Opponents of selling PGW could push for revenues from LNG

If the deal to sell Philadelphia Gas Works dies, the city has several opportunities it can pursue to increase earnings from its gas utility.

One of the more alluring alternatives: Liquefied natural gas, or LNG.

The city utility's most valuable asset is a four-decade-old industrial plant on the gritty Port Richmond waterfront that converts natural gas into liquid form. The utility built the LNG plant to store gas for peak winter days. After the city's population diminished, it now has excess capacity.

With new investment, experts say, PGW's plant could be expanded to satisfy a potentially lucrative market for LNG as a transport fuel or in oil-and-gas drilling operations.

"PGW has an opportunity to expand its existing LNG facilities to serve new emerging markets, earning margins that will benefit its customers," Concentric Energy Advisors Inc. said in a report last month to City Council that explored alternatives to an outright PGW sale.

Concentric said PGW could more than double its profits from off-system LNG sales to $7.7 million to $10 million, recovering the costs of a plant expansion in four to eight years.

The LNG plant is likely to be a central focus of City Council's hearings Thursday and Friday into alternatives for PGW, other than the Nutter administration's proposed $1.86 billion sale to UIL Holdings Corp. of Connecticut.

The hearings will take place against an unsettled backdrop. Though Council President Darrell L. Clarke announced Oct. 27 that Council would not consider the UIL sale, that deal is not dead.

City Hall insiders say much work is underway to salvage a compromise before the sale agreement expires at year's end. Any sale requires Council approval.

Privatization foes say the mayor did not consider alternatives before he launched the formal sale process in 2013.

Mayor Nutter said that other options were in the mix, but that none would yield the kind of payday a sale would achieve, injecting at least $420 million into the city's underfunded pension plan while forever taking PGW's financial and environmental liabilities off the city's hands.

Concentric, which Council contracted for $522,000 to study the UIL deal and alternatives to a sale, outlined six recommended options for PGW to increase revenue or reduce costs. It estimated the options would yield up to $33 million a year in added revenue or savings.

Concentric said none of the opportunities were easy. "They will all require commitment and execution," it said.

The options include converting more customers to natural gas, supporting the development of natural gas vehicles, and reducing subsidies to low-income customers by weatherizing their homes to use less gas. Those are all strategies PGW is pursuing.

The consultants said PGW could achieve the biggest saving - up to $17 million a year - by buying natural gas from the Marcellus Shale region rather than from Gulf Coast producers and having it shipped more than 1,000 miles by pipeline.

UIL has said its winning bid was based on plans to diversify its gas supply. It says its three New England gas utilities already source about 75 percent of their gas from Pennsylvania Marcellus producers.

The LNG opportunities present perhaps the most intriguing growth option for PGW because they would more closely conjoin the utility to a growing private-sector movement to build up the region as the Marcellus Shale energy hub. Concentric said PGW could grow earnings up to $10 million a year by expanding LNG production.

PGW's flirtation with LNG opportunities is not new. The investment bankers who marketed PGW last year to prospective buyers heavily promoted LNG and the utility's riverfront access. The 33 bidders who competed to buy PGW presumably factored the LNG opportunities into their offers.

Concentric, in its report, reinforced the prevailing wisdom that exporting LNG from Philadelphia was "unrealistic." It said PGW can't compete with dozens of other ventures across the country that have already applied for federal LNG export licenses.

"PGW is too late to the competition and does not have an advantaged location," Concentric said.

But PGW could more modestly expand its ability to produce LNG, which is made by super-cooling the gas to minus 260 degrees until it condenses into liquid. PGW has plenty of unused capacity in its two 120-foot-tall insulated tanks, which can each store 25 million gallons of LNG.

PGW is already selling some surplus LNG to oil-and-gas exploration companies that are using it as a clean fuel to replace diesel for drilling and hydraulic fracturing operations. Concentric said there was potential demand for LNG to fuel long-haul trucks and, to a lesser extent, ships.

The consultant said PGW could also take advantage of "arbitrage opportunities" by selling LNG to retail customers or power plants in the region when gas prices spike, as they did during last winter's polar vortex.

But the consultants cautioned Council that such business opportunities involve more risk for PGW, and more capital. And state regulators would be wary about any venture that might jeopardize the core function of the LNG plant - to maintain a supply of gas for PGW's "firm" residential and commercial customers on even the coldest days.

"The LNG market is not price-regulated, and, thus, PGW would be investing in facilities to support sales in a competitive market, where supply, demand, and price are all impacted by market forces beyond PGW's control," the Concentric report said. It suggested PGW "may want to consider partnering with a private entity that can bring capital and marketing competencies to the opportunity, while also accepting a portion of the risks."

Any serious partnership with PGW would require the city to launch a new process to request and evaluate proposals. That's unlikely to happen quickly. The sale process in which UIL prevailed took more than two years.

The Nutter administration also dismissed private partnerships because they present insurmountable legal challenges for a nonprofit entity like PGW that is funded with tax-free bonds.

That City Council is even entertaining new ventures to exploit the Marcellus represents a dramatic turnaround in its attitude toward natural gas.

Only three years ago, Council conducted a hearing that largely portrayed Marcellus exploration as a threat, not an opportunity.

Council unanimously passed a resolution calling for a moratorium on drilling. It nearly banned PGW from buying any gas produced by fracking, until lawyers advised it would be illegal to direct the utility to buy anything but the lowest-priced gas.