$1.86B sale of Philadelphia Gas Works is dead

City Council's leadership on Monday drove a spike into the proposed $1.86 billion sale of Philadelphia Gas Works without bringing the matter to a vote, apparently killing a signature effort by Mayor Nutter to reduce the city's pension-fund deficit.

Council President Darrell L. Clarke said Council would not hold hearings on the proposal to sell PGW to UIL Holdings Corp. of New Haven, Conn. Nutter billed the sale as a way to divest the city of a burdensome asset and raise money for its underfunded pensions.

"The simple fact of the matter is that there is not support on the City Council," Clarke said at a news conference, surrounded by the entire Council leadership. He said Council instead would schedule hearings to examine other options for the 176-year-old utility.

Nutter blasted Council's decision to nix a deal in which his administration invested more than two years. PGW has spent more than $2 million on financial, legal, and communications consultants to organize an auction supervised by investment bankers to attract bids from more than 30 potential buyers.

"What we saw today is the biggest cop-out in recent legislative history in Philadelphia," the mayor told reporters.

UIL spokesman Michael A. West Jr. said the company, which operates four New England utilities, was disappointed by Council's decision, and was unsure whether Clarke's announcement was absolute. UIL had received no formal communication from Council.

"We followed the process that we thought was representative of the City of Philadelphia, we gave our response, put in a good-faith effort to acquire the asset, and still believe we are the strongest company," West said.

Council's decision was decried by sale advocates and business leaders, who fear it will send an inhospitable message to potential investors.

"This is clearly not going to be perceived as a positive signal to those interested in coming here to create jobs," said Rob Wonderling, head of the Greater Philadelphia Chamber of Commerce, which earlier Monday called on Council to sell PGW.

"Today's action violates every principle of transparent and effective governance," said Ellen Kaplan, interim president of the Committee of Seventy watchdog group. She called Council's action "disgraceful and cowardly."

But advocates for low-income residents and the Utility Workers Union of America Local 686, which represents 1,150 PGW employees, hailed the decision.

"This proposed sale was never in the best interests of our citizens, especially the poor and elderly on fixed incomes," Frank Keel, spokesman for the gas workers' union, said in a statement. "PGW is a stable, profitable city asset, and we are delighted that it will remain so."

Sam Bernhardt, a senior organizer with Food and Water Watch, said Council "stood up today for Philadelphia residents, and rightly rejected a plan that would have robbed the city of control over its own gas system."

Nutter announced the sale March 3, and Council hired Concentric Energy Advisors for $522,000 to evaluate the sale proposal and also to consider alternatives to selling the utility. Clarke said Council concluded the risks of selling the utility outweighed the stated benefits.

The lengthy consultants' reports, which Council released only Monday afternoon, called into question one of the Nutter administration's central assertions - that the sale was expected to net the city from $420 million to $631 million after all PGW pension and debt obligations were paid off.

Council said its evaluation concluded that the city would net $200 million less because the administration had not calculated the loss of the $18 million annual payment PGW makes to the city. That payment was suspended for seven years recently when the utility was in financial trouble.

The administration said that it did include the loss of the $18 million annual payment in its calculus, and that the sale proceeds were structured to offset the reduced annual payments from the larger reduction the city would need to make to its pension plan. The administration had proposed legislation to formalize that arrangement for future administrations, but Council has declined to introduce the bill.

Nutter said Monday the city would need to find other sources of money to reduce the pension obligation.

"Unfortunately, the only other option to generate that kind of money would be to either take it from the general fund or increase citizens' taxes," he said.

Nutter had said that it was an opportune moment to sell the utility because interest rates are low and investors are paying high prices for utilities.

He said UIL was the only bidder that agreed to contract terms important to the city: keeping rates frozen for three years, maintaining PGW's discount programs for low-income families and seniors, and preserving PGW employee and retiree pensions.

But Council members said UIL's commitment was insufficient.

UIL's pledge to step up investment in replacing PGW's infrastructure was not spelled out in the agreement, said Clarke, who was joined at the announcement by Council Members Marian B. Tasco, Curtis Jones Jr., Blondell Reynolds Brown, William K. Greenlee, Brian J. O'Neill, and David Oh.

Business leaders had endorsed privatization as a critical part of the effort to build the region as an energy hub, connecting Philadelphia's ports and businesses with the Marcellus Shale natural gas boom in Western and northern Pennsylvania.

Clarke said that Council was interested in exploring options for PGW's role in the new natural gas world, and noted that the Chamber of Commerce was organizing a major summit in December to attract international businesses to invest in Philadelphia. Advocates of a sale said a privately owned PGW would be better able to forge private deals than the city-owned utility, which requires Council approval of even small transactions.

Pat Gillespie, head of the Philadelphia Building and Construction Trades Council, endorsed a PGW sale last week on the condition that gas workers' concerns about pensions and health care were addressed.

"It would go a long way to position Philadelphia to take our rightful spot in the energy development field," he said.

The sale had been endorsed by the business community as well as by the city's fiscal overseer, the Pennsylvania Intergovernmental Cooperation Authority.

UIL has spent $11.9 million on acquisition expenses through the first six months of this year, mostly to pay bankers for a credit line to cover the purchase costs.

215-854-2947 @Maykuth