The One Question That Really Matters About the Proposed PGW Sale

The city’s unfunded pension liability is driving this move. But is selling the nation’s biggest municipal gas utility the answer?

Photo | Jeff Fusco

Photo | Jeff Fusco

Mayor Michael Nutter’s proposal to sell the city-owned Philadelphia Gas Works to a Connecticut utility holding company for nearly $1.9 billion goes before a skeptical City Council for review in the next few weeks. And while some of that skepticism arises from Council’s frosty relationship with the mayor, some of it also has a legitimate policy basis.

Philly journalist Jake Blumgart raised some of the possible policy reasons for objecting to the sale in his recent article on Next City titled “Four Pressing Questions About the Philadelphia Gas Works Sale.” Those four questions deal with the sale’s possible effect on gas rates, the assistance programs the utility offers customers, how PGW deals with customers who can’t pay their bills and the fate of the utility’s workforce. (That workforce made its displeasure with the deal known through protests outside City Hall during the mayor’s March 5th budget address.)

But the main reason the mayor is proposing the sale of the nation’s largest municipal gas utility has to do with that huge unfunded pension liability that threatens to swallow City Hall whole. As long as it remains unaddressed, the city’s rough climb back to fiscal sanity, a project that has consumed the attention of three mayors and a good chunk of Harrisburg’s time, could unravel quickly.

What that means is that the most important question for Council and the rest of us to ponder as the sale is debated is: Will a PGW sale do more to plug that hole than keeping it would?

The mayor, of course, says it will. An analysis performed in October (PDF) by Lazard Freres & Co., the city’s financial advisor, estimated that a sale of the Gas Works could fetch anywhere from $1.45 to $1.9 billion. After using some of the proceeds to pay down PGW debt and fully fund its pension plan, the sale would put anywhere from $422 million to $872 million into the city treasury, and after factoring in the loss of the $18 million annual franchise fee PGW pays to the city and the addition of taxes a private owner would pay, Lazard estimated the net present value of the sale as anywhere from $278 million to $762 million.

Let’s split the difference between those low and high figures and say the sale will have a net present value of about $500 million. Half a billion dollars is nothing to sneeze at, even if it represents less than 10 percent of the city’s total unfunded pension liability. But that liability won’t all come due tomorrow, and the possibility exists that it could be taken care of with ongoing payments from a continuing revenue stream. Like the one PGW provides, for instance.

Operationally, PGW has been transformed over the past few years from a wreck into a well-oiled machine, and its revenues reflect that. Over the five fiscal years that ended in 2012, the utility posted steady gains in annual net revenue until a warmer-than-normal winter in 2012 put a dent in that growth. With the Marcellus Shale offering the possibility of cheap gas rates for years to come, astute PGW management could produce continued revenue growth.

Just as nothing in the proposed sale guarantees that the utility’s current rates won’t go up — nor that assistance programs will remain unchanged or the workforce held harmless — nothing in the city’s current arrangements with PGW guarantees that annual payments from the utility to the city treasury must remain as they have been. Some of the revenue that PGW has generated must be plowed back into the operation, and the utility does face a pretty large infrastructure bill as aging cast-iron gas mains must be replaced, but the dramatic increase in PGW net revenue of late — from $3.1 million in fiscal 2008 to $29.8 million in fiscal 2012 (down from $53.3 million the previous year) — raises the possibility that new arrangements could be forged to provide the city treasury with a percentage of net revenue on top of the franchise fee.

Would that be enough to cover the injection the sale promises to provide? If so, maybe the city shouldn’t be so quick to sell PGW now that it’s an asset rather than a liability. If it isn’t, then maybe those four pressing questions need to be addressed in additional conditions attached to the sale.

Follow @MarketStEl on Twitter.

Around The Web

Be respectful of our online community and contribute to an engaging conversation. We reserve the right to ban impersonators and remove comments that contain personal attacks, threats, or profanity, or are flat-out offensive. By posting here, you are permitting Philadelphia magazine and Metro Corp. to edit and republish your comment in all media.

  • DTurner

    I think this really presents one of the major failings of this state: that state control of certain businesses and resources is somehow acceptable if it makes money for the state. While PGW, like PLCB, is performing better than it has in the past, it’s still ripe for political patronage under post-Nutter administrations.

    Keeping these government corporations under city and state government keeps taxpayers at the whims of corrupt politicians and for the reason alone, Philadelphia needs to sell PGW. This city is in desperate need of infrastructure modernization and that is unlikely to occur under the constraints of the City.

    • Joe Clark

      The PGW was once a private corporation that political patronage employees this was long before it was taken over by the City in the 1930’s. So was PECO which at one time (about 1900) was the supplier of electricty in the country.
      Should this be taken over by a for profit what is to prevent them from basically running an extortion racket?

      • DTurner

        Probably the PUC, which regulates every other utility company in the state.

    • One of the main reasons for municipal control of utilities, at least as I understood it, was the provision of essential services at lower rates. There is a fairly long and broad history of municipally owned utilities in this country; I think that there’s even a Hollywood film, “Chinatown,” whose story is based in part on the actions of a legendary leader of one of them: William Mulholland, who built the dams, reservoirs and aqueducts that made modern Los Angeles possible as head of the city’s Department of Water and Power.

      As to why our city-owned gas works has been a patronage haven with a checkered history of operations ever since Mayor Frank Rizzo dumped the private management company that ran it for most of the 20th century, while the city-owned Water Department, some of whose initiatives are national models, is not, I’ll leave to you all to discuss.

      • DTurner

        I think the rates argument, at least at this juncture is not really logical. Philadelphia government services, by and large, tend to be black holes of corruption and waste, which is hardly going to result in lower rates. A private company is obviously not a panacea, but it does move a lot of the operations into the open, particularly if it is a publicly-traded company.

        In regards to the Water Department, that is a very good question; my guess would be that political attention and interference of PGW is probably to blame, as services that gain the attention of politicians are unlikely to be able to get away with running a transparent operation that does not suit their benefactors.

  • E Philly

    It is definitely more of a liability than an asset to the City. There’s no question about that to me.

    • matthew brandley

      agreed. Its a money pit thats draining the city dry

  • matthew brandley

    Theres always the union thats at fault and the long running sweetheart deals with the pensions . as long as the state and unions drag pension reform phila will be the next Detroit in a few years. The writting is on the walls people. Pensions need to be privatised. Period. As far as the pgw deal theres one thing your all ignoring. The exporting of natural gas

    • Joe Clark

      The characters that drag “pension reform” are the City Council, because of a provision that allows the Council to declare themselves “Public Employees”

  • Joe Clark

    If you are so concerned about the fiscal health of the City then you have no problem ending the 10 year tax abatement program correct? And have the City retake control of their parking lots eh?

    • DTurner

      How are those comparable? The tax abatement has actually allowed for private development even in the face of mammoth construction costs.

  • Joe Clark

    As usual an excellent article by Sandy Smith

  • Mark

    REALLY this is foolish. Rather than address the City Pension PROBLEM head on we are going to sell PGW a resource that benefits the entire City and place a band aid on the problem for now so City employees can retire with no worries. What happens next time the Pension runs dry do we sell the Park System.