PGW requests emergency $60 million-a-year increase

The weight of the nation's credit crisis may soon come down on a new set of victims: Philadelphia Gas Works customers. The city-owned utility asked state regulators yesterday for an emergency $60 million-a-year increase in distribution charges, starting Jan. 1, because PGW is worried that it won't be able to borrow as it usually does to make it through the winter.

However, PGW says the increase would not raise customers' total rates - at least for the next few months. Because of the recent drop in natural-gas prices on the commodities markets, the utility says it is planning a simultaneous $85 million annual decrease in its gas-cost rate.

"The good news is that there's a net decrease that customers will see on their bills for the worst part of the winter," said Steven Hershey, PGW vice president for regulatory and external affairs.

Hershey said the plea to the state Public Utility Commission was "largely driven by the meltdown in the financial markets."

If the commission approves PGW's requests, overall rates would drop about 2.5 percent for residential customers, the utility said. But compared with last year, rates would still be high. Based on an average winter's use of 91,000 cubic feet of gas, PGW said its proposal would cost a typical residential customer $1,971 for gas this winter, up 14 percent compared with rates in effect a year ago.

PGW's proposed changes drew criticism yesterday from some consumer advocates who warned that the recent break in natural-gas prices could be temporary while the $60 million increase in the base distribution rate would be permanent.

"This is just sort of a game with numbers," said Philip Bertocci, a lawyer at Community Legal Services who said he expected to intervene in the case on behalf of low-income customers. "It really is misleading to set off a temporary rate reduction against a permanent increase."

Gas utilities in Pennsylvania typically bill their customers for two kinds of usage-based charges. One, the gas-cost rate, compensates the utility for the actual costs it pays for gas, and is subject to quarterly adjustments. The other covers delivery costs, rate subsidies for low-income customers, and other expenses, including the cost of borrowing.

Natural-gas prices have fallen more than 50 percent since peaking in June. But Hershey said PGW's prime concern now was the financial front, where he said PGW faces a stark fear: that its usual strategy for coping with seasonal shifts in demand could fall apart in the middle of the winter.

"We buy gas and pay for it before the customers use it or pay for it," Hershey said. "We borrow to always make sure we don't run out of cash, but it's a regular concern."

Because of trouble in the market for commercial paper, one of the types of loans PGW uses, the utility has already incurred an additional $12 million in debt-service costs this fall, Hershey said. "That's $12 million that's not in rates today."

Hershey said PGW was due to roll over a set of commercial bonds in January, and is worried that it may not be able to find buyers at any price.

"We know that there have been no sales for municipal bonds in the recent past for any bonds rated at less than A. We're at BBB-minus," Hershey said. Nor does the utility know whether bond insurance will be available because of turmoil in that corner of the financial industry.

"Because we are so heavily dependent on borrowing, particularly for cash flow in the winter, we can't take the risk that one piece of it will fall apart," he said.

Hershey said the emergency increase would meet PGW's immediate needs, and reduce its debt-service costs for the winter. He said the utility also hoped it could help in the longer run by giving "the bond market reason to believe PGW is a better risk."