What Would Philly Do With Cash From a PGW Sale?

The time is right for the city to unload the gas utility. Let's daydream about spending the profits.

Philadelphia mayors have dreamed of selling off—even giving away—the publicly owned Philadelphia Gas Works for nearly 20 years. The obstacles: Some pols blanch at the mere mention of privatization, and few buyers were interested in taking on the utility’s huge debt.

Now, though, the political stars seem to be aligning in favor of a sell-off. Mayor Nutter appears fully on board, so long as the city can make a buck on the deal, and new Council President Darrell Clarke has made selling off city assets a central piece of his 2012 agenda  (though he hasn’t yet explicitly endorsed a PGW sale). Propitiously, the growing political will to sell comes at a time when the utility’s enormous debt has been whittled down to more tolerable levels and broader economic conditions have made PGW more attractive to would-be buyers.

So what would privatization get the city? Possibly as much as $350 million, according to a new report prepared by the financial advisory firm Lazard, which the city commissioned to study the viability of selling off PGW.

The fact that Lazard is confident a buyer could be found is itself pretty amazing, considering where the utility was in 2000, when Mayor Street appointed Thomas Knudsen—then a consumer advocate and prominent PGW critic—as the CFO. Knudsen was later made the CEO. On his watch, PGW transformed from one of the most badly run utilities in the nation into a stable, financially sound adjunct to the City of Philadelphia. Last month, Knudsen moved on to the School District of Philadelphia, where he now has a short-term gig as the Chief Recovery Officer.

So if PGW is finally stable, why sell it now? After all, government privatizations don’t always work out as planned, and a privately held PGW wouldn’t be on the hook to pay the annual $18 million franchise fee the city is supposed to collect from the utility (between 2004 and 2010, the city waived the fee to help PGW recover financially). And what about the employees? The gas workers union has vowed to actively fight the deal, worried that a private operator would lay off employees to increase profits.

That could well happen. But the fact is running a gas company isn’t a core government function like garbage collection or policing. Of the 30 biggest U.S. cities, only four own gas utilities, and there’s no compelling reason for Philadelphia to be in that minority. Second, the city instructed Lazard to presume that whatever company buys PGW would freeze rates through August 2016, preserve PGW’s discounted rates for seniors, and honor the current collective-bargaining agreement. Third, although PGW is once again a competent operation, there’s no guarantee it will stay that way for good, which makes it a long-term risk to the city’s financial health.

But it’s the prospect of cash money that really talks here. The proceeds from selling off PGW could be used to take a whack at any number of big problems, from funding infrastructure investment to putting a dent in the city’s massive unfunded pension liability, as PICA Chairman Sam Katz advocates.

Just don’t expect the windfall anytime soon. In remarks yesterday, Mayor Nutter was careful to characterize a sale as a possibility, not a sure thing. Finding the buyer, working out the deal and getting regulatory approval would likely take at least a couple of years, maybe more.