PUC plans to pressure city to replace aging pipes

In the aftermath of the city's failed attempt to sell the Philadelphia Gas Works, state regulators announced plans Monday to step up pressure on the city to accelerate its 88-year gas-main replacement schedule.

The Public Utility Commission's move to study PGW pipeline safety is aimed at speeding the rate at which the utility replaces brittle cast-iron mains. PGW operates one of the oldest and leakiest gas distribution systems in the nation.

"We can't continue to have this utility run this way," PUC Chairman Robert F. Powelson said. "I'll just say it's a hazard, this cast-iron pipe sitting in the ground while other utilities are going after it to replace it."

City Councilwoman Marian B. Tasco called pipeline safety a "red herring" and said the PUC move was payback for Council's refusal last year to agree to sell PGW for $1.86 billion to UIL Holdings Corp.

"I think they're trying to punish the city," said Tasco, chairwoman of the Philadelphia Gas Commission.

Powelson said the PUC's motive was public safety. "I want to assure you this is not to be viewed as a witch hunt of PGW," he said.

Powelson and Commissioner James H. Cawley, in a conference call with The Inquirer, suggested that the PUC might pressure the city to forgo the $18 million annual dividend it now receives from PGW to reduce the impact on ratepayers of an upgraded main-replacement program. PGW customers already pay the highest rates in the region.

"Is that really an appropriate transaction that needs to take place if we're really focusing on pipeline replacement and safety?" Powelson said of the dividend.

PGW and Mayor Nutter's office said they welcomed the PUC's review.

But Mark McDonald, the mayor's spokesman, said Nutter would oppose sacrificing the $18 million annual fee from PGW "because of the significant impact the loss of that revenue would have on the city's budget."

Powelson said the review is expected to be completed by April.

The analysis will examine PGW's system integrity and pipeline replacement schedule, and identify impediments to pipeline replacement.

"We will take an in-depth look at PGW and determine what may be done to accelerate this process and avoid tragic accidents, while at the same time being mindful of how much of a burden ratepayers can bear," Powelson said in a statement.

Nearly two-thirds of PGW's 3,024 miles of mains, which deliver natural gas to city homes, are considered "at risk." They are made of aging cast iron and unprotected steel, more prone to breakage. That total is nearly twice as much as any other Pennsylvania gas utility.

Half PGW's gas mains are "high risk" cast-iron pipes. Only one utility in the nation has a higher percentage of "high-risk" mains, according to federal data.

State regulators across the nation have pushed utilities to increase the replacement of aging gas distribution systems, following a series of fatal gas explosions four years ago in San Bruno, Calif., Allentown, and Philadelphia.

The commissioners said that if an accident occurs, the PUC will be held accountable, because it is responsible for utility safety.

"If there's a leak in the city and there's an explosion, it's the PUC on the ground, with inspectors having to manage the situation," Powelson said. "That's really what's driving us in terms of this next step."

Pennsylvania in 2012 approved a new funding mechanism 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 nonfuel costs. PGW said the additional revenue allowed it to replace 28 miles of pipe last year, up from 18.

But the PUC said that even with the additional $22 million generated from the surcharge, PGW's replacement rate is still too slow.

"We set it at a level we thought [the city and PGW ratepayers] could afford, but it's not sufficient and it's not sustainable," said Powelson. He and Cawley said too much of the utility's resources were directed to repairing gas leaks rather than replacing old mains.

"It's patch, patch, patch, rather than replace," said Powelson.

PGW Chief Executive Craig White said he was comfortable with the utility's current pace. He argued that although PGW's gas mains are old, the utility has not experienced a greater number of serious incidents.

"Our rate of incidence is not out of the norm," he said. "We significantly increased the program from 18 miles to where it is today. Having said that, as an operator, do I want to remove more pipe? Absolutely."

The PUC urged the city to sell PGW last year, saying private owners could accelerate gas-main replacement by spreading the costs out over decades. As a municipal utility, PGW pays for infrastructure repairs out of current funds on a "paygo" basis.

UIL had promised to accelerate gas-main replacement, but Tasco and Council President Darrell L. Clarke complained that there was nothing in the sales agreement that committed the buyers to pick up the pace.

"It was a red herring to scare the public that the mains were going to blow up, and if you don't sell it, you're going to have all these blown-up mains," said Tasco. "But there was no promise by UIL in the sale agreement that they were going to accelerate main replacement."

Council declined to hold hearings on Nutter's proposal and the deal collapsed in December.

Powelson and Cawley expressed alarm at the pace PGW is replacing its gas mains, and said there was no way to avoid an impact on rates.

"This company is being forced increasingly to spend money on emergency maintenance," said Cawley. "And you still don't have a replaced system, you have patches."

"You get what you pay for," he said. "I think customers value safety above all else."

The city's $18 million annual fee would only cover part of the cost of an accelerated pipe-replacement program, Cawley said.

It is unclear how the PUC could order the city from halting the annual payments, which the city suspended for seven years until 2011 because of PGW's financial problems. The annual fee is included in PGW's management agreement with the city.

Theoretically, the PUC could order PGW to ramp up gas main replacements without giving it sufficient rate relief to pay for the improvements. Whether such a move could pass legal review is uncertain.

"I think the PUC needs to go back and kind of rethink their role as an oversight commission and be realistic in coming to some conclusions about what is feasible and what is not feasible," said Tasco.

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