to work out its financial and operational problems," said Chairman Wendell F. Holland. "That's the big picture and until that happens, PGW will remain Philadelphia's number one energy issue."

Holland commented after the PUC rejected PGW's request for its largest-ever rate increase of $100 million per year, instead approving a $25 million increase targeted exclusively at residential customers.

The PUC estimated the typical residential customer would see a $57 increase, raising the annual bill to $1,784.

PGW President Thomas Knudsen said the company will appeal the PUC decision to Commonwealth Court. He said the company favored spreading any rate increase among all classes of customers.

Yesterday's PUC decision followed a recommendation from two administrative law judges who said the rate increase should be limited to $25 million.

But PGW argued it needed the full amount to replace its aging gas mains. In its legal filings, the company said it needed $60 million to extricate itself from a "crisis mode" or $70 million to get it back to where it was in 2002, after the last rate increase.

Knudsen, who has guided the company since 2000, said PGW has $1.22 billion in debt. For the last 14 years, the utility has not been able to generate cash from its customers to help pay for needed capital improvements.

"We're using one high-interest card to pay off another," he said. "We're almost a payday borrower."

The $25 million increase is in base rate, which provides money for operations, from salaries and benefits to materials and interest on the company's massive debt. But it doesn't pay the cost of natural gas, which fluctuates on the open market.

For its last base-rate increase, the company asked the PUC for $60 million and got $36 million.

Knudsen said if the $25 million increase stands, the company will be forced to seek another increase almost immediately to stave off a technical default on its debt by 2010.

The Street administration has done much to stabilize the company, increasing its rate of bill collection from 87 percent in 2003 to almost 97 percent last year.

When apprised of Holland's comments about selling PGW, Joyce Wilkerson, Street's chief of staff and a member of the PGW Board of Directors, said: "What does that have to do with setting appropriate rates? We have long wanted to dispose of the company, but the PUC seems to think a sale at any price is OK. The city can't afford to be stuck with all that debt."

State Rep. Dwight Evans said he has legislation pending to empower the PUC to require a merger or sale of energy companies in the commonwealth. Now, it can force mergers only among water companies.

Holland was the only commissioner to vote against the proposal to place the entire rate increase on residential users.

"PGW has the highest rates in the state and also the poorest customers," he said.

"Shifting all of that increase on one class of customer just wasn't the answer."

A PUC spokesman said the commission majority put the burden on residential customers in reaction to a Commonwealth Court ruling last year that rejected the then-existing method of apportioning rate increases among residential, industrial and commercial customers.

Holland said the ruling called for a "gradual process" of equalizing the burden, but his colleagues did it "in one fell swoop."

Phil Bertocci, the Community Legal Services attorney who represented Action Alliance for Senior Citizens during the rate process, said:

"We're disappointed the PUC decided to place the entire burden of the rate increase on residential customers." *

Source: Philadelphia Daily News