More Than $100 Million Wasted Gives Philadelphians Gas Pains

The cold weather has a lot of people thinking about heating bills and in Philadelphia that is reason enough to have gas pains.  But the situation is worse than high bills.  In recent years, the privilege of being one of only a tiny handful of cities in the country to own and operate its own gas utility has cost the city more than $100 million.  Philadelphians often complain about the Philadelphia Gas Works, its high rates, and its poor customer service, but few realize that the utility has become a tremendous cost for city taxpayers.  Like a gas leak — the situation stinks.

There are a few compelling reasons for a city to own a utility.  If the city-owned gas utility could take advantage of the fact that it operates without much of the tax burden born by a privately owned utility, low rates and the use of reduced utility costs to encourage economic development could justify municipal ownership.  Similarly, PGW could produce a significant revenue stream for the city that could fund expanded governmental services in other areas.  Of course, Philadelphians understand that PGW rates are high, not low, and where PGW once did produce a small dividend for the city each year, that is no longer the case.  In fact, the city budget now supports PGW instead of the other way around.  

We should have seen this coming.  In fact, many of us did.  In 1995, when I was but a policy-wonk pup working for the Pennsylvania Economy League, I wrote a report titled The Philadelphia Gas Works:  Governing for Performance (http://www.peleast.org/images/PGW.pdf) that considered the troubled utility’s future in a world of competition for gas utilities, concluding:

Competition with alternative energy sources, private gas marketers, and other gas providers will force PGW to drastically change its practices and policies, necessitating a new emphasis on providing quality service to its customers, strengthening its customer base, and cutting costs. If PGW is unable, or unwilling, to respond, the utility will find itself stripped of its best customers and locked in a downward spiral that will turn PGW into a burden to its owners, the citizens of the City of Philadelphia.

That is exactly what happened.  Just five years after the publication of the report (and five years after I was assured by top city officials that my assessment was overly pessimistic and that PGW would become a powerful asset for the city), the citizens were propping up the utility with millions from the city budget.

Since 2000, the “cost” of owning PGW to the citizens of Philadelphia has been $117 million (in foregone revenues that were previously expected and loans which may never be repaid). That cost grows by $18 million each year with no end in sight.

In 2000, the Street administration loaned PGW $45 million to help the utility through its troubles.  But the loan, originally set to be repaid in January 2003, was extended and is now due to be repaid no earlier than July 2008, months after the end of the Street administration.  Few City Hall insiders believe the city will ever recover the “loaned” funds.

Perhaps more significant for the budget, beginning in 2004, the City of Philadelphia released PGW from its legal obligation to pay the city $18 million per year.  Forgiving this obligation has cost the city a total of $72 million including the current fiscal year, and it will cost the city $18 million per year for each year PGW’s obligation remains forgiven.

In my work with Philadelphia Forward promoting implementation of the recommendations of the city’s voter-established Tax Reform Commission, I have often encountered well-meaning Philadelphians who have questioned what might happen to the city budget if we reduce the city’s job-killing tax rates.  Despite a wealth of scientific, historic, and anecdotal evidence supporting reductions — and despite the fact that every year for more than a decade, the city has reduced tax rates, but increased tax revenues — the falsehood that “tax reform will force vital service cuts” is a standard from special interest groups. 

Ironically, in my years of paying attention to PGW’s deteriorating situation, I have never heard from those same individuals that the $117 million cost of owning PGW has been responsible for any vital service cuts.  In fact, this subsidization of PGW is a lot like many other programs initiated in recent years (stadium financing, the Neighborhood Transformation Initiative, and Operation Safe Streets quickly come to mind).  The millions spent come at a staggering cost, the benefits are uneven at best and nonexistent at worst, and none of those spending efforts seem to elicit any concerns from the special interests about any vital service cuts. 

In concluding my report about PGW more than a decade ago, I offered this warning:

If the City’s elected leaders cannot, or will not, alter PGW’s governance structure to make the utility viable for the short term and competitive for the long term, then PGW should be sold for whatever short-term gain can be realized, lest the utility become a long-term drain on Philadelphia’s future.

If anything, my prediction turned out to be optimistic and my warnings not dire enough because where PGW was once an asset that the city could consider selling to generate revenue, the utility’s deterioration over the years has resulted in so much debt that it is not clear that the collection of assets known as PGW has any value at all for a potential buyer.  In fact, we have reached a point where the city could conceivably have to pay a private firm to take the utility off our hands.  That cost would come on top of the $117 million loaned and lost already.  Those are some serious gas pains!