PUC's plan for Philadelphia Gas Works: Mostly higher rates

The Pennsylvania Public Utility Commission published a report Tuesday that suggests seven ways the city-owned Philadelphia Gas Works can speed replacement of its aging pipeline infrastructure. Most of the "opportunities" involve raising prices.

The PUC's report recommends that PGW boost charges, cut costs, borrow money, and halt annual payments of $18 million to the city so the utility can direct more money to replacing its system's dangerous gas mains.

PGW operates one of the oldest and leakiest gas-distribution systems in the nation. Last year, it accelerated the pace of replacing "at risk" pipes to a rate of 65.5 years - up from 88 years. But that pace is twice as slow as the rest of the state's gas utilities, according to the PUC.

"Staff believes this replacement rate is not aggressive enough, given the risk this pipe poses to PGW's system and its customers," the PUC said.

The commission announced plans to conduct a study in January, after Mayor Nutter's efforts to sell PGW for $1.86 billion to a Connecticut utility company fell through. The PUC had encouraged a sale, saying private investors would have been better able to fix the system.

"After a sale was taken off the table last year, we moved forward with our plans to help PGW explore all possible savings and revenues that could fund the accelerated replacement of at-risk mains, bringing PGW closer to generally accepted replacement rates," PUC Chairman Robert F. Powelson said Tuesday.

The utility received the report Tuesday and praised the collaborative review.

"PGW welcomes genuine dialogue that seeks to improve the way our infrastructure programs proceed and is highly motivated to continue discussions with PUC staff," spokesman Barry O'Sullivan said in a statement.

The report was released the same day Vice President Biden visited Philadelphia to unveil the federal government's Quadrennial Energy Review, which focuses on the need for energy-infrastructure investment. As depicted in the PUC report, PGW is a case study in the ailments suffered by many aging urban gas utilities.

About two-thirds of PGW's 3,000 miles of gas mains are made of cast iron or unprotected steel, more than any other gas utility in the state and among the most in the nation. About half are cast iron, a material used in the first half of the 20th century that becomes brittle with age.

"While cast iron and unprotected steel are both at risk, cast-iron main is more risky than unprotected steel," the report said. "Cast iron is prone to catastrophic failure, while unprotected steel is more likely to develop slow leaks, which can be detected over a period of time."

New mains are made of plastic or coated steel.

The city has already increased the pace of gas-main replacement. Last month, Craig White, PGW's chief executive, told the Philadelphia Gas Commission that the utility would seek to boost the distribution system improvement charge (DSIC) to 7.5 percent, from the current cap of 5 percent of PGW's distribution charge. The distribution charge is about half a residential customer's bill.

Authors of the PUC report endorsed a boost in the surcharge. An increase to 7.5 percent would generate $11 million, reducing the pipe-replacement schedule by 14.5 years, the report said.

PGW could raise the surcharge even more than the 7.5 percent permitted under a 2012 state law. The PUC is allowed to grant some exceptions to PGW as a municipal utility.

The city has balked at raising PGW's prices, which are already the highest in the state. A third of the utility's 500,000 customers are low-income, and PGW historically has written off more uncollectible debt than other utilities. About 20 percent of PGW rates pay for subsidies to keep gas service affordable.

The PUC's motives are likely to come under suspicion from City Council. It maintains that the regulatory agency approved its slower gas-main replacement plan two years ago, and that the PUC's efforts now are payback for Council's refusal to sell PGW.

"I think they're trying to punish the city," Councilwoman Marian B. Tasco said in January. She chairs the city gas commission, which the report recommends could be eliminated at a savings of $800,000.

In addition to increasing the distribution surcharge, the PUC's recommendations include:

Annualizing costs that are eligible to be recovered from the surcharge. PGW's current practice is to adjust the rate quarterly, depending on the amount spent on improvements. "Levelizing" the charge would generate $5 million more a year.

Issuing new debt. PGW could add up to $33 million in annual infrastructure spending, cutting 30 years off the gas-main replacement pace. By borrowing the money, PGW can spread costs out over a generation, rather than forcing current customers to pay for upgrades that will benefit the system for decades.

Generating a one-time $25 million infusion by reducing cash reserves from $100 million to $75 million.

Requesting that the city waive some or all of its annual $18 million payment. Although the city waived the fee for seven years, until 2010, when PGW was in financial trouble, Nutter and City Council have been reluctant to sacrifice the revenue. If PGW retained the funds, it could cut 20.5 years from its pipe-replacement pace.

Streamline PGW's corporate-governance structure, which includes the PUC, the mayor, City Council, the city controller, PGW's board of directors, and the gas commission.

Consolidate warehouses, meter shops, field services and fleets to save up to $5 million a year.

Though Nutter supports an increase in the infrastructure surcharge, he does not endorse the PUC's recommendations to repurpose the $18 million fee or to issue new debt for pipe replacement, said his spokesman, Mark McDonald.

Read the full Pennsylvania Public Utility Commission report on Philadelphia Gas Works at philly.com/pucreport.

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