Philadelphia City Council Rejects Gas Works Sale

The Philadelphia City Council rejected the mayor's proposed sale of the city's gas utility Monday, saying the risk of increased costs to consumers and a lack of infrastructural improvements from the transaction outweighed the benefits.

In March Mayor Michael Nutter announced an agreement to sell the Philadelphia Gas Works for $1.86 billion to UIL Holdings Corp.

The sale would have led to the city paying off the utility's $1.06 billion bond, commercial paper and pension debt. Its swaps would have been terminated.

The bonds would have been paid off as they became callable. Many of them are already callable. Some money would be set aside in an escrow account to pay off bonds in the future as they became callable.

After the city used money to pay off debt or for the escrow account, the city expected to have $420 million to $630 million to be deposited in its pension fund. The city had a $5.3 billion unfunded pension liability as of July 1, 2012, said Janney Montgomery Scott managing director Alan Schankel.

The city council released a statement saying that the sale's "financial and public policy risks associated with the sale proposal outweighed the stated benefits to the city of Philadelphia and PGW customers."

About six months ago the city council hired Concentric Energy Advisors to investigate the sale's impact. Concentric found that the sale would have a net benefit to the city of $200 to $400 million, which would be roughly $200 million less than the mayor's estimates.

In addition, the council objected that while in the deal UIL could not raise the base rate for three years after the sale, it could raise prices through rate adjustment riders, charges and surcharges. UIL had made no commitments concerning the base rate after three years, the council said.

After the sale, UIL had not committed to income-based assistance programs other than for seniors, the city council said in its statement. UIL had not committed to accelerate the replacement of the city's aging cast iron pipe replacement program. The council made several other objections.

On Monday City Council President Darrell Clarke announced the council's decision not to hold hearings about the proposed gas works sale, saying that it did not have the city council's support.

On Tuesday Clarke spokeswoman Jane Roh said that the council did not necessarily oppose a sale of the Works to UIL, it just opposed the terms approved by the mayor.

Late on Monday Nutter responded to Clarke's statements by saying, "I think what we heard and saw today was quite possibly the biggest cop-out in the recent legislative history of Philadelphia."

Nutter said when he read a memo said to be from the council stating the council's opposition to the sale, he asked himself, "who voted and when did they vote? … Normally legislative bodies take positions when they actually vote."

Nutter said he hoped that there was still a possibility to sell the Gas Works.

Schankel said that the Gas Works sale would have helped fill the city's unfunded pension liability to a marginal degree.

The utility has required city financial support in the past, Schankel said. It would be better if Philadelphia did not run a major public utility, he said.

However, Schankel said, "I don't think there's a large or significant credit impact if the gas works sale doesn't happen."

A mayoral and city council election is scheduled for November 2015. The gas works sale may be an issue in the election. It is possible the works may be sold after that, Schankel said.

Earlier this year the Philadelphia City Council attempted to receive state approval to make permanent a recession-era 1% increase in the city sales tax, Roh said. The proceeds would have been directed to the pension fund. "That plan was hijacked by Governor [Tom] Corbett and the Republican-led legislature to compensate for another consecutive year of state underfunding of the School District of Philadelphia."

Clarke continues to seek a return to a fair, weighted funding formula for all the state's public schools, which would allow the city to redirect revenue to the pension fund, Roh said. Clarke "believes that only by identifying a new, recurring revenue stream - as opposed to a one-shot payment - will the City gets its unfunded pension liability under control."

Philadelphia Gas Works is the largest municipally-owned gas utility. Moody's rates its senior-most bonds Baa2 and rates Philadelphia's general obligation bonds A2.

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