Analysis: What the PGW Flop Means
Philadelphia’s bid to become the nation’s next great energy hub is a stool built on three legs. The pitch goes a little like this.
“Hey petrochemical and energy behemoths, Philly is the city that loves you back. 1) We’re just 100 miles from the Marcellus Shale, the biggest gas reserve in the nation. 2) We’ve got infrastructure! Ports. Rail lines. Refineries. Proximity to markets. 3) The political climate is warm and welcoming. Come on down. You’re going to get those approvals, you’ve got a political class anxious for jobs and economic development. No undue hassles here!”
On Monday, in rejecting the privatization of the city-owned Philadelphia Gas Works, City Council gave a swift kick to that third leg of the stool.
On one hand, this wasn’t surprising at all. City Council has been telegraphing it’s disapproval of Mayor Nutter’s plan to sell off PGW ever since he first publicly floated the notion at a Chamber of Commerce breakfast in 2012. Council has a lot of reasons for opposing the sale. Some are reasonable. Others are not. But nobody, Nutter included, ever expected this to be an easy deal to pull off.
On the other hand, Council President Darrell L. Clarke — a potential mayoral candidate, and one of the most potent political figures in the city — had positioned himself as a clear ally of the energy hub team. Clarke’s got strong ties to the labor community, particularly Local 98 President John Dougherty, whose members stand to gain from a bunch of energy-related investment. And he’s generally well regarded by local energy and petrochemical executives.
Or at least he was until Monday at 3:15 p.m., when Clarke (flanked by seven Council members, just short of a majority), summarily announced that Nutter’s proposed $1.86 billion sale of PGW to UIL Holdings was dead. There would be no public hearings on the deal (which is an irony, given Council’s many complaints that the Nutter administration had been too secretive and closed-off while constructing the framework of the proposed sale).
Was this a conscious blow against the energy hub vision? Was it simple political dysfunction; just the latest chapter in the tiresome story of Nutter and Clarke’s inability to work together on major deals? Or is it something else altogether?
Whatever the reason, the message on Monday for out-of-town investors interested in Philly’s energy opportunities was not a good one. Here you have UIL, a solid company, responding to a formal request for proposal and spending at least $20 million in the effort, only to be summarily shot down without so much as a hearing.
Talking to Clarke, it’s clear he didn’t intend for Monday’s move to send negative signals to energy players. Rather, he’d like to explore possible public private partnerships to expand PGW’s portfolio and make it a more nimble utility, better equipped to meet the demands a natural gas-fueled industrial boom might create. Clarke repeatedly described the deal that Council rejected (without ever taking a vote) as a “very narrowly tailored, specific proposal.” In other words, Clarke contends, Council rejected only this deal, not the entire notion of privatizing PGW, and certainly not the prospect of a public private partnership (which would likely be focused on PGW’s liquified natural gas assets). To get a sense of what Clarke thinks is possible, take a look at this report, generated by Council’s consultants on the PGW deal.
“The PGW governance structure clearly needs to be revised. You can’t have these layers and layers of approval for certain processes, and we want to make sure we position ourselves to be much more competitive in the market,” Clarke says.
The risk, of course, is that by not selling PGW, the utility will remain politicized, it will remain unable to take advantage of market opportunities in the way a private utility could, and thus it’ll slow the development of an energy hub in the first place. Indeed, Council’s own consultants warn in their study that a city-owned PGW simply will not be capable of developing a gas export facility (which is actually a good thing, in my view) or of becoming a transporter and seller of liquified natural gas, which can be used to power vehicles and ships. “Concentric considers to be be non-viable any opportunity that is either clearly outside of PGW’s core business, relies primarily on competencies that it does not currently possess and that cannot be easily acquired, or would impose unacceptable financial risk on PGW such that it might threaten its ability to meet its obligations as a public utility.”
PGW’s management has worked wonders at the utility over the last 14 years, turning what was once a liability so huge it could theoretically bankrupt the city into a clear asset worth (at least) $1.86 billion. But taking full advantage of the Marcellus opportunities will require more than capable management of traditional utility duties, and I’m dubious that the political actors would stay far enough way from PGW for long enough to give the executives there that opportunity.
BUT IS THE FAILURE to privatize PGW a fatal blow for the energy hub movement? Probably not. Almost certainly not. The success or failure of the wide-eyed gambit to reforge Philadelphia’s manufacturing might in a Marcellus-fired furnace won’t be sunk by a single City Council call. What’s more, there were some qualms in the local business sector about UIL’s capacity to make the most of the opportunities the Marcellus Shale presents.
Michael Krancer, the former Pennsylvania DEP Secretary (not the porny email one), and now the city’s loudest energy hub cheerleader, said the deal’s breakup didn’t look good, but wasn’t enough to convince big energy and petrochemical companies to stay away.
“There’s still the potential to make a lot of money, there’s still a lot of opportunity. This didn’t send a great signal, but it’s hardly over,” said Krancer, who is now a partner at Blank Rome LLP.
Still, the energy industry is likely to look very closely at what Clarke and Council do next. How open are they really to another sale? How plausible is a successful public private partnership? Can Clarke put the stool back together again?
I don’t know. But Clarke surely realizes he’s got to propose an alternative, and soon.
The Politics of the Deal That Wasn’t
Now to the politics.
Council’s decision has been met with incredulity from a lot of corners, which I don’t really understand. Council’s got a host of obvious reasons for rejecting this deal. Many readers won’t consider these to be good reasons, but they’re easy enough to understand.
- Council is generally furious with Nutter, and particularly enraged by his handling of the proposed PGW sale, which largely kept Council out of the loop right up until the moment a finalized sale agreement was presented for approval. “He didn’t ask us could he sell PGW,” Councilwoman Marian Tasco told me yesterday, talking about Nutter. “He said ‘I’m going to sell it and you’re going to vote for it.’ Well I think this is America, and we don’t live in a dictatorship.” You can call that sentiment petty, but the administration should have seen this coming, and should have found a way at minimum to involve Council in the crafting of the request-for-proposal (for both legal and business reasons, Council could not have realistically been a party to the negotiations with the buyers). It’s possible no amount of Council accommodation would have been enough to get this deal done, but it’s also clear Team Nutter wanted to limit Council’s role to a straight up or down vote. In the end, they got even less than that out of Council.
- Nebulous talk of an energy hub with a lot of potential jobs down the road means less to many Council members than what they hear directly from low-income constituents worried about the implications of a PGW sale. Yes, PGW’s rates are high, and rates would have been lower, at least in the short term, under UIL. But a lot of Council members are just fine with that arrangement, as the higher rates in significant part are used to offset the unpaid bills of low-income gas consumers. That thinking is irksome to a lot of gas customers who do pay their bills, of course, but it’s not a difficult political calculation to understand. Council members representing high-poverty districts feel they were simply looking out for their constituents when they objected to this deal. Again, Tasco: “You have a city that’s 25 percent below the poverty line. What are you going to do with them? Not give them heat?”
- Job preservation and pressure from the gas workers union. It’s hard for council members to decry what the School Reform Commission did to the teacher’s union, and then in the same month privatize a city utility in a deal that offered no long-term job guarantees (the deal guaranteed the jobs for three years, but not longer). Again, it would arguably be nice if Council members were less beholden to public employee unions than they are, but the fact that labor has sway in City Council is not a new development.
WHAT MAKES FAR less political sense was Council’s decision to never give the UIL deal a hearing. It just looks awful. Clarke says there was “no support for this particular transaction,” and thus no reason to have a hearing.
That’s not entirely true, though. You’ll notice there were Council members missing from the dais on Monday. I gather there were five or maybe six Council members who were likely “yea” votes, and six can turn to nine pretty quickly. At minimum, hearings would likely have exposed fissures in City Council. Clarke likes to run a tight ship. “In Council, we tend to be at the end of the day having significant majorities if not unanimous votes on the legislation we push, there’s a very inclusive process.” A divided Council and a close vote on something as momentous as selling PGW is just not in keeping with Clarke’s style. Clarke contends that broader hearings that get at both the energy hub prospects and PGW’s role in it will be more productive than a narrowly focused hearing on a sale to UIL. We will see.
The rest of the political fallout is obvious enough. Nutter’s highly quotable, impassioned response to Council’s rejection of the deal was fun to watch (and he is largely right on the merits, in my view), but it’s not going to do anything to enhance his already-toxic relationship with Council.
As for Clarke, I think on balance the decision hurts his mayoral prospects, if he does indeed decide to run. Rejecting a PGW sale will play well in neighborhoods where Clarke can already expect to run well. It’s likely to hurt him with Center City business interests, who write the big campaign checks. And it could well complicate Clarke’s relationship with the building trades unions, who have a lot to gain if the energy hub takes shape.
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