Pipe replacement at heart of PGW debate

Philadelphia Gas Works operates one of the oldest, leakiest gas distribution systems in the nation, and the city-owned company is replacing pipe at a slower pace than any other Pennsylvania utility, according to state regulators.

Nearly two-thirds of PGW's 3,024 miles of mains that deliver natural gas to city homes are considered "at risk" - they're made of aging cast iron and unprotected steel, more prone to breakage. That's almost double the proportion of any other gas utility in the state, according to the Pennsylvania Public Utility Commission.

Whether city government or private investors are best equipped to fix PGW's crumbling infrastructure is at the heart of Mayor Nutter's proposal to sell the utility. UIL Holdings Corp., a Connecticut company that has agreed to pay $1.86 billion for PGW, says it can speed up the rate of pipe replacement because it has access to capital that the heavily indebted municipal utility does not.

UIL recently launched a "fix-the-system-or-cross-your-fingers" ad campaign to pressure a reluctant City Council to approve the sale before the deal expires at year's end. Council has thus far not scheduled hearings.

"Right now the city is facing a big decision about the sale of Philadelphia Gas Works," the ad announcer says to the sound of a clock. "And the clock is ticking, just like the clock is ticking on the dangerously outdated gas system below our city - and as experts say, an accident waiting to happen."

UIL's campaign has rubbed some council members badly. Sale opponents call it a scare tactic that overstates the danger to Philadelphians and neglects to mention that PGW customers, who already pay the highest rates in the region, ultimately will pay for accelerated pipe replacements, while UIL profits.

PGW says it vigilantly patrols for leaks and is methodically replacing older pipes at a responsible pace.

Its focus is primarily on 1,500 miles of cast-iron mains, which make up about half its system. Cast-iron mains - some installed in the 1800s - become brittle with age.

"To say that it's a ticking time bomb - I don't go that far," said Paul Mondimore, PGW's vice president of operations. "Yes, I know it's risky. It's like your old car. It works every day. You have no problem with it, as long as it doesn't break down on you."

Eleven people have died in three PGW explosions in the last 35 years. Pennsylvania lawmakers raised alarms about aging infrastracture after a PGW worker was killed in a 2011 blast in Tacony followed three weeks later by an explosion on another utility's system in Allentown that killed five.

The legislature approved a new funding mechanism in 2012 that allows utilities, with PUC permission, to recover pipe replacement costs without going through an expensive rate proceeding. PGW was first in line to sign up.

The surcharge began appearing last year on PGW bills as the Distribution System Improvement Charge (DSIC), which amounts to 5 percent of non-fuel costs.

With the additional $22 million generated from the DSIC, the utility accelerated its pipe-replacement pace this year. Mondimore said PGW replaced 28 miles of cast-iron mains with state-of-the-art plastic or corrosion-resistant steel.

PGW is now on pace to replace most of its cast-iron mains in 50 years. All "at-risk" pipe - including some older coated steel mains that PGW says are not as high-risk as cast iron - will be gone by 2100.

Even at the accelerated pace, PGW's replacement rate still ranks low compared with other utilities, according to the state utility commission.

UIL says it can double the replacement rate with borrowed money, based on expected future income from the DSIC surcharge. While PGW currently pays for pipe replacements on a cash basis, UIL and other investor-owned utilities typically spread their costs out over decades, and are allowed to collect a rate of return on their investment.

Michael A. West Jr., UIL's spokesman, compares PGW's current financing method to buying a house with cash, compared to taking out a mortgage and paying over time. "We can put more investment into the ground up front," he said.

Critics of investor ownership say that eventually UIL will need to raise rates to recover its costs. City Controller Alan L. Butkovitz, a sale skeptic, in May likened UIL's method to "a balloon mortgage situation."

But UIL says that rates will rise no matter who owns PGW. The utility, under continued city ownership, also has signaled a need to raise rates in 2018.

UIL makes no secret that PGW's need for new pipe represents an investment opportunity. With consumers using energy and water more efficiently, the future for most utility investors these days is not in sales volume growth, but profit from new steel and concrete, for which regulators will grant a guaranteed rate of return.

Regulators such as the PUC and the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) are also pressuring utilities to step up infrastructure investment in response to public outcry after several fatal gas explosions, including PGW's Tacony accident.

The PUC expressed exasperation with PGW after the Tacony explosion, and some commissioners openly urged the city to sell - even at a loss - to shift the utility's burdens to the private sector.

"This is a real opportunity to avoid huge future cash outflow and present liability and potentially a much greater future liability," James H. Cawley, a Democratic member of the PUC, said in a 2012 interview.

But PGW's supporters say the utility is doing fine under municipal ownership. Just last week, Standard & Poor's raised its rating on PGW debt, citing improved collections and management.

A 2008 study by the consulting firm Advantica, filed with PUC, acknowledged that PGW reported incidents from 1986 to 2004 at more than three times the rate as other U.S. gas companies. "However, the general trend for PGW has shown a reduction in incidents in recent years," it said.

A 2012 benchmarking study for PGW by GL Noble Denton also found the utility has made "remarkable progress" in reducing reportable incidents.

PGW last year reported 354 hazardous leaks per 1,000 miles of main - still among the highest rates in the country, according to statistics kept by PHMSA, the federal pipeline agency. New Jersey's Public Service Electric and Gas Co., which also has a large amount of cast-iron pipe, reported 65 hazardous leaks per 1,000 miles.

PGW officials say the leak counts are not as alarming as they seem because most of Philadelphia's system operates at low pressure - typical for older, urban systems. Low-pressure leaks are less likely to result in a catastrophic gas release, Mondimore said.

And cast iron pipe, as long as it is buried in a stable setting, is not necessarily dangerous.

"A cast-iron main, if left undisturbed, would last another 100 years," he said. "We're addressing what we believe is the most risky pipe."

UIL says by every standard, its performance is superior. Its three New England gas utilities have about 1,000 miles of cast-iron mains, which are being replaced at a rate of 35 miles per year, said West.

PGW says it responds to 96 percent of leak calls in 60 minutes or less. UIL responds to 99 percent of all leak calls in 30 minutes or less, the standard in Connecticut.

"We have to do it in half the time, and do it at a higher rate," said West.

215-854-2947 @maykuth