Four Pressing Questions About the Philadelphia Gas Works Sale

Mayor Michael Nutter announced the sale terms for Philadelphia Gas Works, a city-owned utility.

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Earlier this week Mayor Michael Nutter announced the sale terms for Philadelphia Gas Works, the city-owned agency that provides heat to roughly one-third of all Philadelphians. The sales pitch hinges on the notion that cities shouldn’t own and operate utilities. “There was a time when owning the gas company made sense,” Nutter wrote in a letter to residents. “That time has long since passed.”

But PGW is a singular entity, serving a unique consumer base: More than a fifth of its 500,000 customers depend on the utility’s relatively generous safety net provisions for hot food and warmth in the wintertime.

The company in question, Connecticut’s UIL Holdings, has offered $1.86 billion. (The Hartford Courant reports that the company took a $1.9 billion loan from Morgan Stanley to make the buy. The paper also, however, called Philadelphia’s mayor “Anthony Nutter.”) Nutter has promised cheaper rates, maintenance of safety net programs and jobs, and that about $424 million of the sale will go toward struggling city pensions.

Will a deal that sounds this good be able to deliver? Here are four issues to watch with the announced sale, which still needs approval from city council.

1) Does the deal guarantee that prices will not increase?

Nutter assures that the deal will freeze rates for three years, but there appears to be a rather large loophole. The mayor would allow UIL to raise prices on gas consumers if the company needs to cover any new tax liabilities. Because PGW is currently publicly owned, it is not subject to state and federal taxes. That will change, however, if the company passes into private hands. So the very basis of the deal, the privatization of PGW, will open up UIL to new tax liabilities and allow it to raise rates.

Yesterday a city spokesperson assured the Philadelphia Inquirer that the company has taken these costs into account and will not raise rates. But the tax liability loophole is just one potential vehicle for cuts.

2) The proposed sale does not assure PGW’s current low-income assistance programs

Under the terms of sale, UIL has agreed to keep PGW’s safety net programs on the books. But there is actually no such guarantee that the programs will remain preserved. In theory, UIL could renegotiate the policies as soon as the deal is closed and, indeed, the company has only agreed to do what is “commercially reasonable” to maintain the programs or establish another “support program similar in purpose.”

Most utilities in the city are subject to Pennsylvania Public Utility Commission (PUC) regulations, which ensure safety net programs of some kind. The vaguely worded assurances above are troubling because the commission establishes guidelines, not mandates. At present, PGW’s programs are unusually equitable.

The utility sets low-income customer bills as a percentage of household income: If you live at 0 to 50 percent of the poverty line, you are charged 8 percent of your income; at 51-100 percent you pay 9 percent; and at 101-150 percent you pay 10 percent. Most utilities are not so straightforward with their calculations and do not directly base their assistance programs on household income. As a result, they are not necessarily affordable for each individual family. Electric company PECO, for instance, uses a intricate measure featuring seven different income tiers: Its most recent assessment found that its services are not affordable to a third of its low-income customers.

There is also a potential broad-based rate increase hidden in privatized provisions for low-income customers. “PGW is the only PUC-governed utility whose low-income program is funded by all rate payers, commercial, industrial and residential customers alike,” Robert Ballenger, staff attorney with Community Legal Service’s Energy Unit, said in an interview before the terms of the sale were announced. “Privatization threatens to limit that to residential, which [means their costs] would go up if they alone are required to subsidize the low-income program.”

3) What about those who cannot pay at all?

Some people will always slip through safety nets. Every year people fall behind on their PGW payments, and the municipal utility has lien authority (it collects roughly $30 million a year). Residential customers can enter into agreements of payment with the agency, which sometimes even extends forgiveness.

But the PUC does not guarantee these norms and, as Ballenger writes in an email, “All indications are that the buyer will acquire these liens.” This “raises concerns about future collection tactics and potential foreclosures that PGW has historically not engaged in.”

A private company’s principal motivation is, of course, to provide returns for its shareholders. There is no reason to believe UIL will be as lenient as PGW in its collections or foreclosure policies.

4) What will become of PGW’s workforce?

One of the sale conditions is that UIL offer all PGW workers jobs and that the workforce cannot shrink substantially for three years after completion of the sale. (On the white-collar side, the company will apparently have two headquarters, one in Philly and one in New Haven.)

The Utility Workers Union, Local 686, which represents most of PGW’s workforce, is ardently opposed to the sale. It’s not hard to see why. When public services are privatized, the quantity and quality of employment generally drops. Slate’s Matt Yglesias made, and oversold, this point about utility ownership last year:

In a public ownership model, typically management will team up with the rank-and-file workforce to divide the spoils. In a regulated monopoly model, management has more incentives to squeeze compensation and divide the spoils with shareholders instead. That is obviously a very important difference to the specific people involved. But in terms of the public interest you are stuck with the problem of basic institutional quality and good governance.

What is the public interest in this case? Perhaps privatization could have once acted as a tool to change the governance structure of PGW, which used to be notoriously corrupt and inefficient. But the utility is very well run these days. Indeed, PGW is an important part of the city’s safety net. Considering the sale terms myriad opportunities for saving on the backs of low-income customers, there is a strong case to be made that a well-run municipally owned utility is of far greater value to Philadelphia.

It remains to be seen whether city council will approve the sale. Few of Nutter’s priorities have made it through that body in recent years and it does not appear that rapprochement will be forged on the PGW sale.

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Jake Blumgart is a senior staff writer at Governing.

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Tags: philadelphiainfrastructureutilitiesmichael nutter

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