PGW: Rate hike is needed to lift utility from 'hole'

The city's gas utility is like a consumer who's maxed out on credit and needs to raise cash not only to keep making payments, but to pay down debt as well.

At a meeting yesterday with the Inquirer Editorial Board, executives of the Philadelphia Gas Works (PGW) spelled out why they asked state regulators last month for a $100 million-rate increase.

Thomas Knudsen, PGW's chief executive, characterized the rate request as an urgent attempt to gain control over the company's growing debt.

The city-owned utility has borrowed more than $1.1 billion from bond investors and will need to borrow even more this spring just to pay for immediate improvements and repairs.

"We're living in a hole and have been in a hole since 1996," Knudsen said.

The company doesn't generate any extra cash from its operations to cover the cost of necessary repairs like fixing old cast-iron gas mains, Knudsen said.

As the company's debt level keeps rising, its customer base continues to shrink and financial support from the state for low-income customers is declining, he added.

Knudsen said the state has refused to provide financial support for PGW's capital projects, despite $200 million that's been authorized for the company's use in the current state budget.

The city, in turn, "has stepped up to the plate," Knudsen said. He said the city would waive an $18 million annual payment from PGW through 2010. It also has further delayed the repayment of a $45 million loan.

But Knudsen said the company had come perilously close in the last year to running out of cash and not meeting all of its obligations to bondholders. And he added that if the company broke any of its bond covenants, it could jeopardize its ability to continue borrowing from the bond markets.

"We cannot stay in this mode," Knudsen said.

With a rate hike of $100 million a year in the utility's so-called "base rate," Knudsen said the company could use $80 million to cover higher operating costs and $20 million for whittling away debt.

The rate hike would amount to an increase of between 9 percent and 13 percent for consumers, he said.

Philip Bertocci, a lawyer with Community Legal Services who will represent the interests of lower-income customers in opposing the rate increase, said he was looking for specific guarantees from PGW.

"What guarantees are there that the money will actually go to debt reduction rather than for dealing with the company's wish list of things they'd like to do?" Bertocci said.

"We don't want to be in the position of providing any more money than is absolutely necessary to do the minimum," Bertocci said.

He added that the rate request would only cover the cost of delivering gas to customers, leaving residents vulnerable to price swings in the actual cost of natural gas.

"This just increases the insecurities of people," Bertocci said.

Steven Hershey, a PGW vice president, said the state is not providing the same level of financial help for lower-income customers as before. This year, he said the company could face a reduction of as much as $7 million in state help for low-income customers.

Even though state lawmakers last week came up with a $500,000 grant to help low-income customers whose service has been disconnected, Hershey called that "a drop in the bucket" in the face of overall state cuts.

While any rate increase would not take effect this winter, the process of public scrutiny and debate over the rate request has begun. PGW officials said public hearings on the rate request could begin next June, with a decision by September 2007.