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Can a public-private partnership work for PGW?

City Council President Darrell L. Clarke, whose opposition killed the $1.86 billion sale of Philadelphia Gas Works, has an alternative plan in mind for the city-owned utility.

City Council President Darrell L. Clarke can't talk details but he has an alternative plan in mind for the city-owned utility Philadelphia Gas Works.
City Council President Darrell L. Clarke can't talk details but he has an alternative plan in mind for the city-owned utility Philadelphia Gas Works.Read moreFile Photograph

City Council President Darrell L. Clarke, whose opposition killed the $1.86 billion sale of Philadelphia Gas Works, has an alternative plan in mind for the city-owned utility.

He can't talk about details.

"There is a proposal I can be comfortable with," Clarke told Inquirer editors and reporters recently, just hours before UIL Holdings Corp. announced it was pulling out of its deal to buy PGW, ending Mayor Nutter's two-year effort to privatize the utility.

Clarke said he favored some kind of public-private partnership concept in which the city retained ownership of PGW. He said he could not reveal specifics: "It's not available yet."

He cited several cities with municipal utilities - Jacksonville, Memphis, San Antonio, and Allentown - as models for operating public-private partnerships.

Two examples he cited have already proved unworkable.

A Jacksonville public-private partnership to produce liquefied natural gas, which Clarke cited as the archetype, was terminated in October after 10 months, eclipsed by private-sector competitors. The municipal utility was shut out.

The Memphis utility's investment in a fiber-optic network was sold off in 2007 after seven years at a loss to public ratepayers of $28 million.

Nutter, in the aftermath of the UIL deal's defeat, has pressed Clarke to "release his public-private partnership plan in full detail so that the citizen taxpayers and ratepayers can understand his plan for PGW and its future."

Nutter says no partnership deal can match the benefits the outright sale of PGW would have brought the city: a half-billion-dollar infusion into the city's pension fund, permanent relief of all of PGW's financial and environmental liabilities, acceleration of aging gas-main replacement, and the introduction of a new private energy company to the city to participate in development of a regional energy hub.

Clarke said his paramount concern was to keep the utility under city control and to retain its 1,600 workers as city employees.

"There are a whole lot of opportunities if your interest is something other than a straight privatization," Clarke told The Inquirer Editorial Board on Dec. 4.

Jane Roh, Clarke's spokeswoman, said Friday that Council's exploration of options for PGW was ongoing, including its interest in public-private partnerships - also called "P3s."

"Council plans to learn from P3 successes and failures alike," she said in an e-mail.

An investor go-between

Council's interest in partnerships accelerated after a losing bidder for PGW, Liberty Energy Trust, whose politically connected supporters included some prominent local investors and national labor groups, began lobbying Council to consider alternatives to an outright sale even before Nutter formally announced UIL as the winner March 3.

In recent statements, Clarke has suggested PGW might engage in some kind of arrangement that would involve the Philadelphia Energy Authority as a go-between with private investors. The authority, created in 2010 to promote energy conservation, has one employee.

Clarke's discussions about partnerships hint at the potential for expanding PGW's crown jewel, its Port Richmond plant, which produces liquefied natural gas (LNG) to store for winter use. There is an emerging market for LNG as a fuel for ships, trains, and long-haul trucks, and a growing interest in shipping LNG to places unreached by natural gas pipelines.

Among examples of cities with municipal entities that Clarke named as models to study, the experience of the Jacksonville Energy Authority (JEA) is instructive. JEA signed a memorandum of understanding in January with Sempra U.S. Gas & Power to develop a liquefied natural gas plant. The deal came under attack from competitors, who complained the government LNG venture had an unfair marketplace advantage.

"We don't want the city competing with private industry," said William H. Bishop, a Jacksonville councilman. The authority was also skewered for entering into an agreement without going through a public selection process.

It was a short-lived effort. The authority and Sempra agreed in October to dissolve their venture after two private competitors moved ahead with their plans.

"We do not have any sort of agreement," said Gerri Boyce, a utility spokeswoman. "Having said that, we do believe in public-private partnerships."

An energy consultant who advised the JEA and a Jacksonville Chamber of Commerce official testified Nov. 13 in Philadelphia about the Florida experience without mentioning that the agreement had been terminated.

Clarke later cited Jacksonville as the most solid example of a public-private partnership to emulate. "They created an environment where they entered into a public-private partnership," he said. "They can actually hire private investment."

Examples of failure and success

In Tennessee, the Memphis Light, Gas & Water utility consummated a public-private partnership in 2000 to invest in a "next-generation broadband fiber-optic network."

In 2007, after the dot-com crash, the venture was sold at a loss of $28 million for the public utility.

Jacqueline Reed, a spokeswoman for the Memphis utility, said that the fiber-optic foray was the company's only public-private partnership and that it was not regarded as a success.

The San Antonio Water System in October signed a 30-year agreement with private investors to build a $3.4 billion, 142-mile pipeline to supply the city with groundwater from a drought-resistant aquifer in Central Texas.

Clarke also cited the experiences of Allentown and Harrisburg in unburdening municipal liabilities by leasing assets to public authorities.

Allentown last year leased its water and sewer assets for 50 years to the Lehigh County Authority, the entity that provides water and wastewater service to suburban customers. The county authority borrowed $220 million for the deal, most of which was transferred to the city to pay down its underfunded pension. The utility remains under public control.

Harrisburg in 2013 leased its parking facilities for 40 years to the Pennsylvania Economic Development Financing Authority to pay down debt.

There are many examples of public entities and private businesses that successfully combine their strengths, involving public financing or private entities managing public assets - stadium deals, concert halls, new industries.

The Nutter administration has cautioned that partnerships in which public assets were used in profit-making ventures might run afoul of the state constitution. The city also says a partnership involving the LNG plant might jeopardize the tax-exempt revenue bonds the city used to finance the plant.

A possible path around obstacles

Clarke's interest in the Philadelphia Energy Authority may be a signal he believes such an entity can provide a pathway around some of the legal obstacles.

Municipal authorities are independent public agencies supported by service revenue, not taxes, whose boards are appointed by the municipalities. They can also engage in contracts for longer than four years, an advantage they have over city government.

They can issue bonds to finance projects.

City Council created the five-member Philadelphia Energy Authority in 2010 to reduce city government's energy consumption and to facilitate development of renewable-energy projects. Clarke sponsored the legislation.

According to the bill's preamble, and a transcript of the May 5, 2010, hearing of the Council's Committee on Transportation and Public Utilities, there was no discussion about the authority's becoming a vehicle for owning city assets. And no mention of PGW.

Clarke now sees the authority's creation as a forward-looking act that anticipated current events.

"If you read in the bill, it basically says the charter change actually created the energy authority for the sole purpose of purchasing, selling all or parts of the utility owned by the City of Philadelphia," Clarke said. "That was important to us for a number of things - it gave us the flexibility to enter into private-public partnerships."

Christopher A. Lewis, a Blank Rome lawyer who is chairman of the authority, said Clarke only recently began talking about using the entity in connection with PGW. That does not mean the authority could not serve such a purpose. "We have a broad mission," said Lewis.

The discussion about where PGW goes from here may be largely academic.

Mark Alan Hughes, director of the University of Pennsylvania's Kleinman Center for Energy Policy, said the mayor and Council were so divided it was unlikely any substantial legislation would be accomplished during Nutter's last year in office.

"This takes the whole government," said Hughes, Nutter's former sustainability director. "And we're not going to have a whole government until 2016."

215-854-2947 @maykuth