Philadelphia: Closed for Business

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Last week Philadelphia City Council made it clear that "Philadelphia is closed for business". Not only is Council walking from a good deal, but they are doing so in manner that must be chilling to the business community. City Council President Darrell Clark announced that Council was not going forward with the proposed sale of the Philadelphia Gas Works (PGW) to UIL Corp. Since the outset of the transaction in my opinion UIL has been transparent and negotiated in good faith with the City. However Council chose not to hold public hearings on the sale of PGW nor an up-down vote. I believe Council feared that both yea and nay votes contained landmines for their re-election prospects next year. A nay vote would placate PGW’s local 686 and sympathetic municipal unions, but possibly anger the building trades unions and business interests in the City. So it was better not to vote at all. What does this tell any company thinking about doing business in Philadelphia – – Not only may you not get a fair hearing, you may not get one at all.

The UIL deal would have been good for Philadelphia’s finances, pensioners, ratepayers and public safety. UIL’s was willing to pay this financially strapped city a premium over what the assets are worth. Moody’s Investor Service upon reviewing the merger proposal changed it outlook for UIL from "Stable" to "Negative" and specifically noted that UIL’s bid reflected a "premium valuation." In another words – UIL was willing to pay too much. The net proceeds of the sale were to go to the City’s grossly underfunded pension plans.

Contrary to the hue and cry of the unions and some Council members, we would not have seen "staggering" rate increases under UIL. As PGW cannot unilaterally raise rates, neither would have UIL. The Pennsylvania Public Utility Commission (PUC) regulates utility rates in the state, and allows reasonable but certainly not high rates of return to municipal and investor owned utilities alike. Additionally, UIL expected to lower rates by better managing operating costs including decreasing PGW’s bloated payroll. To put this in perspective Peoples Gas that serves Chicago is roughly 40% larger than PGW in terms of both net assets and customers, but currently has approximately 25% fewer employees. UIL workforce reduction was to be met primarily through attrition. UIL promised not to lay off anyone for 3 years, and not to allow the current work force of roughly 1650 to drop below 1350 during that time. I should note UIL planned to accelerate the replacement of PGW’s aged pipes which the Nutter administration estimated would have lead to 200 new jobs. This was not good enough for the unions. They believe that you, the ratepayers, should pay inflated rates for unnecessary employees.

The majority of PGW’s gas mains are old cast iron and unprotected steel pipes. The PUC estimates that 93% of gas main leaks are from cast iron pipes. Accidents while tragic are less financially problematic for a municipal utility than for a private sector owner. PGW as a municipal authority in Pennsylvania has its liability capped at $500,000 per incident. However, a private sector utility could be liable for the full cost of the accident. Because of the associated liabilities, companies like UIL have accelerated the replacement of their older infrastructure. For example local gas utility, UGI Corp., expects to replace all of its cast iron pipes within 14 years. At current replacement rates, it could take over 50 years for PGW to replace these aged pipes.

Council passed on a very good deal for the City owing to pressure from unions. These union leaders were more interested in saving 300 plus superfluous jobs rather than protecting the pensions of Philadelphia’s roughly 60,000 retirees and over 25,000 current employees. Council did not act in a transparent manner, which was not only unfair to UIL, but also unfair to the voters and taxpayers of Philadelphia at whose pleasure Council serves. If you were considering opening operations in this city and your business might need approvals from Council, given Council’s treatment of UIL, what would you do? Frankly Detroit looks more attractive.

Denise M. Furey
Regent Square Advisors
University City
Republican Leader of the 46th Ward
[email protected]