COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES
CONSUMER AFFAIRS COMMITTEE HEARING
STATE CAPITOL IRVIS OFFICE BUILDING ROOM G-50 HARRISBURG, PENNSYLVANIA
THURSDAY, APRIL 23, 2009 9:10 A.M.
PRESENTATION ON DISTRIBUTION SYSTEM IMPROVEMENT CHANGE (DSIC)
BEFORE: HONORABLE JOSEPH PRESTON, JR., MAJORITY CHAIRMAN HONORABLE GARY HALUSKA HONORABLE WILLIAM C. KORTZ, II HONORABLE ROBERT MATZIE HONORABLE HARRY READSHAW HONORABLE CHRIS SAINATO HONORABLE TIMOTHY J. SOLOBAY HONORABLE ROBERT W. GODSHALL, MINORITY CHAIRMAN HONORABLE SHERYL DELOZIER HONORABLE FRANK FERRY HONORABLE WILL GABIG HONORABLE SETH M. GROVE HONORABLE BOB MENSCH HONORABLE DOUGLAS REICHLEY
————————— JEAN DAVIS REPORTING 7786 Hanoverdale Drive • Harrisburg, PA 17112 Phone (717)503-6568 • Fax (717)566-7760z 2
1 ALSO IN ATTENDANCE: GAIL M. DAVIS, EXECUTIVE DIRECTOR 2 BETH ROSENTEL, RESEARCH ANALYST MARCI SANTORO, COMMITTEE SECRETARY 3 TIM SCOTT, RESEARCH ANALYST DAVID VITALE, LEGAL COUNSEL 4
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6 JEAN M. DAVIS, REPORTER 7 NOTARY PUBLIC
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1 I N D E X
2 TESTIFIERS
3 NAME PAGE 4 JAMES H. CAWLEY, CHAIRMAN 5 PENNSYLVANIA PUBLIC UTILITY COMMISSION...... 10
6 WAYNE E. GARDNER, COMMISSIONER PENNSYLVANIA PUBLIC UTILITY COMMISSION...... 14 7 IRWIN "SONNY" POPOWSKY 8 CONSUMER ADVOCATE, PENNSYLVANIA OFFICE OF CONSUMER ADVOCATE...... 30 9 J. MICHAEL LOVE, PRESIDENT AND CEO 10 ENERGY ASSOCIATION OF PENNSYLVANIA...... 47
11 DAVE TREGO, PRESIDENT AND CEO UGI UTILITIES, INC...... 79 12 GEORGE E. STARK, DIRECTOR, EXTERNAL AFFAIRS 13 COLUMBIA GAS OF PENNSYLVANIA...... 89
14 TOM KNUDSEN, PRESIDENT AND CEO PHILADELPHIA GAS WORKS...... 100 15 MIKE WELSH, CHAIR 16 PENNSYLVANIA AFL-CIO UTILITY CAUCUS...... 104
17 STUART BASS, DIRECTOR KEYSTONE DEVELOPMENT PARTNERSHIP...... 109 18 PAMELA A. WITMER, PRESIDENT 19 PENNSYLVANIA CHEMICAL INDUSTRY COUNCIL (PCIC).....123
20 PAMELA C. POLACEK, COUNSEL INDUSTRIAL ENERGY CONSUMERS OF PENNSYLVANIA...... 128 21
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2 PHILIP E. RILEY, JR., PRESIDENT UTILITY SERVICE PARTNERS, INC...... 141 3 JOHN T. GLANEMAN, MANAGER 4 RETAIL NETWORK OPERATIONS DOMINION PRODICTS & SERVICES...... 149 5
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1 P R O C E E D I N G S
2 * * *
3 MAJORITY CHAIRMAN PRESTON: Good morning.
4 The hour of 9 having come and gone by, I
5 would like to call this public hearing to order.
6 This is a public hearing on House Bill 744 introduced
7 by Representative Solobay concerning the distribution
8 system improvement charge, better known as DSIC.
9 I would like first to remind the people -- I
10 know it's a little warm in here. Gentlemen or
11 ladies, if you feel you can take off your jackets,
12 ladies, please do not. This is being broadcast on
13 PCN.
14 The other thing is that if you have a cell
15 phone, please set it to buzz so that we can have
16 continuity here in the hearing room just as well.
17 The first order of business would be to my
18 right or the audience's left is to have the members
19 identify themselves. That will also serve as an
20 attendance record.
21 REPRESENTATIVE SOLOBAY: Thank you,
22 Mr. Chairman.
23 Representative Tim Solobay from the 48th
24 District in Washington County.
25 REPRESENTATIVE MENSCH: Representative Bob 6
1 Mensch, Montgomery County.
2 MINORITY CHAIRMAN GODSHALL: I'm
3 Representative Bob Godshall, Montgomery County.
4 REPRESENTATIVE SAINATO: I'm Representative
5 Chris Sainato. I represent the 9th Legislative
6 District, which is Lawrence County and a small
7 section of Beaver County.
8 REPRESENTATIVE KORTZ: Good morning,
9 everyone. My name is Bill Kortz. I'm from Allegheny
10 County, 38th District.
11 REPRESENTATIVE MATZIE: Rob Matzie, 16th
12 District. That's Beaver and Allegheny County.
13 REPRESENTATIVE READSHAW: Harry Readshaw,
14 36th District, Allegheny County.
15 REPRESENTATIVE GROVE: Seth Grove, 196th
16 District, York County.
17 REPRESENTATIVE FARRY: Frank Farry, 142nd
18 District, Bucks County.
19 REPRESENTATIVE HALUSKA: Gary Haluska, 73rd
20 District, Cambria County.
21 MAJORITY CHAIRMAN PRESTON: Also the
22 appropriate staff.
23 MS. DAVIS: Gail Davis, Director for the
24 Committee Democratic Caucus.
25 MR. VITALE: Dave Vitale, legal counsel to 7
1 the Consumer Affairs Committee, Democratic Caucus.
2 MS. ROSENTEL: Beth Rosentel, Chairman
3 Preston's Office.
4 MR. SCOTT: Tim Scott, Chairman Preston's
5 Office.
6 MAJORITY CHAIRMAN PRESTON: And I know that
7 our two absent solicitors on the Majority side, one
8 is having a baby -- no, he's not having a baby. His
9 wife had a baby -- and one is getting married. That
10 will complete it.
11 Also, I would like to ask -- and I'll try
12 this again. We are short on copies of testimony. So
13 before you leave, if you would leave a business card
14 or address so that we can have it and not let someone
15 take it and then we will get the appropriate copies
16 to you.
17 That being said, I think this hearing, we've
18 gotten specific now. Earlier in the year, we went
19 through each and every item basically somewhat that
20 we had as an overview to familiarize the members.
21 Now we're getting down to the subjective
22 issues of House Bill 744. Everybody talks about,
23 quote, unquote, the stimulus issue. I think this is
24 something that in Pennsylvania, dealing with
25 infrastructure that is so tantamount and so 8
1 important, even after the stimulus package is gone,
2 this is something that I think the stimulus package
3 helps.
4 But it still doesn't solve the problem at
5 all that we have to be able to deal with. We've been
6 having different conversations with a lot of
7 different people. And you sit down and as you start
8 fixing things, it means -- especially with
9 infrastructure -- as you fix one thing, then that
10 means if you don't complete the whole system, that
11 which is weaker actually gets a little bit weaker and
12 then the cost continues to go up.
13 This is something that we've gone through in
14 Pennsylvania as far as companies buying other
15 companies. We've had an aging infrastructure system.
16 So we're hoping to be able to improve.
17 With that, I'd like to recognize the prime
18 sponsor of the bill, the Honorable Timothy Solobay.
19 REPRESENTATIVE SOLOBAY: Thank you,
20 Mr. Chairman.
21 And I appreciate the opportunity for us to
22 be able to hold the hearing this morning on House
23 Bill 744. Just for a reference, this bill was
24 brought up last session and passed by this Committee
25 and taken to the House floor. And unfortunately, 9
1 with the time line that we had during that process,
2 it died at the end of November without any action
3 taken.
4 I would say that with the attendance in the
5 room this morning, this bill has quite a bit of
6 excitement and interest. And I would also reference
7 that if you look down through the list of cosponsors,
8 the number of cosponsors, it's a very bipartisan-type
9 bill that we're looking at.
10 It's got support from both sides. And I
11 look at it as a very consumer-friendly bill. And I
12 know we're going to have a lot of testimony today
13 that's going to support and also raise additional
14 questions maybe based on that.
15 And I would just ask everyone to stay
16 open-minded on it and look through all the
17 information that's going to be presented and whenever
18 the opportunity comes, that we get an affirmative
19 vote through this committee.
20 Thank you, Mr. Chairman.
21 MAJORITY CHAIRMAN PRESTON: That being said,
22 first on the panel, we have James Cawley, who is
23 Chairman of the Public Utility Commission, and Wayne
24 E. Gardner, who is a Commissioner of the Pennsylvania
25 Public Utility Commission. 10
1 Welcome, gentlemen. We are glad to see you
2 back here again as we work on the infrastructure of
3 Pennsylvania. We can't wait to hear your comments.
4 PUC CHAIRMAN CAWLEY: Thank you, Chairman
5 Preston and Chairman Godshall and members of the
6 committee and especially Representative Tim Solobay
7 for prim sponsoring this legislation.
8 Commissioner Gardner and I are here to
9 wholeheartedly support this legislation. And
10 Commissioner Gardner is along with me because he has
11 taken a special interest in this legislation and this
12 issue. He's worked on it at least twice as hard as
13 the rest of us have.
14 He also has a special interest in the
15 Philadelphia Gas Works and the issues that it has.
16 We together hope that we can answer your questions.
17 Rather than reading my testimony or our
18 testimony on behalf of the Commission, let me just
19 highlight the Commission's views of this bill.
20 As you know, it has three parts to the bill.
21 The first part would extend ownership of maintenance
22 responsibility of natural gas service lines -- that's
23 from the curb to the house -- to a million customers
24 in Pennsylvania, which by an anomaly in the law do
25 not presently have -- the companies presently do not 11
1 have the responsibility for those gas lines.
2 This would correct the situation because for
3 the rest of Pennsylvania, the gas line is owned and
4 maintained by the gas company. And this is primarily
5 for safety reasons.
6 Water lines, generally speaking, are owned
7 by the customer and are the responsibility of the
8 customer. Gas lines for the rest of the State,
9 except for just part of it -- and this bill would
10 correct this problem. For the rest of the State, the
11 gas companies own the line. So we are wholeheartedly
12 in support of making the rule uniform throughout the
13 county.
14 The second part of the bill makes special
15 provisions for the Philadelphia Gas Works, one of the
16 ten largest natural gas companies in the State, to
17 finance capital projects for system reliability and
18 safety.
19 I won't dwell on this now, but there's a
20 special need for language for the Philadelphia Gas
21 Works because, as you know, it is a municipally owned
22 system. It is not like the rest of the companies
23 that the PUC regulates. It is not an investor-owned
24 public utility.
25 This provision is very much needed to help 12
1 the Philadelphia Gas Works finance capital
2 improvements in a way that will allow -- or improve
3 the capital structure of the company. It will help
4 the credit rating of the company and, therefore,
5 lower its borrowing costs.
6 The third part of the bill provides, for the
7 first time, a natural gas distribution system
8 improvement charge. And it mirrors the
9 extraordinarily successful water distribution system
10 improvement charge that the Legislature enacted in
11 1997, which has become a model for legislation in
12 other States.
13 Our water DSIC, D-S-I-C, Distribution System
14 Improvement Charge, has been put forth by the Council
15 of State Governments as model legislation. It's been
16 recommended by the National Association of Regulatory
17 Utility Commissioners as best practice.
18 And we, frankly, are very proud of it. It
19 has worked very well. The Legislature, in broad
20 terms, gave the Public Utility Commission the ability
21 on a very limited basis to add a small surcharge to
22 customers' bills which would allow for the
23 acceleration and replacement of existing
24 infrastructure, water mains primarily.
25 This legislation would extend that authority 13
1 to the Commission to natural gas mains and service
2 lines. In my view, it is even more compelling that
3 the Commission have the authority to implement this
4 very limited surcharge on the bill than it is in the
5 water situation.
6 It's one thing for the water line to leak.
7 And it's quite another for a gas line to leak. Let
8 me tell you very briefly the extent of the problem.
9 Pennsylvania's natural gas lines, as we sit here this
10 morning, are leaking, especially 12,000 miles of
11 them, which are either cast iron or unprotected bare
12 steel, obviously yesterday's technology and, in fact,
13 a hundred-year-ago technology.
14 The ten largest -- we have ten large natural
15 gas companies in Pennsylvania. We have 21 smaller
16 ones. Of the ten largest now, just the ten, not the
17 smaller ones which have the same problem, but just
18 the ten largest, they have 3,300 miles of cast iron.
19 We have brought along some examples of this this
20 morning.
21 PGW has half of the 3,300 miles of cast
22 iron, it being one of our oldest utilities in
23 Pennsylvania.
24 Mr. Gardner is really not my assistant, but
25 he's insisting that he show this to you. That's cast 14
1 iron. It's very brittle. It's the best they had
2 when they put it in the ground. It breaks very
3 easily.
4 COMMISSIONER GARDNER: And I'm told this is
5 very fresh, like a week ago. This is what came out
6 of the ground.
7 PUC CHAIRMAN CAWLEY: Now, bare steel or
8 unprotected bare steel, we have 8,700 miles of that.
9 You see the clamps on that because it was cracking.
10 And that was an effort to extend its service life.
11 COMMISSIONER GARDNER: Actually, it was
12 extended. You're not going to be able to see it, but
13 we'll leave this here. But if you look down in this
14 pipe, you're going to see a plug in there. And
15 that's a wood plug that was stuck in there to repair
16 a leak some years ago.
17 PUC CHAIRMAN CAWLEY: Approximately a third
18 of the unprotected bare steel in the ground is in
19 Columbia Gas service territory. And the company you
20 may hear this morning, has undertaken an extremely
21 ambitious program to replace it.
22 When I say unprotected, that means it's not
23 coated in any fashion to protect it from corrosion
24 and it has no cathodic protection, which is an
25 electric way of fending off corrosion. 15
1 Don't ask me any more about that. That's
2 all I know. All I know is it corrodes very easily.
3 So 95 percent of the leaks in our ten
4 largest utilities are because of those two types of
5 pipes in the ground.
6 The third type is the plastic PVC that
7 serves as a replacement and is what the companies are
8 putting in the ground. So we've got a problem. And
9 normal rate-making has not provided the monies or the
10 incentive to match the useful life of these pipes.
11 In other words, in the normal course of
12 events, the utilities are replacing pipes like this.
13 What the water DSIC did and what this legislation
14 will do will accelerate the replacement of this
15 problem pipe in the ground by placing a small
16 surcharge on the bill.
17 They will not recover all of their
18 investments immediately by a surcharge. Just like
19 the water DSIC, by regulation, the Commission has
20 limited the amount of recovery. But it does provide
21 an incentive for the companies to start replacing it
22 as fast as it is wearing out.
23 If we do not do this, by normal service
24 lives, we will not only continue to have safety
25 problems, but it could be two centuries before we 16
1 catch up. This accelerates the replacement of
2 infrastructure in Pennsylvania. It is the most
3 prudent public policy.
4 And that's why the Commission supports it
5 wholeheartedly. We ask that you pass the bill in the
6 form that it has been introduced, giving the
7 Commission the authority to pass regulations to
8 implement it. We ask you, please don't be too
9 prescriptive in the legislation.
10 It's just the way that water DSIC is worded.
11 And in the 12 years since the water DSIC legislation
12 was passed, this Commission implemented that
13 legislation, as it will this one, with prudent
14 consumer-protection provisions.
15 In other words, please let us do what we do.
16 That's why we were created. We think that we have
17 implemented the water DSIC responsibly. We will
18 promptly pass regulations for your inspection and
19 approval. And the public will have every opportunity
20 to comment on those regulations.
21 They are likely to be very, very similar to
22 the water DSIC regulations. And those regulations
23 will undoubtedly say that we will audit the books of
24 the accounts of the natural gas utilities just as we
25 do with the water companies to make sure that only 17
1 eligible projects that replace mains and service
2 lines with this kind of pipe are eligible for
3 surcharge treatment.
4 We will annually audit. We will annually
5 have a hearing to reconcile the numbers. We will
6 quarterly adjust the surcharge amounts, if necessary,
7 to make sure that if the company is earning overall
8 more than its allowed annual return, we will put the
9 surcharge to zero. In other words, they wouldn't be
10 able to collect it if they are otherwise earning
11 enough money that they should have enough to do this
12 kind of work.
13 And for those who think, why don't you just
14 look at this in rate cases, the simple answer to that
15 is this. Rate cases are expensive and
16 time-consuming. And customers -- because it's the
17 cost of doing business, customers pay for rate cases.
18 And on top of that, we scrutinize through
19 this annual reconciliation and auditing process these
20 kinds of investments more than we would in a rate
21 case. In a rate case, you're looking at all of the
22 plant and service for a utility.
23 When you do an annual audit and have an
24 annual hearing on just the expenditures for these
25 infrastructure replacements, you have more time. 18
1 You're focusing on the actual improvements that have
2 been made.
3 For the limited amount of recovery that the
4 companies are allowed or will be allowed to make
5 these kinds of replacements, they will receive more
6 scrutiny by us than we would give them in a rate case
7 or have time because, as you know, the Public Utility
8 Code provides that in a rate case, from the filing of
9 a rate increase request to its end, there is only
10 nine months to do it. So you're under a time
11 deadline in a rate case. I think I made that point
12 well enough.
13 I would just conclude by saying that if this
14 does nothing else, it's going to create a lot of
15 jobs. This is good for Pennsylvania's workers. It
16 provides a lot of great jobs and it provides a great
17 service because this needs to be replaced on an
18 expedited basis.
19 So Commissioner Gardner and I have attached
20 a presentation, a PowerPoint presentation, along with
21 our testimony. And we'd be happy to answer any of
22 your questions.
23 MAJORITY CHAIRMAN PRESTON: Thank you very
24 much for your testimony.
25 Representative Solobay. 19
1 REPRESENTATIVE SOLOBAY: Thank you,
2 Mr. Chairman.
3 Thank you both, Chairman Cawley and
4 Mr. Gardner, for your testimony and your support.
5 My initial question that I had asked to
6 speak on about halfway through your testimony
7 basically was covered in your last portion. And that
8 was the issue of some of the criticism shown that the
9 oversight would not be tight enough or scrutinized
10 enough to show when the surcharge or the additional
11 monies would be too high or too excessive and put
12 them into a larger profit status as opposed to going
13 in and being utilized for the purpose that the DSIC
14 is lined out for.
15 PUC CHAIRMAN CAWLEY: Right.
16 REPRESENTATIVE SOLOBAY: But you very well
17 covered that several times through that. I
18 appreciate that explanation because I know that was a
19 concern of some, that this would be something that
20 would be looked at as a bonus or a benefit to the
21 company as opposed to the consumer.
22 PUC CHAIRMAN CAWLEY: Sure.
23 REPRESENTATIVE SOLOBAY: And I think in the
24 long run, as you so well put it, that that truly is a
25 consumer item. Whether it's because of the 20
1 infrastructure being done, the jobs being created,
2 and/or in those cases -- and I know Chairman Preston
3 has said it many, many times -- we are tired of
4 hearing from our communities and other folks that
5 they are constantly having to open and reopen and
6 sometimes triple-open roadways and things to have
7 things done.
8 PUC CHAIRMAN CAWLEY: Yes.
9 REPRESENTATIVE SOLOBAY: These DSIC monies
10 will enable them to work along with communities and
11 other utilities to be able to replace lines in either
12 an emergency situation or in an additional plan
13 situation.
14 Now, as we're looking at the stimulus monies
15 that become available, there's going to be some
16 unseen consequences that many utilities are going to
17 be facing to have to do utility relocation while some
18 of these stimulus projects are being done.
19 And they may not have planned for some of
20 that in their capital improvements. So this is going
21 to enable them to have those resources to do it
22 without having to wait and delay and miss an
23 opportunity to do some replacement whenever a ditch
24 or a roadway is opened up in the communities that
25 they service. 21
1 I appreciate that explanation.
2 PUC CHAIRMAN CAWLEY: Thank you.
3 MAJORITY CHAIRMAN PRESTON: Representative
4 Sainato.
5 REPRESENTATIVE SAINATO: Thank you,
6 Mr. Chairman.
7 Thank you, Chairman Cawley and Commissioner
8 Gardner. I think you made a very interesting
9 presentation, especially you, Mr. Gardner, showing
10 those pipes.
11 COMMISSIONER GARDNER: Thank you.
12 REPRESENTATIVE SAINATO: I mean, looking at
13 those and you see the iron there and its
14 deterioration. What percentage in Pennsylvania has
15 that iron pipe now? Do you know?
16 PUC CHAIRMAN CAWLEY: Twenty-six percent of
17 our natural gas pipelines in Pennsylvania are either
18 cast iron or unprotected bare steel. So roughly a
19 quarter of it. Much is in Philadelphia, a lot of it
20 in the western part of the State.
21 REPRESENTATIVE SAINATO: Now, you said
22 earlier in your testimony that we're losing this gas
23 right now, it's going through these pipes. Do you
24 know what the percentage is of the gas that we lose?
25 PUC CHAIRMAN CAWLEY: Offhand I don't know. 22
1 But every company has lost and unaccounted-for gas.
2 And again, it's a cost of doing business. And much
3 of it is recovered from all customers as a result of
4 these leaks. We don't give them every claim they
5 make for it because -- oh, by the way, you're
6 responsible for maintaining your lines.
7 But when you have that kind of pipe in the
8 ground and you don't have the finances to replace it
9 all immediately, there is some reason to allow them
10 some recovery for lost and unaccounted-for gas.
11 REPRESENTATIVE SAINATO: Okay.
12 PUC CHAIRMAN CAWLEY: So in other words,
13 it's not only costly to other customers, but it's a
14 safety problem.
15 REPRESENTATIVE SAINATO: Right. That's why
16 I said I'm looking at it. It's right in front of me
17 and Representative Kortz here. And you look at
18 that --
19 MAJORITY CHAIRMAN PRESTON: Mr. Sainato, if
20 we could save that for the President of the Energy
21 Association, maybe he can answer that question for
22 you.
23 REPRESENTATIVE SAINATO: All right. Thank
24 you, Mr. Chairman.
25 MAJORITY CHAIRMAN PRESTON: Representative 23
1 Mensch.
2 REPRESENTATIVE MENSCH: Gentlemen, good
3 morning.
4 PUC CHAIRMAN CAWLEY: Good morning.
5 COMMISSIONER GARDNER: Good morning.
6 REPRESENTATIVE MENSCH: A comment, not a
7 question. You talked about the rate process, the
8 rate-case process. And I believe you said it was
9 nine months. That's without any intervention. If
10 memory serves, there can be outside intervention
11 either from competitors or from user groups,
12 interested consumer groups. And I believe it can be
13 almost as much as two years, if I'm not mistaken, in
14 the entire rate process. Is that not so?
15 PUC CHAIRMAN CAWLEY: That's the way it used
16 to be until the Legislature put a nine-month limit on
17 rate cases.
18 REPRESENTATIVE MENSCH: Like I said, it's
19 been awhile since I dealt with it.
20 In the old days, it was quantified that
21 rate-case activity with intervention with legal cases
22 and so forth could add as much as 12 percent
23 additional cost to a rate case.
24 So I'm supporting your contention that rate
25 cases are expensive and that the DSIC is a much more 24
1 practical way and much more cost-effective way of
2 going about the business.
3 There's probably not 12 percent now, but
4 there's still a considerable amount of cost in a
5 rate-case process.
6 PUC CHAIRMAN CAWLEY: Again, we don't allow
7 all rate-case expenses, but we allow some.
8 REPRESENTATIVE MENSCH: I understand that,
9 sir.
10 PUC CHAIRMAN CAWLEY: And if you can
11 minimize it by taking out items where there's really
12 no dispute or very little dispute or that can be
13 scrutinized more carefully on an individual basis, so
14 much the better.
15 REPRESENTATIVE MENSCH: But that cost can
16 always find its way into the next rate case as well
17 because of guaranteed rate of return.
18 Thank you very much.
19 PUC CHAIRMAN CAWLEY: Thank you.
20 REPRESENTATIVE MENSCH: Thank you,
21 Mr. Chairman.
22 MAJORITY CHAIRMAN PRESTON: Representative
23 Kortz.
24 REPRESENTATIVE KORTZ: Thank you,
25 Mr. Chairman. 25
1 Thank you, PUC, for coming today and
2 offering this.
3 PUC CHAIRMAN CAWLEY: Certainly.
4 REPRESENTATIVE KORTZ: A question I have is
5 this: Is it under the PUC purview of what type of
6 pipe is going to go in the ground; for example, the
7 diameter, the wall thickness, the permeability of the
8 PVC? Do you get involved in that at all or is that
9 strictly up to the company to decide what they need
10 going in the ground?
11 PUC CHAIRMAN CAWLEY: I don't think that we
12 are that prescriptive.
13 REPRESENTATIVE KORTZ: Okay.
14 PUC CHAIRMAN CAWLEY: But because we have a
15 pipeline safety inspection responsibility partially
16 paid for by the Federal Government, on behalf of the
17 Federal Government, you can ask the people behind me
18 who are going to testify.
19 REPRESENTATIVE KORTZ: Okay.
20 PUC CHAIRMAN CAWLEY: My guess is that
21 they're industry standards and they meet them for
22 safety reasons. And it's probably settled what the
23 standards are.
24 REPRESENTATIVE KORTZ: Okay.
25 PUC CHAIRMAN CAWLEY: You know, we do get 26
1 into problems on the water side sometimes when
2 developers will put in a water system on the cheap
3 and then hand it over to the homeowners and the pipe
4 that's been put in the ground is substandard.
5 But on the gas side, I'm fairly certain it's
6 industry standards are met and that our inspectors
7 insist on it.
8 REPRESENTATIVE KORTZ: Okay. Thank you.
9 And that's exactly where I'm coming from. If they go
10 to all this work to replace these lines and here we
11 have something done on the cheap, especially with
12 gas, now we have a safety hazard.
13 PUC CHAIRMAN CAWLEY: Right.
14 REPRESENTATIVE KORTZ: I look forward to
15 talking with the other testifiers.
16 Thank you, sir.
17 PUC CHAIRMAN CAWLEY: Sure.
18 REPRESENTATIVE KORTZ: Thank you,
19 Mr. Chairman.
20 MAJORITY CHAIRMAN PRESTON: Chairman
21 Godshall.
22 MINORITY CHAIRMAN GODSHALL: Thank you also
23 for being here this morning.
24 PUC CHAIRMAN CAWLEY: Thank you.
25 MINORITY CHAIRMAN GODSHALL: Approximately 27
1 what percentage of our population is serviced by
2 natural gas in the State of Pennsylvania?
3 CHAIRMAN CAWLEY: I'm embarrassed to say I
4 don't know. But again, I think the industry will be
5 able to answer that, Chairman.
6 MINORITY CHAIRMAN GODSHALL: Well, in your
7 eyes, would the passage of this bill in any way
8 enhance gas distribution throughout Pennsylvania to
9 additional customers?
10 PUC CHAIRMAN CAWLEY: I think anything that
11 you do that lowers costs and assures safety and
12 reliability will enhance your ability to attract
13 customers. But, you know, again, this legislation is
14 meant to replace existing infrastructure.
15 MINORITY CHAIRMAN GODSHALL: I understand
16 that.
17 PUC CHAIRMAN CAWLEY: New service lines and
18 extensions of service are not covered within this
19 legislation.
20 COMMISSIONER GARDNER: But it should improve
21 the company's position to do other things. Because
22 in freeing up some cash for them to be able to do the
23 repair and replacement of existing infrastructure,
24 they will have, could have, more additional resources
25 to do extensions and expansion. 28
1 On top of the fact that as they are now
2 losing less gas through leakage, their costs are
3 going to go down, which also makes them much more
4 attractive as a fuel provider.
5 MINORITY CHAIRMAN GODSHALL: Those were my
6 thoughts, that it could have, you know, a side
7 benefit beyond the repair benefit?
8 COMMISSIONER GARDNER: I believe so.
9 MINORITY CHAIRMAN GODSHALL: Thank you.
10 COMMISSIONER GARDNER: Sure.
11 MAJORITY CHAIRMAN PRESTON: I guess the
12 final comment, first, I want to commend Commissioner
13 Gardner. I know that you have very strong concerns
14 about dealing with PGW. I think that doing this and
15 with the structure that you set up as far as the
16 Commission and as far as having what I finally feel
17 comfortable about, a better oversight, and be able to
18 have an effective business plan so that we can
19 monitor that, I think, gives us a chance.
20 I think the other thing, in having sat and
21 having oversight over a water authority, I guess,
22 where we do about 80 million gallons a day and we
23 couldn't account, where we started off, for 18
24 percent. And we can see the difference as we lowered
25 it and updated some things without worrying about it. 29
1 I think, Chairman Godshall, too, one of the
2 things you'll see is that the utility and a lot of
3 the gas companies have bought companies that have
4 been in existence for the last 20 or 30 years.
5 But the infrastructure that they purchased
6 along with that is over 100 years old in some sense.
7 And I think that we will be able to see a revision in
8 redoing capital programs along with that.
9 And again, as Representative Solobay and
10 other people have heard me say over and over again, I
11 think that if we try to get people to coordinate
12 their overall cost in looking at this, we will see a
13 phenomenal amount.
14 That offset gives an opportunity, if you go
15 back to the old days and old critical method of doing
16 business, to be able to sit down and schedule, maybe
17 as we handle hot areas that do grow, they can balance
18 those things a little bit more effectively as they
19 deal with some of the stockholders and some of their
20 bondholders as far as the fiscal oversight just as
21 well.
22 So that's one of the things we'll be able to
23 look at where you have one way to be able to pay for
24 one thing and still be able to generate revenues to
25 be able to handle potential growth. 30
1 I want to thank you, gentlemen. I really
2 appreciate this. And as we move forward, we
3 appreciate your support on this issue.
4 PUC CHAIRMAN CAWLEY: Thank you for having
5 us.
6 COMMISSIONER GARDNER: Thank you.
7 MAJORITY CHAIRMAN PRESTON: The next person
8 to testify is Irwin "Sonny" Popowsky, Consumer
9 Advocate, Pennsylvania Office of Consumer Advocate.
10 I will also note for the attendance that
11 Representative Gary Haluska is here from Cambria
12 County and also the Honorable Douglas Reichley from
13 Berks County is here. And that's not to say that
14 Representative Haluska is not also honorable just as
15 well. And the Honorable Representative Delozier is
16 also here just as well.
17 Mr. Popowsky, you may begin when you so
18 choose.
19 CONSUMER ADVOCATE POPOWSKY: Thank you,
20 Chairman Preston and Chairman Godshall. Also, thank
21 you, Representative Solobay, for continuing to meet
22 with me and work with me on this statute. And I look
23 forward to continuing to work with you to see if we
24 can come up with a law that I think fairly balances
25 the interests of utilities and consumers. 31
1 I have to say that House Bill 744, as is
2 currently written, in my opinion is not fair to
3 consumers for a simple reason. It's true that the
4 companies have to replace those pipes. There's no
5 question that we need pipe replacement for safety and
6 reliability.
7 But we have had natural gas utilities in
8 Pennsylvania who have gone as long as 20 years -- 20
9 years -- without filing a base-rate case.
10 During that period, they have been able to
11 operate safely, meet their requirements, replace
12 hundreds, maybe thousands, of miles of pipe. Let me
13 just read to you one statement that is contained in
14 my testimony, a press release that was issued by PECO
15 Gas. PECO Gas serves many of the suburban counties
16 around Philadelphia. In 2007 -- they have not filed
17 a rate case since 1987 when Ronald Reagan was
18 President.
19 In 2007, they issued a press release that
20 said: "During the past 20 years, PECO has made
21 significant upgrades to its natural gas delivery
22 system and expanded capacity, serving about 7,000 new
23 customers each year, all without an increase in the
24 company's delivery and service charges since 1988.
25 By saving customers money through the use of new 32
1 technologies, increasing sales, operational mergers,
2 and other efficiencies, PECO charges among the lowest
3 rates in Pennsylvania."
4 That's the way rate-making is supposed to be
5 done. This is an issue about how to set rates, how
6 to protect Pennsylvania consumers. These utilities
7 are monopolies. We have rate cases because it's not
8 supposed to be easy to raise rates.
9 If we can go 20 years without a rate
10 increase and the company can operate safely, why
11 would we want to create an automatic adjustment
12 clause to allow companies to raise their rates by 5,
13 7.5, 10 percent a year to do the same thing they've
14 been doing for the last 20 years without that
15 surcharge?
16 PECO Gas is not the only one. We have
17 several other companies who have gone 13, 15 years
18 between rate cases.
19 Now, if the concern is that some companies
20 want to go out and spend more money, actually
21 accelerate their deployment of new plants, well, that
22 can be addressed.
23 And one of the amendments that I've
24 suggested in my testimony -- because I realize that
25 I've got an uphill battle here. I have proposed 33
1 several amendments that I think might make the DSIC
2 more fair.
3 And one of them is to take the simple
4 measure of saying that if you're going to increase
5 your plant by a certain amount, that needs to --
6 okay, raise your rates, but that has to be offset by
7 the amount that the current value of your plant is
8 decreasing.
9 That's how rate-making works. In a rate
10 case, you take a snapshot. You look at all the good,
11 you look at all the bad, and you take the balance and
12 you say, that's what needs to be in rates.
13 So between rate cases, some of these pipes
14 are deteriorating. They're being replaced with new
15 pipes. At the same time, there is an existing level
16 of rates that covers the cost of the existing pipes
17 that as depreciation occurs, the value of that goes
18 down, those things offset each other.
19 And if we have a base-rate case, we take
20 another snapshot. And if they have added more plant
21 and need more rates, they get a rate increase.
22 With the DSIC, all that happens is the
23 increases are taken into account. That's all that
24 happens. The decreases are not reflected. That's
25 the way the water DSIC has worked for 12 years. And 34
1 the Commission has not -- notwithstanding the fact
2 that that's been in effect, the Commission has not
3 used -- has not decreased the water DSIC to reflect
4 the decrease in plant.
5 The Commission originally had a cap on the
6 water DSIC of 5 percent. But they blew through that
7 cap in 2007 when Pennsylvania American said, well, we
8 want 7.5 percent. Well, why not 10 percent? Why not
9 15 percent? Why ever have a rate case if you can
10 raise your rates every three months based on each
11 pipe that you replace?
12 So what I'm saying is, if the idea is that
13 you've got a company that's really spending a lot of
14 money, wants to replace a lot of pipe, and therefore
15 demonstrates that its new pipe exceeds the
16 depreciation on its old pipe, then you would have
17 what's called a net DSIC. You can do that. And I
18 think that ought to be reflected in the statute.
19 At the same time, what we've learned from
20 the water DSIC is that if the General Assembly
21 doesn't put a cap on it, then we might not have a
22 cap. You know, the Commissioner talked about we have
23 this limited surcharge. Well, it was limited to 5
24 percent. Now it's 7.5 percent.
25 It could be 10 percent next year. So I 35
1 think the General Assembly has to say, if you're
2 going to allow this, it ought to be capped and it
3 ought to be net.
4 So again, the battle here is not between
5 folks who think that we need to have a safe system,
6 who think that we need to replace our pipes, who
7 think that it's a good idea to modernize our system.
8 The battle is between the people who think
9 that we should have automatic rate increases versus
10 people who think this should be done either through
11 base rates, which is the way we've been doing it for
12 the last many decades, that protect customers or at
13 least if you're going to do it through a surcharge,
14 then it should be a limited surcharge. It should be
15 limited to the net increase in plant, not the gross
16 increase, but the net increase in plant. And it
17 should be capped as a percentage of distribution
18 revenues.
19 I know you will hear a lot of testimony from
20 people who are going to say, oh, this is not an
21 automatic increase. There's all these Commission
22 reviews. Well, the Commission reviews are after the
23 fact. The Commission reviews are audits.
24 The reason that House Bill 744 in the second
25 line refers to automatic adjustment is in the 36
1 statute. It's in the bill. It says, automatic
2 adjustment. The reasons it's called an automatic
3 adjustment is because the rates are allowed to
4 increase every three months as the companies add new
5 plant without taking into account all the
6 depreciation on the existing plant that would be
7 looked at in a base-rate case.
8 There's a third amendment that I proposed,
9 which is simply that a utility before -- we've had
10 utilities now that have still been out for 10, 15
11 years. Before you implement a DSIC for a company,
12 you would take a look. The Commission would have to
13 take a look at the company's earnings.
14 And if I could just mention, if you look at
15 the Commission's written handout here, these issues
16 that I've raised are all issues that the Commission
17 says that it will address through regulations.
18 On the next-to-last page of their handout,
19 they refer to important safeguards that shall be
20 addressed through regulation: Net depreciation of
21 plant, cap on DSIC revenues, companies using DSIC
22 must complete a general rate case.
23 I agree. I'm glad the Commission is going
24 to look at those. But those are all -- none of those
25 are contained in the water DSIC. And I think it's 37
1 important for the General Assembly to say, if we're
2 going to go forward with something like this for
3 natural gas, that it also be in the statute.
4 And just one last point. In the
5 Commission's handout, they also give the annual
6 revenues of the major gas companies. So for example,
7 a company, PECO Gas, has annual gas revenues of $838
8 million.
9 Well, let's say that they had a 5 percent
10 DSIC in effect for all those 20 years when they
11 didn't file a rate case. So 5 percent of $800
12 million is $40 million. So $40 million a year for 20
13 years, that money adds up.
14 And it's a lot more than the cost of one
15 rate case every 20 years, which, by the way, was
16 settled, as was every rate case that was filed by the
17 gas utilities, by the major gas utilities, Columbia,
18 Equitable, and PECO.
19 When they did file rate cases in 2008, all
20 three cases were settled. The companies received
21 substantial increases. And that cost ratepayers, I
22 think, a lot less in rate-case expense than it would
23 have cost if they had been collecting a 5 percent
24 DSIC for the last 15 to 20 years.
25 So with that, I'll close. I realize that 38
1 there are a lot of folks who want this DSIC to go
2 forward. I'm happy to continue to work with you,
3 Representative Solobay and other members of the
4 Committee, to see if we can develop amendments to the
5 bill that might make it, in my opinion, more fair to
6 customers.
7 Thank you.
8 MAJORITY CHAIRMAN PRESTON: I'll agree with
9 you because -- and I have to give Representative
10 Solobay credit. Because before we had this hearing,
11 he was having meetings with Sonny and other different
12 people. So he was kind of ahead of the norm instead
13 of waiting afterwards.
14 And I think that's a good sign.
15 CONSUMER ADVOCATE POPOWSKY: Yes.
16 MAJORITY CHAIRMAN PRESTON: With that,
17 Representative Solobay.
18 REPRESENTATIVE SOLOBAY: Thank you,
19 Mr. Chairman.
20 And I, too, would also just like to thank
21 Sonny and the different groups. I mean, I know we
22 agree to disagree on many portions of this bill. But
23 you have been very instrumental in providing
24 information for us to review and look at to get a
25 different outlook on things. 39
1 There is one piece of this bill, though,
2 that you and I seem to be pretty much in lockstep
3 with, and that is the portion that puts the
4 responsibility of the service line from the curb box
5 out to the meter inside the home back to the
6 responsibility of the gas company, especially in
7 Western PA where that's been included.
8 That is a very large customer savings. In
9 fact, if sometime during the lifetime of that
10 particular line they would have to replace it, the
11 cost to a customer could exceed $2,500 or even more
12 based on some of the figures we've gotten.
13 So that in itself is a very large
14 consumer-friendly portion of this bill. And I would
15 just ask if you would for the record give me that.
16 CONSUMER ADVOCATE POPOWSKY: Yes.
17 Absolutely. And I apologize for not mentioning that.
18 I figured I only had five minutes.
19 Particularly for residential customers,
20 that's who I'm concerned about. When Columbia came
21 forward with that proposal initially and you came
22 forward with it in legislation to turn that over,
23 turn that responsibility over to the utilities,
24 that's where I think it belongs.
25 I don't think residential customers want to 40
1 be in the business of maintaining gas service lines.
2 And I appreciate that. And I fully support, at least
3 for, like I said, residential customers that portion
4 of the bill because I think that really is a value.
5 So thank you.
6 REPRESENTATIVE SOLOBAY: Thank you, Sonny.
7 Thank you, Mr. Chairman.
8 MAJORITY CHAIRMAN PRESTON: Thank you.
9 For the record and the attendance, I'd like
10 to also recognize that Representative Gabig from
11 Cumberland County is also here as well.
12 Next for questions, Representative Reichley.
13 REPRESENTATIVE REICHLEY: Thank you,
14 Mr. Chairman.
15 Mr. Popowsky, just a couple brief questions.
16 I'm curious. You noted a number of the companies
17 that had gone substantial periods of time without
18 submitting a rate review case.
19 CONSUMER ADVOCATE POPOWSKY: Yes.
20 REPRESENTATIVE REICHLEY: Do you believe
21 that we should limit the, I'll say, eligibility of a
22 gas company to pursue a DSIC to those who have only
23 sought rate review cases within a certain period of
24 time? If you haven't done it within five years, then
25 you're allowed to do a DSIC or how would you set that 41
1 up?
2 CONSUMER ADVOCATE POPOWSKY: Yes. I think
3 that would be one way to do it. For example, if you
4 look in the proposal in the materials from the
5 Commission, they talk about limiting it to companies
6 that have filed within the last three years, just to
7 get a look. And I think that would be a reasonable
8 compromise, just to get a look at a company before
9 you start automatic rate increases.
10 The Commission ought to take a look at all
11 the companies' costs and revenues as a starting
12 point. So, yes, I think there should be some rate
13 case prior to the initiation of a DSIC.
14 REPRESENTATIVE REICHLEY: And do you have
15 any sense of if you had total -- the potential amount
16 of a DSIC over a period of time, how that would
17 compare to an actual rate submission?
18 CONSUMER ADVOCATE POPOWSKY: Yes. So let's
19 say PECO Gas has $800 million a year in revenue. And
20 let's say they had a 5 percent DSIC. And then you
21 take the ten largest companies which are comparable
22 in size, I think we're talking about tens of millions
23 of dollars a year.
24 I think the rate case, the cost of a rate
25 case, can be over a million dollars for a company. 42
1 But I think -- and I'm sure the companies can tell
2 you exactly how much they spent on their last rate
3 cases.
4 But like I said -- and Representative
5 Mensch, I'm sorry he's not here, because there is a
6 nine-month limit on these rate cases. And that's
7 where the rate cases with people like me are
8 involved.
9 Like I said, each of the major gas utilities
10 rate cases, PECO, Equitable, and Columbia, were
11 settled amicably last year. I think we got good
12 settlements. The companies were satisfied. The
13 consumers were satisfied. And the companies received
14 enough money, I think, to go forward with their
15 programs.
16 So I think we're talking -- I do think we
17 are talking perhaps more than a million dollars for a
18 rate case. But I think we're talking about tens of
19 millions per year potential for the cost of a DSIC.
20 REPRESENTATIVE REICHLEY: Thank you,
21 Mr. Chairman.
22 MAJORITY CHAIRMAN PRESTON: Thank you.
23 Sonny, you made your comments, but I want to
24 get one clarification from you.
25 CONSUMER ADVOCATE POPOWSKY: Sure. 43
1 MAJORITY CHAIRMAN PRESTON: Does this bill
2 create an automatic rate increase? You said that
3 several times. Does it create an official automatic
4 rate increase for the gas companies?
5 CONSUMER ADVOCATE POPOWSKY: Well, what
6 the --
7 MAJORITY CHAIRMAN PRESTON: I just want to
8 get that straight.
9 CONSUMER ADVOCATE POPOWSKY: Yes. Well --
10 MAJORITY CHAIRMAN PRESTON: You said it
11 creates an automatic rate increase.
12 CONSUMER ADVOCATE POPOWSKY: Yes. What
13 House Bill -- what House Bill 744 says is it would
14 amend Section 1307 (g.2). It says, natural gas
15 distribution companies may file tariffs establishing
16 a sliding scale of rates or other method for the
17 automatic adjustment of the rates.
18 MAJORITY CHAIRMAN PRESTON: They may file.
19 CONSUMER ADVOCATE POPOWSKY: Oh, no. I
20 agree.
21 MAJORITY CHAIRMAN PRESTON: But this does
22 not create for all gas companies in this bill
23 automatic rate increases.
24 CONSUMER ADVOCATE POPOWSKY: Fair enough.
25 Yes. I apologize. Yes. 44
1 MAJORITY CHAIRMAN PRESTON: I just wanted to
2 clarify, you know, for both sides so that we can be
3 sure, not on your part, when someone says, this is
4 what you said and I didn't think you were saying
5 that.
6 CONSUMER ADVOCATE POPOWSKY: Right.
7 MAJORITY CHAIRMAN PRESTON: I just want to
8 make sure we clarified that.
9 CONSUMER ADVOCATE POPOWSKY: The companies
10 would have to file tariffs. The Commission will have
11 to approve the tariffs. But they are what's called
12 an automatic adjustment.
13 MAJORITY CHAIRMAN PRESTON: Okay.
14 CONSUMER ADVOCATE POPOWSKY: And that's
15 what's called an automatic adjustment. And that's in
16 contrast to a base-rate case where the company must
17 file and it can take anywhere from two to nine months
18 for the rate increase to go into effect.
19 MAJORITY CHAIRMAN PRESTON: And, I think,
20 last in fairness to you, I know, for example, with
21 the wastewater collection system to even be in
22 compliance with the Federal Government things now in
23 the State, we're looking at a replacement of $13
24 billion.
25 You mentioned something like over 20 years 45
1 or something, they had $40 million. And I'd almost
2 like to say, you know, if you consider wherever
3 wastewater is, in a lot of cases, there are certain
4 gas lines. So if you could cut that in half to be
5 able to replace or update a system that has probably
6 been somewhat more neglected, because in the private
7 sector as far as their capital programs,
8 unfortunately, I think they wait until something
9 breaks as compared to sometimes on the public, we
10 were trying to have a preventive maintenance program.
11 CONSUMER ADVOCATE POPOWSKY: Okay.
12 MAJORITY CHAIRMAN PRESTON: You're looking
13 at billions of dollars to be able just to replace a
14 system we have now.
15 So when you look at 800 million -- I know in
16 the city of Pittsburgh, we looked at just redoing the
17 collection system. It was around eight, nine hundred
18 million just to bring it up to date to stay in
19 compliance.
20 You know, we spent about $800 million just
21 to be able to do some reservoir covers and some
22 infrastructure. I just wanted to raise that to you
23 and to the public so that the people can understand.
24 I think the other thing is what
25 Representative Solobay was saying. And you raised 46
1 the issue. I know personally in my own district,
2 one-third of the registered voters are over the age
3 of 60.
4 And when you look at the issue about going
5 from the house -- and most people in an urban area
6 have a curb. When I have constituents and they have
7 to pay eight to fourteen thousand dollars sometimes
8 to redo a lateral -- yes, a lot of them are maybe two
9 to four or five thousand.
10 And even that doesn't save because most of
11 the plans that I've seen for preventive maintenance,
12 if something does happen, under the insurance -- you
13 pay three or six bucks a month -- it only goes up to
14 like $2,500.
15 When I have a senior citizen on a fixed
16 income of eight or nine hundred dollars a month and
17 they're seeing a four- to eight-thousand-dollar bill,
18 this, in a sense, from a mental standpoint, as far as
19 the gas line is concerned, there's a bill for those
20 of us in Western Pennsylvania which would help
21 alleviate that pressure on different individuals who
22 are thinking as far as their house is concerned.
23 And I've also had some of my other
24 colleagues in Western Pennsylvania that have had
25 sometimes even a senior citizen who wants to sell 47
1 their house that this work has to be done --
2 CONSUMER ADVOCATE POPOWSKY: Right.
3 MAJORITY CHAIRMAN PRESTON: -- and they
4 don't have the means to be able to do that, so they
5 can't really even sell the house unless they put the
6 mortgage up or get a loan, then go out and wait for
7 this work to be done, and then hope they can sell
8 their house again.
9 I just wanted to raise that. You brought up
10 a very poignant point.
11 CONSUMER ADVOCATE POPOWSKY: And I
12 absolutely agree with that point and support that --
13 as Representative Solobay said, support that portion
14 of the bill.
15 MAJORITY CHAIRMAN PRESTON: And we are the
16 only region in a sense that has this problem in
17 Southwestern Pennsylvania. So it's more than just
18 Columbia Gas because I have Equitable Gas in my area
19 as well.
20 Thank you very much.
21 COUNSEL POPOWSKY: Thank you.
22 MAJORITY CHAIRMAN PRESTON: Next we have
23 J. Michael Love, who is President and CEO of the
24 Energy Association of Pennsylvania.
25 PRESIDENT AND CEO LOVE: Thank you. 48
1 I brought my own pipe.
2 MAJORITY CHAIRMAN PRESTON: You don't like
3 theirs?
4 REPRESENTATIVE KORTZ: Don't cut yourself.
5 MAJORITY CHAIRMAN PRESTON: You're going to
6 give him the PUC gloves even. Be careful, they might
7 bill you.
8 PRESIDENT AND CEO LOVE: First of all, I
9 want to put something in context. You heard the
10 Chairman say this is an issue that we have to address
11 now.
12 Chairman Preston, you just talked about the
13 fact that we need to have preventive maintenance.
14 The gas lines today are safe, but we are concerned
15 about the mammoth need to get rid of this stuff.
16 MAJORITY CHAIRMAN PRESTON: Slide it over,
17 please.
18 PRESIDENT AND CEO LOVE: Sorry.
19 This massive amount, between 12,000 for the
20 big companies and 13,000, when you include all
21 companies, miles of pipe. They're sitting here.
22 And the Chairman talked about -- you know,
23 we're talking about centuries if we continue the
24 usual rate-case process. And those that are
25 suggesting we go through the traditional rate-making 49
1 process and wait to address this over time, you know,
2 we do not have the luxury of having this project be
3 grandchild ready. We need to address it today.
4 Burdening our grandchildren with this type of problem
5 is a big one.
6 Now, I want to put this in context because I
7 want to do a little show and tell while we're here.
8 First of all, we've come before you over the last
9 four years. This is an automatic adjustment clause
10 where we get to pass on the costs of the commodity,
11 what it costs us to buy it, and we can file and it
12 can be higher or lower, what's approved by the
13 Commission.
14 Not all water utilities have a DSIC today.
15 Only one water utility is getting 7.5 percent of
16 their revenue.
17 The Commission decides if the particular
18 utility should have a DSIC or not. That's what we're
19 asking for. We're not asking you to approve a DSIC.
20 We're asking you to approve the ability for the
21 Commission to make that choice.
22 Now, here's an adjustment clause that deals
23 with 75 percent of the bill that we tender to the
24 consumers, that adjustment clause, which reflects the
25 commodity that we have to pay based at Henry Hub, 50
1 which is like the gold standard of how you measure
2 gas prices.
3 Back in Katrina, we were paying $15 per
4 million BTUs. Today we're paying $4.77. So if you
5 hear from others down the way that say, oh, you know,
6 it's going to have this effect on the economy, etc.,
7 look at the drop, look at the change. And this major
8 adjustment is done through a, quote,
9 automatic-adjustment clause.
10 It is automatic in the sense that we have
11 the right to do it. It is not automatic in its
12 result and the major component that affects rates is
13 handled just this way. So I want to make sure we're
14 clear on that.
15 And we're in a situation, unlike gasoline
16 prices, unlike propane prices, unlike other energy
17 prices, of downward spread. What a perfect time to
18 start addressing this.
19 The other thing I want to make sure you're
20 cognizant of is when you look at this pipe,
21 understand that similar pipes, smaller in size, are
22 the service lines that are under your customers'
23 yards leading to their meter.
24 Their service lines -- right now in southern
25 and central Pennsylvania, they have to replace it 51
1 themselves. So we're not just talking about this.
2 We're talking about us going in and replacing this
3 and this, like, underneath people's homes.
4 Now, I'm going to talk -- I'm going to be
5 showing you video because I want you to see what
6 we're talking about.
7 And one of the finest things I think you've
8 done, Representative Solobay, is to address this
9 service-line issue.
10 REPRESENTATIVE SOLOBAY: Thank you.
11 PRESIDENT AND CEO LOVE: Because I want to
12 tell you how unique this is. Only in Central and
13 Southern Pennsylvania and only in Eastern Ohio do
14 customers own service lines. Everywhere else in the
15 country, everywhere else, they're owned by the
16 utility. They're run and maintained by the utility.
17 Now, since this bill will require us, as we
18 go in and replenish these streets, to fix these
19 service lines and take over ownership of it, let's
20 readily also acknowledge that since we don't own
21 those service lines today, there's certainly no
22 double-counting on depreciation there.
23 And there's also no double-counting on
24 depreciation because -- look at this -- this is
25 70-year-old pipe. Most of this pipe we're talking 52
1 about is 50, 60, 70 years old. It's fully
2 depreciated, as well it should be. This looks kind
3 of old, doesn't it, guys? It's fully depreciated
4 and, if not, it's close to being fully depreciated.
5 The Commission talked to you about a very
6 elaborate process that Sonny and others, the
7 industrial interveners, anybody, can intervene with
8 the water industry. For 12 years, there's been a
9 water DSIC in place, not for all water utilities,
10 just for some. And at no time has there been
11 double-counting.
12 And you heard the Chairman talk about the
13 levels of protection that go in. Everybody is
14 involved in these cases, just like they're involved
15 in the adjustment-clause cases for commodity costs,
16 which is 75 percent of our bill.
17 Again, people are involved in every process.
18 There are protections in this. And rather than
19 getting into the rate-making -- I mean, you heard two
20 qualified representatives of your Public Utility
21 Commission. As a former Commissioner myself, I will
22 tell you, people take this very seriously. No one is
23 going to allow double-counting.
24 Now, undertaking a massive project like
25 replacing half the circumference of the world, which 53
1 is, what, 13,000 miles, is not without a lot of other
2 costs.
3 You're going to hear later on, we're working
4 with the unions. We're working with the State to try
5 to address a major cost we're going to have, which is
6 training. Just like we've allowed this pipe to get
7 old, we also have an old workforce. And we have the
8 need to get skill sets, such as pipe locations, such
9 as backhoes.
10 And we're working with folks because we have
11 to absorb the training costs. That's something that
12 will be discussed in the rate case, the hiring of
13 people, the rate case itself, and the training.
14 Those are major dollars. We're not here
15 about that. We're just simply saying, when we get
16 the project done, like any other firm, we want to
17 include that price in the product that we sell. It
18 is a small portion of it.
19 Again, we're in a down time. This is the
20 time to start addressing this. For PGW, they already
21 have a mandatory 10-mile replacement program every
22 year. And in 100 years, they'll have completed their
23 replacement program. But they're on a financial
24 brink. They're on a very difficult thing.
25 This would change this so they could 54
1 segregate out certain revenue to continue what
2 they're doing now. Absent the ability of the exact
3 language that Mr. Solobay has put in the bill,
4 they're not going to be able to do it. They're BBB
5 minus. They're one step to junk bonds. It is
6 critical for them to be able to address this.
7 But I also want to leave you with the most
8 important aspect. As important as this is, please
9 understand this is also what is under homes in
10 Southwest Pennsylvania and Central Pennsylvania.
11 Now, I have a short video, eight minutes, to
12 show that I think will underscore some of the issues
13 that are going on.
14 (Video played.)
15 PRESIDENT AND CEO LOVE: Thank you for the
16 courtesy of letting me play that. But I thought the
17 words there would give you greater insight.
18 There were some questions that I was meant
19 to answer and I will try to answer them. We have
20 roughly 2.8 million gas customers in the State. We
21 have roughly 5.2 million electric customers in the
22 State, to put it in perspective. And 52 percent of
23 the State heats with natural gas. Areas such as
24 Pittsburgh, etc., that might be as much as 90, 95
25 percent of the population. 55
1 In terms of lost and unaccounted for, which
2 was a question that was asked, ranges from a couple
3 tenths of 1 percent up to 9 percent. And it's an
4 area that your Committee on Climate Change is
5 currently looking at.
6 Again, I'm not trying to make a judgment one
7 way or another. But the factual numbers are that it
8 runs from a couple tenths of 1 percent to 9 percent.
9 Now, there are many factors that affect loss
10 and unaccounted for, but that was the question you
11 asked and you wanted to know about the number of
12 customers.
13 Was there another one I was supposed to
14 address?
15 MAJORITY CHAIRMAN PRESTON: No.
16 PRESIDENT AND CEO LOVE: Now, one of the
17 reasons why we're pushing so hard on this is, you
18 know, there's $400 million of new bond money for
19 water projects.
20 You know there's another $400 million that's
21 coming with the stimulus package. That means there's
22 $800 million for people that are going to be opening
23 up roads where what, the gas line sits here, the
24 water line sits there.
25 If they're going to be working on this, it's 56
1 kind of logical that they might be touching that.
2 And this would be a good time for us to get in and
3 just simply say, if the Commission finds that that's
4 true, let us have the right to do it, which we don't
5 have today.
6 Again, I can leave with you examples in
7 Kansas and Texas where they passed similar statutes
8 because they're concerned about infrastructure,
9 safety, and reliability.
10 But even if that does not meet your needs,
11 the ability to save on cost -- Representative
12 Preston, when I heard Major Brenner from York and how
13 proud he was that the City, the water company, and
14 the gas company were working together, I thought
15 about you a couple of years ago saying, why aren't we
16 doing that? Well, we're doing it in York.
17 If we have the ability to undertake
18 Representative Solobay's bill, we have the ability to
19 cut down on those paving costs and those other costs.
20 You've been quite kind listening to me. I
21 thank you. And I'll answer any questions.
22 MAJORITY CHAIRMAN PRESTON: Thank you very
23 much for your comments.
24 And I guess also, too, when you mentioned
25 about the roads, I know in my county, we have 1,100 57
1 bridges. Almost half of them span over other things.
2 A lot of them are being included in the stimulus
3 package.
4 This is going to escalate an awful lot of
5 things. It goes beyond the issue about the roads.
6 It goes with the bridges that some of the drawings
7 have already been done, but they've been on hold
8 because the funding's not there and now we have the
9 stimulus package.
10 Now, your pipelines, whenever possible, go
11 underneath an awful lot of bridges. So throughout
12 this State -- and I sit down and say -- this will
13 create a different change because you may not have
14 any say-so if they're going to be replacing these
15 bridges.
16 And what are you going to do? You're going
17 to have to reallocate and change some of your plans
18 unless we have different alternatives just as well.
19 I wanted to bring that also to the member's
20 attention when we're starting to look at what's
21 happening with the stimulus package as we look at
22 this infrastructure along with this bill.
23 The other thing I want to be able to say is
24 that, first, I was getting kind of nervous because it
25 looked like President Bill George of the AFL-CIO 58
1 didn't want to let you in his office. But I was glad
2 to see that you had him covered.
3 And the other thing is, when you bring a
4 movie along, at least bring a snack or something like
5 that. Okay?
6 PRESIDENT AND CEO LOVE: Well said.
7 MAJORITY CHAIRMAN PRESTON: Representative
8 Reichley.
9 REPRESENTATIVE REICHLEY: Thank you,
10 Mr. Chairman.
11 Mr. Love, I don't know if you have a copy of
12 the bill with you there or if you can get one.
13 PRESIDENT AND CEO LOVE: Yes.
14 REPRESENTATIVE REICHLEY: If you flip over
15 to page 2, starting at line 22 down to the bottom of
16 the page.
17 PRESIDENT AND CEO LOVE: Sure.
18 REPRESENTATIVE REICHLEY: I'm wondering if
19 you can explain something to me.
20 PRESIDENT AND CEO: Sure.
21 REPRESENTATIVE REICHLEY: It indicates the
22 recovery of cost for natural gas distribution
23 companies would be allowable and that a natural gas
24 company may follow a tariff to establish a sliding
25 scale of rates. 59
1 And then I get down to line 25, the comma
2 after costs, including depreciation and pre-tax
3 return, comma, of certain underground infrastructure
4 distribution projects.
5 What does that mean, the parenthetical
6 phrase there?
7 PRESIDENT AND CEO LOVE: It means that as
8 part of this, we would receive depreciation costs on
9 the new plant that we put in and we would receive a
10 return on the new plant we would put in, exactly what
11 we would recover in normal rate-making proceedings.
12 REPRESENTATIVE REICHLEY: And this is
13 completely out of ignorance. If the point of the
14 DSIC is to allow you to recover the cost of upgrading
15 the pipe, why do you need to get the depreciation and
16 pre-tax return?
17 PRESIDENT AND CEO LOVE: Again, we are
18 seeking -- and what the water DSIC allows and why it
19 is such an incentive, it allows you to receive the
20 cost of the investment plus a return thereof on it.
21 So the return of the investment plus a return on the
22 investment.
23 REPRESENTATIVE REICHLEY: Well, within your
24 video, you said it was fallacious, that there would
25 be a claim that somehow there would be double-dipping 60
1 on depreciation of new pipelines, either under your
2 rate tariff case or under the DSIC. I believe that
3 was the statement you were making.
4 So why have reference to the depreciation as
5 part of the DSIC?
6 PRESIDENT AND CEO LOVE: The reason we are
7 doing this is that the DSIC that was approved for the
8 water industry is exactly the same language. And
9 this is what has worked in the water industry and
10 accelerated them to, instead of spending on an annual
11 basis one million, seventeen million a year.
12 Again, we're not -- what we're saying to you
13 is the depreciation on the pipe that we take out
14 either has no depreciation or very little.
15 And we're simply saying that we want to make
16 sure, as we do with any investment, because when we
17 make any investment in a rate case, we begin to
18 depreciate on it and we begin to get a return on it
19 once we put it into rates.
20 REPRESENTATIVE REICHLEY: Well, wouldn't
21 that argue you to go for a full-rate case then
22 instead of just a DSIC if you want to capture the
23 depreciation?
24 PRESIDENT AND CEO LOVE: Again, what we're
25 trying to do is, as with the commodity cost where all 61
1 commodity costs are examined, we have to -- let me
2 take the water DSIC.
3 REPRESENTATIVE REICHLEY: All right.
4 PRESIDENT AND CEO: Let me take the water
5 DSIC and walk you through it.
6 REPRESENTATIVE REICHLEY: Okay.
7 PRESIDENT AND CEO LOVE: There's only a
8 certain type of investment that qualifies. There are
9 only certain utilities that get it. You have to
10 demonstrate there's a public need and a safety and
11 reliability need.
12 Once you have demonstrated that, then you
13 get the standard rate treatment for the investment
14 that you're making. And that's what this allows.
15 Just like that thing allows for regular
16 recovery of one type of expense, this allows for one
17 type of recovery of capital. You've made the
18 investment. You've financed it. You've carried it a
19 year or two until you completed it and now the time
20 is to start earning a return on it and a return of it
21 through depreciation.
22 REPRESENTATIVE REICHLEY: Well, I understand
23 that. I'm not really sure that the comparison of the
24 water DSIC is necessarily applicable.
25 PRESIDENT AND CEO LOVE: Well, it's the same 62
1 industry. It's the same accounting. It's the same
2 Commission.
3 REPRESENTATIVE REICHLEY: Well, it's not the
4 same industry.
5 PRESIDENT AND CEO LOVE: A pipe in the
6 street is the same industry from that standpoint.
7 REPRESENTATIVE REICHLEY: Okay. Thank you.
8 MAJORITY CHAIRMAN PRESTON: Chairman
9 Godshall.
10 MINORITY CHAIRMAN GODSHALL: Thank you,
11 Mr. Chairman.
12 I understand the DSIC situation pretty
13 fairly well from the meetings we had on this in the
14 past. But not having the luxury of natural gas in my
15 area, where you talked about adjustment clause, how
16 does an adjustment clause work as you describe it up
17 here on this chart? Say, to a customer, what's the
18 effect of an adjustment clause?
19 PRESIDENT AND CEO LOVE: An adjustment
20 clause allows for the particular source of the
21 adjustment to be adjusted in a systematic regular
22 fashion subject to regulatory review.
23 So in that case, they're looking at the
24 various commodity costs that we have purchased from
25 the Rocky Mountains, from Louisiana, Texas, various 63
1 pipelines, and what the cost of that product is. And
2 it's adjusted to ratepayers.
3 MINORITY CHAIRMAN GODSHALL: How often would
4 that be adjusted?
5 PRESIDENT AND CEO LOVE: That's adjusted
6 quarterly, just like the DSIC would be.
7 MINORITY CHAIRMAN GODSHALL: Quarterly?
8 PRESIDENT AND CEO: Quarterly.
9 MINORITY CHAIRMAN GODSHALL: And does there
10 have to be a filing each time or is it just about
11 automatic?
12 PRESIDENT AND CEO LOVE: No. There has to
13 be a filing each time. And there's a hearing in
14 which you go through the regulatory process. In
15 fact, in this particular case, I've been here where
16 Mr. Popowsky has complimented the gas utility
17 industry for purchasing wisely over these months.
18 And so those contracts, those costs, are
19 reviewed in a hearing conducted by the Public
20 Utilities Commission each and every quarter for each
21 and every utility.
22 MINORITY CHAIRMAN GODSHALL: And that's sort
23 of mandatory that that has to be done that way?
24 PRESIDENT AND CEO LOVE: This provision,
25 1307, is an automatic mandatory provision. They have 64
1 hearings. They have audits. They review the costs.
2 What's automatic is that you have to have
3 them. Whether we recover or not or whether we earn
4 the right to receive those costs as recovery is
5 determined in each and every case.
6 MINORITY CHAIRMAN GODSHALL: Thank you. I
7 didn't understand that. It's something, as I said,
8 we don't have specifically in my area of the State.
9 It might be beneficial to have it at this point.
10 PRESIDENT AND CEO LOVE: Well, I guess the
11 other thing we're saying is at some point in time,
12 with the Marcellus Shale and other opportunities that
13 this State now has, there will be greater use of
14 natural gas.
15 MINORITY CHAIRMAN GODSHALL: Okay.
16 PRESIDENT AND CEO LOVE: My guess is those
17 numbers I gave you earlier will probably go up. But
18 we're talking about here trying to fix the
19 infrastructure.
20 MINORITY CHAIRMAN GODSHALL: Right.
21 PRESIDENT AND CEO LOVE: But if we're going
22 to start sending more gas through these pipes, we
23 want to make them more like that yellow plastic pipe
24 down at the end. And that will lead ultimately,
25 ultimately, to better tighter systems. 65
1 MINORITY CHAIRMAN GODSHALL: Thank you.
2 PRESIDENT AND CEO LOVE: Thank you.
3 MINORITY CHAIRMAN GODSHALL: Thank you,
4 Mr. Chairman.
5 MAJORITY CHAIRMAN PRESTON: Representative
6 Grove.
7 REPRESENTATIVE GROVE: Thank you,
8 Mr. Chairman.
9 On the stimulus money, I just want to make
10 sure we have this correct, $400 million for gas and
11 $400 million for water that's coming to Pennsylvania?
12 PRESIDENT AND CEO LOVE: No. There's no
13 money coming for gas.
14 REPRESENTATIVE GROVE: All right.
15 PRESIDENT AND CEO LOVE: What I was
16 referencing was there was the bond authority that the
17 voters approved --
18 REPRESENTATIVE GROVE: Okay.
19 PRESIDENT AND CEO LOVE: -- for $400 million
20 in water projects.
21 REPRESENTATIVE GROVE: Okay.
22 PRESIDENT AND CEO LOVE: And there is an
23 additional $400 million of water projects coming. So
24 there's $800 million of water projects.
25 REPRESENTATIVE GROVE: And has PennDOT been 66
1 working with the utility companies to ensure the
2 roads we're going to be paving through the stimulus
3 money get the pipe replacements done before we pave
4 them?
5 PRESIDENT AND CEO LOVE: Those discussions
6 have been held in some instances and in some
7 instances, they have not.
8 Again, we're all moving pretty fast here.
9 REPRESENTATIVE GROVE: Okay.
10 PRESIDENT AND CEO LOVE: I'm not trying to
11 take any shots at PennDOT or the gas industry. I
12 mean, it's in everybody's interest to work together.
13 As Chairman Preston has said, we try to do
14 that. I mean, we're going to already face
15 significant relocation costs associated with this
16 stimulus package as it is. We're going to have to
17 move our gas lines. We're just simply saying that in
18 a time like this, we want to be able to replace them
19 and get them reflected in rates.
20 REPRESENTATIVE GROVE: I just want to make
21 sure we don't pave new roads and then have to go back
22 and tear them up to put pipe down and then repave
23 them and do the patchwork on them.
24 PRESIDENT AND CEO LOVE: See, that's the
25 problem. That's the status quo right now. 67
1 REPRESENTATIVE GROVE: Right.
2 PRESIDENT AND CEO LOVE: And we're trying to
3 change that. We're trying to get like York and
4 coordinated.
5 REPRESENTATIVE GROVE: Yes. We've done a
6 very good job of working with our utility companies,
7 our water, and especially Verizon and Comcast, and
8 make sure all that use those utilities are done
9 before we go in and do roads. We definitely need to
10 look at that statewide to make sure our roads are in
11 top condition so we don't have to tear them up and do
12 patchwork.
13 Thank you.
14 RESIDENT AND CEO LOVE: And, you know, you
15 never know with this when it's going to start to give
16 way. And so obviously, if you've just freshly paved
17 a road and all of a sudden there's a huge gas leak,
18 we've got to go in because of the safety and
19 reliability. But then we tear up that brand-new
20 road.
21 REPRESENTATIVE GROVE: Right.
22 PRESIDENT AND CEO LOVE: We're trying to get
23 some coordination here. That was the whole concept
24 behind the DSIC project.
25 REPRESENTATIVE GROVE: Thank you. 68
1 PRESIDENT AND CEO LOVE: Thank you.
2 REPRESENTATIVE GROVE: Thank you,
3 Mr. Chairman.
4 MAJORITY CHAIRMAN PRESTON: Representative
5 Gabig.
6 REPRESENTATIVE GABIG: Thank you,
7 Mr. Chairman.
8 And thank you for your testimony. It was
9 very informative and enlightening.
10 And, you know, the Chairman starts these
11 meetings very early, so I was a late getting here
12 from Carlisle, which has --
13 MAJORITY CHAIRMAN PRESTON: 14 miles away?
14 I came 200 miles.
15 REPRESENTATIVE GABIG: I live deep in the
16 city, deep in the heart of Carlisle. It takes a long
17 time to get out of there.
18 MAJORITY CHAIRMAN PRESTON: It's a jungle.
19 REPRESENTATIVE GABIG: But we do have -- and
20 he always promises me we would have donuts -- or one
21 of his staff did -- when we first started because of
22 these early meetings. But he wants popcorn, I guess,
23 for the movies. And I'm seconding that motion.
24 But anyway, I have UGI in my area. And I
25 saw a lady on your movie -- and I couldn't really see 69
1 because there was some kind of computer thing they
2 were trying to get rid of. I don't know if anybody
3 else saw that. But it looked like she was from UGI.
4 PRESIDENT AND CEO LOVE: She was. She's the
5 Vice President of Operations for UGI.
6 REPRESENTATIVE GABIG: All right. But they
7 were talking about a Columbia Gas project down in
8 York. Is UGI and Columbia -- do you see what I'm
9 saying? Is anything going on with UGI with that
10 project that was being discussed?
11 MAJORITY CHAIRMAN PRESTON: Representative,
12 I'd like to let you know that UGI and Columbia will
13 be next.
14 REPRESENTATIVE GABIG: Okay.
15 MAJORITY CHAIRMAN PRESTON: You can ask them
16 directly.
17 PRESIDENT AND CEO LOVE: But here's the
18 point. Different companies have different service
19 territories.
20 REPRESENTATIVE GABIG: Right.
21 PRESIDENT AND CEO LOVE: Unfortunately, we
22 have this pipe in all service territories. And we're
23 talking about the ability for all these companies to
24 have the opportunity, if they can convince the Public
25 Utility Commission, to have the right to a DSIC. 70
1 REPRESENTATIVE GABIG: Right.
2 PRESIDENT AND CEO LOVE: And so it's
3 different projects and different communities. And
4 when I was here before, I gave you a list of where
5 the old pipe is in each of your communities. And I'd
6 be happy to send that to you again.
7 REPRESENTATIVE GABIG: No. No. No. No. I
8 don't want you to do that, please.
9 PRESIDENT AND CEO LOVE: Okay.
10 REPRESENTATIVE GABIG: You gave me a lot of
11 information today that I want to go over.
12 PRESIDENT AND CEO: Fine.
13 REPRESENTATIVE GABIG: So UGI is not
14 currently involved with that project? She was just
15 up there as a spokesperson, I guess, for the general,
16 as I understand it, which is fine. I can ask her. I
17 don't want to waste any more time with that.
18 PRESIDENT AND CEO LOVE: No. No. What I'm
19 saying is, they have other projects. They had a
20 project, if I remember correctly -- and they can
21 correct me -- in New Cumberland. They were just
22 taking some replacement pipe in New Cumberland.
23 REPRESENTATIVE GABIG: Okay.
24 PRESIDENT AND CEO LOVE: The pipe you saw
25 there on the screen so displayed was from York and 71
1 dealt with Columbia.
2 REPRESENTATIVE GABIG: And the second sort
3 of general -- that was more of a local question. I
4 just wanted to make sure.
5 PRESIDENT AND CEO LOVE: Sure.
6 REPRESENTATIVE GABIG: When you talk about
7 the stimulus money and you talk about a DSIC -- and
8 I'm new to the Committee, so I'm not an expert. I
9 apologize to those that are more knowledgeable.
10 I just want to make sure I understood, a
11 DSIC is going to be an additional charge on the
12 consumers, the consumers' bill, to help defray the
13 costs, the necessary costs, to make sure the system
14 is upgraded.
15 PRESIDENT AND CEO LOVE: I would put it this
16 way: When the system has been upgraded and only
17 after the system has been upgraded, they will then
18 pay the additional cost of that upgraded system based
19 on the Commission running through the traps and
20 making sure that we have properly installed it,
21 accounted for it, and the like, just like we do in
22 any other rate case.
23 REPRESENTATIVE GABIG: Right. I got you.
24 So the upfront cost, you're going to recoup
25 that cost on the DSIC down in the future through this 72
1 charge.
2 But the initial capital investment, the
3 capital cost, the stuff you're going to have to pay
4 today to put that new pipe in, you want to get that
5 money from the stimulus? What's the stimulus have to
6 do with this bill? I guess that's what I didn't
7 understand.
8 PRESIDENT AND CEO LOVE: I was not
9 articulate enough on that. There is no money
10 requested from the State, the Feds, by the industry
11 for replacement of pipe. We're not asking for any
12 dollars.
13 What we're saying is because of the stimulus
14 package accelerating water and road and bridge
15 construction, they're going to be digging up the
16 roads.
17 REPRESENTATIVE GABIG: Oh, okay, I got you.
18 PRESIDENT AND CEO LOVE: And when they're
19 digging up the roads, it is a good time for us to get
20 in there and replace some of this old pipe.
21 REPRESENTATIVE GABIG: Gotcha. So that goes
22 directly to what Representative Grove was asking
23 about. He wants to make sure we do this together in
24 a coordinated manner.
25 We don't need any of the stimulus money to 73
1 do this, all you need is the DSIC?
2 MAJORITY CHAIRMAN PRESTON: I wouldn't say
3 they don't need it. They can't get it.
4 REPRESENTATIVE GABIG: Right. Right.
5 Right.
6 Thank you very much for your answers and
7 your testimony.
8 PRESIDENT AND CEO LOVE: Sure.
9 MAJORITY CHAIRMAN PRESTON: And, again,
10 Representative, I think, to all of us, this was very
11 important. And again, when we first started off with
12 this saying that your township can relook and the
13 borough can look at its capital program and maybe
14 make some changes to be able to save by just digging
15 the same hole and not having to upgrade things.
16 And I think also that we ourselves have to
17 be slightly responsible because, you know, believe it
18 or not, we can actually fix roads, if we were willing
19 to spend the appropriate money, where we wouldn't
20 have to fix them for 5 or 10 or 15 years.
21 But instead, it is easier for us to say,
22 well, we'll fix them for three or four years and then
23 leave them for someone else.
24 So this is a good chance for us all to share
25 to reduce overall operating costs and to be able to 74
1 save a little money.
2 Representative Sainato.
3 REPRESENTATIVE SAINATO: Thank you,
4 Mr. Chairman.
5 Thank you, Mr. Love.
6 PRESIDENT AND CEO LOVE: Sure.
7 REPRESENTATIVE SAINATO: I think the video
8 spoke for itself. And, you know, Chairman Preston,
9 since the first time he was on this Committee many
10 years back -- and I'll never forget the first time he
11 joined us.
12 He talked about why, you know, we don't work
13 together and get it all done and tear up the roads
14 and stick it in. And it always stuck in my mind, as
15 I'm sure it has in yours, when he gave us those
16 comments. And I couldn't agree with the Chairman any
17 more.
18 And with what you're doing here -- and I
19 looked at your pipe. It just looks pretty bad. And
20 that's associated with, you know, the potential for
21 gas leaks and what could happen after.
22 In Western Pennsylvania, how much of that
23 pipe is still there?
24 PRESIDENT AND CEO LOVE: Again, like I said,
25 we'd have to define Western Pennsylvania. And I will 75
1 give you and I will send to you an exact breakdown by
2 region and by town.
3 REPRESENTATIVE SAINATO: Thank you.
4 PRESIDENT AND CEO LOVE: But I think it's
5 sufficient to say that the Chairman of the Public
6 Utilities Commission told you how much there is in
7 Philadelphia where there is another major issue. And
8 most of the rest of it is in Western Pennsylvania.
9 And I think it was the Chairman who also
10 said, you know, he bought some systems many years ago
11 and it had this type of pipe. We've been replacing
12 this type of pipe.
13 The point being is we've now reached a stage
14 that the Federal Government, just like they did with
15 the Clean Water Act that led to the water DSIC, is
16 now saying under what's called DIMP, that we have to
17 start replacing these pipes in a regular uniform
18 manner.
19 And to address 13,300 miles of pipe, that's
20 a lot of pipe. That's a lot of excavation. And we
21 don't want to do it tearing up streets needlessly.
22 We want to coordinate.
23 REPRESENTATIVE SAINATO: Right.
24 PRESIDENT AND CEO LOVE: And allowing us to
25 have the flexibility and having the Commission 76
1 oversee it will get us to have plans in place that
2 can address this and minimize the cost.
3 REPRESENTATIVE SAINATO: You know, I agree
4 with many of my colleagues here that, you know, the
5 worst thing we ever see is a nice road paved, we have
6 a nice smooth road, and six months later there's a
7 plow tearing it all up.
8 And then when they fix it, there's always a
9 little bump there. And I think anybody, taxpayers,
10 anyone, when they see that thinks -- any
11 coordination, it saves money.
12 I mean, the comments you made earlier in
13 your testimony. It's open. They've dug it up. Your
14 pipes are here, the water pipes here.
15 I mean, it only makes sense that if it can
16 be done to save the ratepayers money, I mean, I think
17 that would be in everyone's best interest. And I
18 think we need to work together to come up with the
19 solutions.
20 Chairman Preston was talking about the
21 bridges and what goes underneath, you know. It
22 doesn't help if it's going to be two years down the
23 road and then all of a sudden you have to replace it.
24 PRESIDENT AND CEO LOVE: And what we're
25 trying to say to you, Representative, is, we're 77
1 wanting to coordinate. We're wanting the flexibility
2 to coordinate. And so we might rush in early if some
3 municipality is going to tear up the street, as York
4 was.
5 And I think Mayor Brenner from York would
6 tell you that the City saved money, so not only
7 ratepayers but taxpayers saved money. The water
8 customers saved money and gas customers saved money.
9 REPRESENTATIVE SAINATO: Right.
10 PRESIDENT AND CEO LOVE: And after all,
11 isn't that what we're all here for?
12 REPRESENTATIVE SAINATO: Yes.
13 Well, thank you, Mr. Love. And I don't
14 think you'll get an argument from anybody when they
15 can save money.
16 Thank you.
17 PRESIDENT AND CEO LOVE: Thank you.
18 REPRESENTATIVE SAINATO: And thank you,
19 Mr. Chairman.
20 MAJORITY CHAIRMAN PRESTON: Thank you very
21 much for your testimony. We really appreciate it.
22 PRESIDENT AND CEO LOVE: Thank you for
23 having me.
24 MAJORITY CHAIRMAN PRESTON: Next on the
25 panel we have Dave Trego, who is President and CEO of 78
1 UGI Utilities; George Stark, Director of External
2 Affairs for Columbia Gas of Pennsylvania; and Tom
3 Knudsen, who is President and CEO of the Philadelphia
4 Gas Works.
5 When I was first elected -- and I've only
6 made one campaign local promise in my life in 26
7 years.
8 And it had to deal with a small little
9 street in Penn Hills off of Mt. Carmel Road. After I
10 got elected, the people brought me to the street.
11 And it was either 20-, 29-, or 30-inch -- which they
12 don't lay anymore.
13 And we're standing there and it's raining
14 and there are air bubbles coming up. And to think
15 that coal trucks drove over this road, dump trucks,
16 and school buses drove over this road every day. It
17 was a heavily traveled small road connecting the city
18 to Penn Hills.
19 And I come to find out, it was a gas line.
20 And the gas line was only 6 inches below the surface
21 of the road.
22 And this was done back in, I guess, the '30s
23 or '40s under the old WPA workforce where we almost
24 are right now with the stimulus package.
25 And you sit down and think of how dangerous 79
1 that was to only do 100 feet at a cost of
2 $1.4 million. But they had to make a dramatic
3 change. And this was back in the late '80s.
4 And that's what I'm saying. If we don't do
5 something now, we're going to pay for it double with
6 inflation over time.
7 That being said, you may begin.
8 PRESIDENT AND CEO TREGO: Good morning,
9 Chairman Preston, Chairman Godshall, and members of
10 the committee. You have my submitted testimony, but
11 in the interest of time, I will just give some
12 highlights on my testimony.
13 I've Dave W. Trego, President and CEO of UGI
14 Utilities. I appreciate the opportunity to come here
15 and talk about the much-needed authority that I feel
16 the Pennsylvania Public Utility Commission should
17 have to authorize a DSIC for natural gas distribution
18 companies of Pennsylvania.
19 This is a topic which Vicki Ebner, who you
20 saw up on the screen, previously addressed in her
21 February 25th, 2009, testimony. And my testimony is
22 -- I intend it to supplement that earlier testimony.
23 MAJORITY CHAIRMAN PRESTON: Can I interrupt
24 just for one second?
25 PRESIDENT AND CEO TREGO: Sure. 80
1 MAJORITY CHAIRMAN PRESTON: I just want to
2 be sure.
3 Is someone here representing Equitable Gas?
4 PRESIDENT AND CEO LOVE: No.
5 MAJORITY CHAIRMAN PRESTON: Okay. I just
6 wanted to be sure.
7 Continue.
8 PRESIDENT AND CEO TREGO: UGI believes that
9 a properly designed DSIC that combines the best
10 long-term interest of public safety and maintains a
11 fair return for gas distribution companies in
12 traditional -- that they do already receive, and
13 traditional rate-making can work in Pennsylvania as
14 it has in other jurisdictions.
15 Gas DSICs, when appropriately tailored, as
16 I'm confident they would be under the PUC
17 supervision, would not be contrary to cost-of-service
18 rate-making principles. This has been shown to work
19 well in Pennsylvania for water companies as they have
20 replaced their aging infrastructure.
21 What we are requesting is that you give the
22 PUC the same authority without any specified
23 restrictions to develop DSICs that are based upon the
24 utilities' individual circumstance and in the best
25 interest of their consumers. 81
1 Under traditional cost-of-service
2 rate-making, the utilities' distribution rates are
3 periodically set in base-rate proceedings where
4 reasonably incurred expenses, return on investment
5 over depreciation on those investments over a defined
6 period are examined and determined by the PUC.
7 These factors are commonly called the
8 revenue requirement for utilities. Then based upon
9 the cost of service to individual customer classes
10 and consumption levels, the rates are then set.
11 This method of rate-making provides
12 utilities with strong incentives to operate
13 efficiently with respect to matters under their
14 control. Specifically, utilities have an incentive
15 to offset increased expenses and increased capital
16 investment requirements between base rates by first
17 increasing customer counts or per-customer unit
18 consumption.
19 Further, they can seek to increase
20 efficiency to manage expense growth. And third, to
21 carefully manage increased capital investments
22 consistent with service reliability and safety
23 requirements.
24 The Office of Consumer Advocate in
25 particular has been historically taking the position 82
1 that preservation of such incentives is an important
2 aspect of cost-of-service rate-making and that
3 utilities should generally be prohibited from
4 recovering incremental expenses, return on
5 investment, or depreciation between rate cases.
6 Attempts to do so are often characterized as
7 violating the prohibition against line-item
8 rate-making, and this is the argument that the
9 Commonwealth Court adopted in the Pennsylvania Water
10 Company decision that is not allowing currently gas
11 companies to have a DSIC.
12 However, it has long been recognized that
13 there may be categories of costs which are caused by
14 events beyond the control of the utility where
15 incremental costs recovery between rate cases can be
16 provided without disturbing the normal efficiency of
17 the incentives provided in cost-of-service rates.
18 For example, in UGI's case, we have been
19 able to recover incremental expenses for expansion of
20 programs that will help low-income ratepayers without
21 objection from the Office of Consumer Advocate.
22 An aspect which I believe the Legislature
23 had in mind when they gave the PUC the authority to
24 develop DSICs for the water companies and for which
25 the individual PUC Commissioners have expressed their 83
1 support of a gas DSIC is that they are capable of
2 crafting the DSIC mechanisms in such a way that
3 maintains the appropriate cost-of-service rate
4 incentives to operate efficiently while enabling the
5 gas companies to meet the long-term needs of safety
6 and efficiency goals as well as any relocation work
7 required on public works projects such as those we're
8 going to be faced with on the stimulus package.
9 Each year UGI develops a capital budget that
10 allows -- that allocates dollars to revenue-producing
11 expenditures, such as connecting new customers, and
12 those which do not produce revenue, primarily
13 replacing aging pipe and relocating pipe due to
14 public projects.
15 When the expenses in the latter two
16 categories increase over those stated in the
17 base-rate case and they create additional return on
18 investment requirements and depreciation, utilities
19 are faced with the decision to accelerate filing for
20 timely and expensive base-rate cases in those
21 situations.
22 If a DSIC was in place, it would allow UGI
23 and other natural gas distribution companies to
24 accelerate these capital investments when they are
25 required such as when these projects and relocations 84
1 occur and no longer have to come in for a base-rate
2 case which, is costly.
3 In UGI's case, we have approximately 1,882
4 miles of cast-iron pipe, wrought-iron pipe, and
5 non-cathodically protected steel pipe and 52,000
6 non-cathodically protected steel services. While UGI
7 continually makes capital decisions that insure a
8 safe and reliable distribution system, all of these
9 aging facilities will eventually have to be replaced.
10 A DSIC mechanism would allow UGI to
11 accelerate replacements when we have the opportunity
12 to replace these aging mains when the roads are open,
13 as we have discussed.
14 As I mentioned before, UGI as well as other
15 gas utilities are faced with the required relocation
16 of our facilities for public projects such as road
17 widening and sewer installation projects for which we
18 get little or no reimbursement.
19 A DSIC mechanism within its design which
20 allows for adjustment in the amount of the surcharge
21 is a perfect method to recover these costs for
22 projects which UGI has no control and by the way they
23 can vary greatly each year, which means that the
24 surcharge can be adjusted.
25 In addition, there are other investments 85
1 which gas distribution companies are required to make
2 due to the need to comply with Federal laws or other
3 regulations. These investments, which typically are
4 incremental investments to the normally budgeted
5 capital expenditures, are more suited to a DSIC
6 mechanism rather than a costly base-rate case.
7 Base-rate cases are costly and
8 time-consuming. In some cases, having a DSIC could
9 space out rate cases for which utilities would need
10 to apply for. The result of this is that utilities,
11 the PUC, and others would save time and money which
12 eventually the utility customers have to pay for.
13 What natural gas distribution companies
14 request is a properly designed DSIC mechanism that
15 would allow, under PUC oversight, our industry to
16 improve our infrastructure in a way that is in the
17 long-term interest of our customers in the State of
18 Pennsylvania.
19 The natural gas industry in Pennsylvania has
20 a long history of providing safe and reliable service
21 and we feel that a DSIC would be a valuable tool for
22 us to help maintain that level of service.
23 I appreciate the time to come before the
24 Committee and I'll take any questions.
25 MAJORITY CHAIRMAN PRESTON: Thank you. 86
1 PRESIDENT AND CEO KNUDSEN: Thank you,
2 Chairman Preston and Chairman Godshall.
3 My name is Tom Knudsen. I'm President and
4 CEO of the Philadelphia Gas Works. My comments will
5 be brief. What I would like to do today is sort of
6 lay out sort of the problems that we in Philadelphia
7 confront and then answer whatever questions you might
8 have.
9 We have a 6,000-mile system under the city
10 streets in Philadelphia. We have 3,000 miles of main
11 and 3,000 miles of services. PGW has the most
12 intensively developed system in the country.
13 By that, I mean our mains average no more
14 than 32 feet from the foundation walls of houses.
15 We're very close to the homes that we serve and if
16 there is a mishap or migration of gas, it doesn't
17 take much to get into the basements of our customers.
18 Most of our mains and services are under
19 pavement. The oldest mains, 2,000, or two-thirds of
20 our system, were laid before 1960. They are now
21 fully depreciated or almost fully depreciated. And
22 1,700 miles are of the brittle cast-iron nature that
23 you have just seen in the two examples.
24 We have a program that we can barely afford
25 which is to replace this pipe at the rate of about 18 87
1 miles a year. The mathematics is very clear. It's a
2 little less than 100 years and we will have taken
3 care of the problem. That will not suffice, I'm
4 afraid. The level of investment that we undertake is
5 about 40 million per year for just those purposes.
6 The difficulty we face is that PGW is highly
7 leveraged. Every dollar invested in this program
8 since 1994 has been borrowed, and we've had no
9 alternative but to borrow money in order to keep the
10 system safe and reliable.
11 Consequently, our outstanding long-term debt
12 is now $1.2 billion, or 85 percent of total
13 capitalization. Just to give you a sense of the
14 growth there, our investment was about $700 million
15 in 1996-1997 and the capitalization ratio for debt
16 for an IOU on either side of me would be more in the
17 40 or 50 percent range, so we're highly leveraged.
18 And as a result, with the current economic
19 conditions, PGW's access to capital has been severely
20 challenged. So this program represents some real
21 opportunity for us to start to deleverage the company
22 and get out from under really severe financial
23 restraints.
24 Just to put a period on that statement, this
25 year, because of our inability to access capital 88
1 markets, we actually had to cut back on the level of
2 investment. We cut back from 18 miles a year to 12
3 miles a year simply because we could not be assured
4 that we would have the money to pay for the program
5 because we need to access long-term debt markets, and
6 that access is somewhat questionable right now.
7 On page 4 of my outline -- I won't go into
8 it -- lays out the distinctions between PGW and the
9 utilities in the State. We have a slightly different
10 mechanism to take advantage of the DSIC process.
11 It's somewhat arcane and difficult to understand.
12 But the language in the bill presents the
13 requirements that PGW would need in order to benefit
14 from the program.
15 I want to also emphasize that this
16 investment program would be thoroughly reviewed.
17 This money would be essentially used for replacement
18 of mains and services. And it would have four levels
19 of oversight consideration. One is from our own
20 Board of Directors; the second is from the
21 Philadelphia Gas Commission, who approves our
22 budgets; the third is from the Philadelphia City
23 Council, who authorizes our expenditures; and lastly,
24 the Pennsylvania PUC, who will have operation
25 responsibilities for the execution of the program. 89
1 Finally, the customers benefit in several
2 ways. First, they will have full review by the PUC
3 in these matters and by intervening parties when we
4 get to proceedings.
5 There is no double recovery here. Most
6 mains being replaced are fully depreciated. And from
7 my point of view, when rate cases do arise -- and
8 they will, in our instance, quite regularly -- there
9 is ample opportunity to make adjustments.
10 Thirdly, the DSIC process would give us much
11 more reliable access to central capital markets to
12 keep the company functioning.
13 And lastly, this mechanism will also
14 substantially lower the cost of financing for our
15 customers. Because of the DSIC process, we will have
16 a lower interest charge, lower debt service coverage
17 charges, and finally lower rates.
18 That completes my comments. I look forward
19 to your questions. Thank you.
20 DIRECTOR STARK: Good morning, Chairman
21 Preston, Chairman Godshall, prime sponsor Solobay,
22 the rest of the members of the Oversight Committee.
23 Thank you for allowing me --
24 MAJORITY CHAIRMAN PRESTON: Don't say
25 oversight. 90
1 DIRECTOR STARK: No?
2 MAJORITY CHAIRMAN PRESTON: You make us
3 nervous.
4 DIRECTOR STARK: All right.
5 MAJORITY CHAIRMAN PRESTON: Just the
6 Committee.
7 DIRECTOR STARK: House Consumer Affairs.
8 I'll go with that.
9 Well, thank you for giving me the
10 opportunity to appear before you to discuss the
11 merits of House Bill 744, which empowers the PUC to
12 grant recovery of certain infrastructure investment
13 costs in between base-rate cases and unifies State
14 law as to the ownership of and financial
15 responsibility for customer service lines.
16 Columbia Gas applauds this Committee for its
17 work to ensure that in the passage of this
18 legislation, there will be benefits for customers,
19 communities, and workers by encouraging the
20 acceleration of the replacement of our aging natural
21 gas infrastructure while minimizing the rate impact
22 on customers.
23 As several of you have heard and several of
24 you know, Columbia Gas did announce a proactive and
25 systematic pipeline replacement program in 2007. We 91
1 announced a 20-year program that would replace on
2 average 120 miles of pipe a year, 2,400 miles at its
3 completion. Enough to go from here to California
4 will be replaced.
5 This effort to build the next generation of
6 the distribution system will cost in excess of $1
7 billion. While few will dispute the need for the
8 upgraded infrastructure, all will ensure that we do
9 it in a cost-effective and efficient manner while
10 minimizing the impact on towns, neighborhoods, and
11 communities.
12 Through that minimization, we have
13 discovered since we have been undertaking this
14 endeavor that the one impact that we are having is on
15 jobs and job creation.
16 Last year, Columbia had projects ongoing in
17 Elwood City, Coraopolis, Bellefonte, Richeyville,
18 Cecil Township, and the much talked about City of
19 York. In doing this work, we had over 350
20 contractors working these various projects.
21 Additionally, Columbia hired an additional 50 workers
22 to add to our 600-worker complement to oversee this
23 work.
24 Several of the main subcontractors and
25 almost all of the subcontractors that were working on 92
1 this work were local companies. We see this work
2 that's being undertaken in Western Pennsylvania and
3 Central Pennsylvania in our service territory is not
4 only creating jobs for a year or two. We see them as
5 creating careers over a lifetime because our project,
6 again, will take 20 years to do.
7 That's the direct impact that we're seeing.
8 The indirect impact that we're seeing is on the
9 communities that we're involved with where we're
10 doing the work.
11 You heard on the video, Columbia Gas does
12 now know that for every dollar that we invest in a
13 community, every dollar that we invest in a pipeline
14 replacement program, 3.8 dollars is generated back as
15 economic stimulus. This comes from use of local
16 suppliers, local services, heads and beds, the
17 negotiation of gasoline, food, the negotiation of
18 services. Also, the idea of wages and taxes is
19 included there.
20 So again, we're undertaking several projects
21 statewide. Since our inception in the whole County
22 of Washington, we have invested $35 million. The
23 economic boost to the county has been $133 million as
24 a result of the work that we're doing.
25 You hear about the City of York. We're 93
1 taking the downtown, 25 blocks by 25 blocks. The
2 boost that we have provided in the City of York has
3 been $27 million. And again, this has been done
4 through the use of contractors from Washington and
5 Dailey, C.S. Davidson, Kinsley, Shellenberger, and
6 the like, Stewart & Tate is another one.
7 So we are seeing our replacement project
8 having a direct and positive impact on jobs and
9 economic stimulus, all at the same time improving our
10 safety and reliability as we build the next
11 generation of infrastructure.
12 What do we need to keep this economic engine
13 chugging along? Two things. And you've heard about
14 it here this morning. We need improved cooperation
15 between municipalities and we need the passage of
16 House Bill 744.
17 Two quick examples on that cooperation.
18 When we did our work in Cecil Township in '07, we did
19 it at a time when the water and the sewer were all
20 doing their work. Again, utilizing local
21 contractors, we were able to replace all that
22 infrastructure at once and in the process renew that
23 whole town's infrastructure. And now there is a
24 brand-new road over top of this. That road should
25 not need to be dug into for several years. 94
1 The other example that we talked long and
2 hard on is the City of York. When we made our
3 announcement of what we were undertaking, the Mayor
4 of York scheduled a meeting between Columbia Gas, the
5 Public Works Department of York, as well as York
6 Water and said, we need to share plans and time lines
7 on projects.
8 The sharing of these plans and time lines
9 saves money. That coordination saves the dollars.
10 This is a dated example because it was from '08.
11 However, what we discovered in our conversations was
12 Columbia Gas was paying $60 a ton for blacktop, York
13 Water was paying $60 a ton for blacktop. Yet through
14 the buying power of the City, they were able to get
15 black top for $30 a ton.
16 Through coordination and cooperation and
17 communication, we all worked together with a payment
18 of $10 a ton, because we split it three ways on the
19 blacktop. Those savings are reflected in the project
20 costs to our customers as well as to the citizens who
21 are in the City of York.
22 This smart and efficient use of resources
23 both saves money and gets the most work out of the
24 little dollars as possible while the renewal of the
25 infrastructure takes place. 95
1 Another critical component I mentioned is
2 the need for 744. This has been addressed numerous
3 times over what the Commissioners have said and what
4 others before me have said, the benefits that are in
5 744 as well as the oversight that's in 744.
6 The bottom line for Columbia Gas, DSIC is a
7 pay-as-you-go mechanism that will allow for more
8 timely recovery of our replacement projects. With
9 this enactment of 744, Pennsylvania will be
10 encouraging the acceleration of replacing aging
11 infrastructure, which is ultimately good for the
12 ratepayer.
13 Again, we think this is done in the most
14 cost-efficient and effective manner. We actually
15 show that savings will be generated by working in
16 these communities together, plus you won't have the
17 cost associated with the rate case.
18 Communities, we heard earlier about York.
19 There is no economic stimulus in our efforts. Yet
20 when we can go in with a community that is receiving
21 economic stimulus dollars and partner with them,
22 again, that lowers the cost to them and it also
23 lowers the cost to the community. It also makes it
24 easy for the motoring public not to have multiple
25 digs over the life of the road. Do it once and do it 96
1 the right way.
2 We also see this is benefiting utilities
3 because it allows us to manage and plan our work more
4 efficiently. Likewise, this is good for the
5 workforce. We are seeing more workers locally hired
6 and we are seeing contractors grow their businesses
7 as a result of working with Columbia Gas. So
8 overall, this effort is worthwhile.
9 And we talk a lot about Columbia Gas. But
10 as we talked about in Western Pennsylvania, there is
11 dominion, it is equitable, and our lines are roughly
12 the same age in Western Pennsylvania.
13 Lastly, the change this legislation also
14 calls for is the oversight of customer service lines.
15 You've heard about Western Pennsylvania and the
16 ownership issue.
17 It came to bear when we were doing our
18 project in Cecil Township that we had to ask for and
19 we did receive a waiver from the PUC allowing us to
20 work on the lines that are owned by customers.
21 As we're upgrading that system down the
22 middle of the road, we are upgrading the pressure to
23 medium pressure, not low pressure. And in doing
24 so -- you've heard about the age of those lines.
25 They would not be able to withstand the pressure that 97
1 was going to go through them. So the bottom line
2 was, we need to upgrade their laterals.
3 In doing so, it became obvious to other
4 folks who live in Cecil Township who weren't in the
5 direct path of the project that while somebody
6 downtown was getting a lateral replaced, theirs may
7 be leaking or was just replaced at their own cost.
8 And again, you've heard this goes at around $2,200 on
9 average to replace that line.
10 It was at that time that constituents'
11 customers were asking us, why are you doing this? We
12 were saying, the law says that you own that service
13 line. And I think at that point, members of the
14 Consumer Affairs Committee were getting some calls
15 saying, explain this. Why does this exist?
16 It does get further aggravating and
17 excessive when they realize it's just in Western
18 Pennsylvania as a Commonwealth that this occurs.
19 Columbia Gas does do the maintenance and upgrades on
20 the facilities in York at our cost. Those customers
21 are not taking paying for that. So you've got this
22 split between the State that this law will unify.
23 And we think that is the right move to go.
24 So in closing, I just want to say what we
25 see from taking the effort that we have done already 98
1 since '07, this type of work is creating jobs,
2 creating jobs that are done locally. We're utilizing
3 local contractors throughout this work and hiring
4 people.
5 It allows for building the next generation
6 of a safe natural gas system, which is needed. The
7 system we have today, as you see, has lasted to the
8 end of its useful life, but now we need to put the
9 new one in.
10 This also calls for the most efficient and
11 effective use of capital that will drive savings.
12 And in the long-term, that savings will go to your
13 constituents and our customers.
14 I thank you for giving me the opportunity
15 today to express our views. We respectfully urge the
16 Committee to move the bill.
17 MAJORITY CHAIRMAN PRESTON: Thank you very
18 much, George. And I appreciate both of you as far as
19 Presidents of the company coming before us with your
20 busy schedules to be able to spend time with us
21 today, not our Government Committee, not our
22 Oversight Committee. I don't want people to think we
23 have that authority.
24 DIRECTOR STARK: Right.
25 MAJORITY CHAIRMAN PRESTON: I want to raise 99
1 this issue from Representative Barbin, who is from
2 Cambria County and because of a family emergency, he
3 could not be here today.
4 But I think it's very relevant to his
5 question. After this, we have someone coming from
6 the AFL-CIO. Then also we have some people who are
7 from utility and general contractors from
8 Southwestern Pennsylvania that are also part of the
9 agenda.
10 And this is his question for you. For
11 example, unfortunately right now, it deals with
12 Cambria County -- not Cambria County, but also
13 dealing with Columbia Gas.
14 But I think there's a question that all the
15 members -- not just on this Committee, but what we'd
16 like to be able to know is, in Ohio, once the
17 utilities got this right, they subcontracted the work
18 to Maryland workers. I don't know what company he's
19 referring to. I'm just saying, this is an example
20 that he's using -- not example. This is his opinion.
21 The question is, are there any protections
22 in this bill to ensure Pennsylvania workers and
23 materials are used for this work? And I'm not saying
24 that that is a law. But I'm very concerned about
25 this issue, not just the meaningful wage issue, but 100
1 local workers also, including women and minorities.
2 I want to be able to really raise this issue
3 to the other people in the industry concerning this
4 because from a personal level, in the next year, this
5 is something that I personally want to be able to
6 draft when we talk about workforce development.
7 I'd like to be able to hear any response
8 that people want to be able to address that.
9 PRESIDENT AND CEO KNUDSEN: Chairman
10 Preston, speaking for the 50 percent of the cast-iron
11 problem in the State, in Philadelphia, we have very
12 specific requirements for use of local contractors.
13 We are working with MBE requirements, trying to
14 develop subcontracting capabilities to do this work,
15 particularly now that the stimulus money is starting
16 to flow to the city, of which we hope to have a
17 piece.
18 So we're very committed to make sure that
19 these jobs are Pennsylvania jobs and that we have and
20 are paying full attention to the opportunities that
21 this law will create for minority participation as
22 well.
23 DIRECTOR STARK: I would echo the comments
24 of Mr. Knudsen. And the one thing is, again, we have
25 had a practice of doing this. The good news is, 101
1 we're already investing in these replacements. And
2 in doing so, we are using local resources to do so.
3 Currently, we have replaced nearly 5,000
4 customer-owned service lines all with
5 Pennsylvania-based contractors. Again, that's one
6 way we're doing it. I look at Stewart & Tate and
7 Kinsley. I mean, I can read a list off where we are
8 using local contractors, local resources.
9 MAJORITY CHAIRMAN PRESTON: And I think the
10 other thing, President Knudsen, I want to say to you,
11 I admire you. I know a lot of people point the
12 finger at you. You didn't inherit this. It was
13 given to you. You had no choice in the matter. You
14 couldn't reject it.
15 I'd like to commend you in the level of
16 business attitude that you've done. The
17 restructuring that you've done, you've made some very
18 tough executive decisions. Everybody is not always
19 going to be happy about it.
20 PRESIDENT AND CEO KNUDSEN: Right.
21 MAJORITY CHAIRMAN PRESTON: But at the same
22 time, I don't think that we would even be talking
23 today and doing some of these things if it hadn't
24 been for some of the decisions that you're making
25 that I think would pass this as it is, that the 102
1 residents in the Philadelphia area and the
2 surrounding area as far as not only the economic
3 impact but the safety issue and be able to give a
4 reliable product.
5 I wanted to really be able to say that to
6 you because three or four years ago when we first
7 started these conversations, I don't think I was as
8 pleasant back then.
9 PRESIDENT & CEO KNUDSEN: Well, you're very
10 kind and thank you very much.
11 MAJORITY CHAIRMAN PRESTON: Okay.
12 PRESIDENT AND CEO TREGO: Can I address one
13 issue that Chairman Godshall brought up?
14 MAJORITY CHAIRMAN PRESTON: Yes.
15 PRESIDENT AND CEO TREGO: It was kind of
16 about facilitating growth. As most of us do whenever
17 possible, a lot of the cast-iron mains are
18 low-pressure mains and that limits our ability to
19 connect new customers. A lot of times a customer
20 will come to us and we do not have enough gas in
21 those mains.
22 Whenever possible when we upgrade those
23 mains, we put medium-pressure gas in those particular
24 mains which can facilitate growth because now we're
25 able to gather those customers. 103
1 I just wanted to address that question.
2 MAJORITY CHAIRMAN PRESTON: Chairman
3 Godshall.
4 MINORITY CHAIRMAN GODSHALL: Yes. I had
5 that situation in the lower end of -- not my district
6 -- Montgomery County. There just wasn't capacity
7 there. So when you're coming into an area and
8 expanding, you're expanding -- you know, the pipes
9 you're putting in are not necessarily the size needed
10 for that specific area but you're planning for growth
11 so you don't have to keep, you know, replacing them.
12 PRESIDENT AND CEO TREGO: Absolutely. You
13 know, we take a look at the area. We take a look at
14 the possibility of extending the medium-pressure gas
15 because, again, we don't want to be opening up that
16 street in five or ten years because there's
17 additional growth.
18 MINORITY CHAIRMAN GODSHALL: I also want to
19 echo Chairman Preston's remarks specifically about
20 what you're doing. I do recall some of the same
21 arguments last session and before. And I really feel
22 you're doing the job as best you can.
23 Hopefully this time we'll have something
24 concrete coming out of this, which will be a benefit
25 to all Pennsylvanians. 104
1 PRESIDENT AND CEO TREGO: Right.
2 MINORITY CHAIRMAN GODSHALL: And I do
3 appreciate PGW's work in Philadelphia. I do get the
4 Philadelphia Inquirer over the years. It's a little
5 bit better reading these days than what it was in the
6 past. You're doing a good job and I say thank you.
7 PRESIDENT AND CEO KNUDSEN: Well, thank you.
8 PRESIDENT AND CEO TREGO: Thank you.
9 MAJORITY CHAIRMAN PRESTON: Thank you very
10 much, gentlemen. We appreciate your testimony.
11 PRESIDENT AND CEO KNUDSEN: Thank you.
12 PRESIDENT AND CEO TREGO: Thank you.
13 MAJORITY CHAIRMAN PRESTON: Next we have
14 Mike Welsh, who is Chair of the Pennsylvania AFL-CIO
15 Utility Caucus. It's always good to see you again.
16 PENNSYLVANIA AFL-CIO CHAIR WELSH: Thank
17 you.
18 MAJORITY CHAIRMAN PRESTON: We look forward
19 to hearing your testimony. And when you're
20 comfortable, you may begin.
21 AFL-CIO CHAIR WELSH: Good morning, Chairman
22 Preston, Chairman Godshall, and other members of the
23 House Consumer Affairs Committee.
24 My name is Mike Welsh and I'm here today on
25 behalf of the Pennsylvania AFL-CIO Utility Caucus. 105
1 Joining me today is Stu Bass, Director of
2 Pennsylvania Keystone Development Partnership.
3 I thank you for the opportunity to come
4 before the Committee today to share our views on gas
5 distribution service improvement charge, or DSIC,
6 legislation.
7 The Pennsylvania AFL-CIO Utility Caucus is
8 formed of several international unions, including the
9 Communications Workers of America, International
10 Brotherhood of Electrical Workers, Utility Workers
11 Union of American, and other unions whose members
12 work in the electric, gas, telephone, and water
13 utility industries.
14 I'm here today to speak in support of House
15 Bill 744, which provides for the Public Utility
16 Commission to allow a natural gas distribution system
17 improvement charge, or DSIC, based on the PUC's
18 review of the companies' infrastructure needs.
19 House Bill 744 responsibly addresses the
20 State's natural gas infrastructure, enabling the
21 replacement of over 13,000 miles of old pipe.
22 Replacing this magnitude of pipe in the Commonwealth
23 of Pennsylvania requires a safe, skilled, trained
24 workforce.
25 House Bill 744 would amend Section 2 of 106
1 Section 1307 of Title 66 (g.4) to include industry
2 standards that state:
3 One, for the purposes of recovery provided
4 for in subsections (g.2) and (g.3), in order to
5 ensure safety and reliability, natural gas
6 distribution improvement projects shall comply with
7 industry standards by operator-qualified workers as
8 required by 49 CFR 192 relating to the transportation
9 of natural and other gas by pipeline, minimum Federal
10 safety standards.
11 Two, natural gas distribution companies
12 shall work with applicable private- and public-sector
13 entities to employ and maintain an adequate trained
14 and qualified workforce.
15 Three, all contractor work shall be done by
16 a qualified contractor who is authorized to do
17 business in this Commonwealth to complete said
18 projects. All contractor work shall be inspected by
19 an appropriate operator-qualified individual.
20 This language ensures that all projects are
21 done to comply with industry standards, as well as
22 ensuring that natural gas companies shall work with
23 applicable private and public entities to employ and
24 maintain an adequate trained workforce. In the event
25 that there is a need for outside contractors, House 107
1 Bill 744 assures the safety of Pennsylvania citizens
2 by requiring all workers to be operator qualified.
3 We have seen how the aging pipelines in our
4 neighborhoods and streets have been affected by gas
5 leaks. Lines that should have been replaced are not
6 until they have failed. We have seen many examples
7 of these problems throughout the Commonwealth.
8 In Western Pennsylvania, there have been
9 explosions that leveled homes an in some cases severe
10 injuries and even fatalities have occurred.
11 In my own township, we have seen water-line
12 breaks that have caused problems with water leaking
13 into old gas lines. We must do everything we can to
14 prevent incidents like these from happening again and
15 ensure the safety of Pennsylvania citizens.
16 House Bill 744 will create a steady funding
17 stream to allow for the much-needed replacement of
18 the aging gas infrastructure in a timely fashion
19 while maximizing the number of Pennsylvanians we put
20 to work.
21 Overall, labor's main concern for several
22 years has been the need for qualified workers to
23 replace the aging workforce that will be retiring in
24 the next five to ten years. The economic downturn
25 has created a slowdown in the number of retirements 108
1 to a small degree. However, ultimately this may
2 compound the retirement problem as more people will
3 become eligible for retirement at the same time.
4 In the next five years, the natural gas
5 utility industry could potentially face losing up to
6 40 to 50 percent of their workforce, as reported in
7 "Gaps in the Energy Workforce Pipeline," a study put
8 out by the Center for Energy Workforce Development.
9 Industry restructuring and hiring
10 difficulties in the late 1990s contributed to the
11 general shortage of experienced workers moving
12 through the pipeline, as have difficulties in
13 recruiting younger workers in the natural gas sector.
14 The retirements tend to create vacancies in
15 the more skilled positions, which in turn create a
16 need for incumbent worker training as part of a
17 career ladder to meet those needs and create openings
18 at the entry-level jobs.
19 The aging workforce and lack of skilled
20 applicants create the need for more comprehensive
21 training programs. Employers and unions can
22 participate in these pipeline activities to help
23 applicants meet the job requirements for the
24 entry-level positions.
25 Infrastructure projects benefitting from the 109
1 stimulus funding furthers this need for more trained
2 workers. Training programs for both gas sector
3 employers and contractors can be leveraged with
4 similar programs to meet these same challenges.
5 At this time, I would like to turn it over
6 to Stu Bass from the Keystone Development Partnership
7 to explain some of the things that have been going on
8 here.
9 MAJORITY CHAIRMAN PRESTON: And I want to
10 apologize, Mr. Bass. I didn't flip my page over fast
11 enough. I should have recognized that you were
12 originally planned to be part of this panel. I
13 apologize.
14 DIRECTOR BASS: Thank you.
15 Good morning and thank you for giving me the
16 opportunity to present the Keystone Utility's
17 Industry Partnership. We submitted some of the
18 background of our partnership in the testimony. I'd
19 like to add some things to that -- or actually
20 emphasize some of the information there.
21 Labor unions and gas utility employers have
22 gotten together and formed the Keystone Utilities
23 Industry Partnership. This partnership is managed by
24 the Keystone Development Partnership which is
25 affiliated with the Pennsylvania AFL-CIO. 110
1 This partnership is based on joint labor
2 management principles and they use a data-driven
3 process to create training programs that are job
4 oriented based on real-life experiences.
5 Through its affiliation with the
6 Pennsylvania AFL-CIO, KDP, the Keystone Development
7 Partnership, has partnered with the International
8 Brotherhood of Electrical Workers and the Utility
9 Workers Union of America in the energy, gas, and
10 water sectors.
11 These links to organized labor provide the
12 partnership with extensive outreach to
13 union-affiliated employers as a direct pathway to the
14 creation of these training partnerships as well as to
15 further expand and enhance existing programs.
16 The industry partnership program is
17 underwritten by the Pennsylvania Department of Labor
18 and Industry. Our program is one of the few
19 statewide programs and it is statewide by designation
20 of the participants.
21 As you've heard, the utility industry is
22 facing a lot of retiring folks as the workforce ages.
23 These companies are most seriously challenged in
24 terms of their sustaining a proficient and
25 knowledgeable workforce while struggling with 111
1 applicants who lack sufficient aptitudes for what are
2 demanding skill requirements.
3 The jobs that are going to be created by the
4 DSIC legislation will be sustainable beyond the
5 current stimulus bill investment. This job creation
6 will also allow the gas industry to address the
7 infrastructure needs and provide improved services to
8 customers. These jobs provide family-sustaining
9 wages and benefits and, if you don't know, the
10 utilities industry is unionized.
11 Our partnership can provide these challenged
12 companies successful joint training and
13 skill-building programs, focusing on building career
14 ladders for less skilled incumbent workers to promote
15 as well as create vacancies for entry-level jobs.
16 The Keystone Utilities Industry Partnership
17 was formed in 2006 to address this emerging crisis in
18 workforce attrition. It began in Southwest
19 Pennsylvania hosted by Local 29 of the IBEW and with
20 hosting employers from the energy sector.
21 What started off there became statewide
22 within a year, and we now have expanded the program
23 for gas and water. It continues to expand and create
24 more efficient economies of scale. There are
25 currently 15 employers and 10 unions participating. 112
1 Some of the folks you heard from here are
2 our partners, and some of the training programs that
3 we are now working with are very much in line with
4 the results the DSIC legislation will provide.
5 There is backhoe training that we found as a
6 statewide initiative will address standardization of
7 training and also will have some impact on operator
8 qualifications to create standardization for each of
9 the properties across the State.
10 We're going to combine this program with a
11 line locator training program. There's a lot of new
12 equipment that's being used. And we also in doing
13 this are creating a network of communication to
14 create an economy of scale so that when we bring in
15 training, we're gathering best practices and meeting
16 the highest standards of the industry and providing
17 this to companies that may be small and not have the
18 training resources.
19 These companies might include a company like
20 T.W. Philips where the idea originated but then when
21 we presented it to UGI, it became a statewide
22 program. We have Equitable Gas and United
23 Steelworkers and we also are planning to expand to
24 include a lot of the companies you heard from.
25 I would like to emphasize that the network 113
1 that happened from the training partnership can also
2 help to enhance communication for the companies to
3 address these challenges, industry challenges, and to
4 coordinate a lot of the programs and work.
5 In summary, in KDP's affiliation with the
6 Pennsylvania AFL-CIO, we're able to provide direct
7 links to many hundreds of unionized companies in
8 multiple sectors statewide, integrated with the joint
9 decision-making based on labor and management
10 principles. This makes a most remarkable synergy
11 possible.
12 In this case, the free and open exchange of
13 ideas specific to a single training need leads to a
14 multi-employer statewide training initiative marking
15 out a pathway to meeting the needs of vital
16 Pennsylvania industries.
17 We hope to expand the partnership. We also
18 are working with many different programs from the
19 Department of Labor and Industry that are coordinated
20 with the stimulus package, and this includes
21 addressing pipeline issues.
22 I wanted to respond to Chairman Preston
23 bringing up the workforce needs. The Keystone
24 Utilities Industry Partnership is participating in
25 the Pittsburgh Labor Management Clearinghouse and 114
1 other programs to help low-skilled and underemployed
2 folks get into these good-paying, family-sustaining
3 jobs.
4 Thank you for your time.
5 MAJORITY CHAIRMAN PRESTON: Thank you.
6 Sometime in the near future, maybe back our
7 way, if I could arrange a time with you and Rich to
8 sit down from the Allegheny County Labor Council and
9 sit down and try to talk to expand and open up some
10 other doors. He's even had some situations and
11 problems that we all had to deal with.
12 The other thing is, I want to say to
13 Mr. Welsh -- and I appreciate from our first meeting,
14 I guess almost two years ago, that it was very
15 refreshing. All too often, we, in Pennsylvania,
16 sometimes want to keep things as they are.
17 You, coming with the union background -- and
18 what I really appreciate is, you know, you're really
19 talking about, let's get ready for this next
20 generation to come and how are we able to provide for
21 people to be able to feed a family, to be able to
22 work and to be able to raise that family, which
23 ultimately creates better schools, better hospitals,
24 better living conditions and all.
25 I want to be able to say that to you, what 115
1 we call a progressive attitude.
2 Representative Solobay.
3 REPRESENTATIVE SOLOBAY: Thank you,
4 Mr. Chairman.
5 And, you know, him being the Chairman, he
6 always asks half of my questions before I ever get a
7 chance to talk.
8 Mike and Stu, I appreciate what you have
9 said to us and, obviously, backed up and fortified
10 the comments made by industry as far as the
11 partnership and working together.
12 In a direct and/or indirect number, can you
13 put any type of a number on jobs and/or opportunities
14 now that are probably going to be created with the
15 advent of this bill?
16 AFL-CIO CHAIR WELSH: Specific number, I
17 can't. It depends, you know, how much money is
18 released and how quick. What we have happening, as
19 more projects expand, you're going to need more
20 trained workers. So depending on the number of jobs
21 that are created as far as projects that are going to
22 be looked at, that all is going to multiply how
23 quick.
24 REPRESENTATIVE SOLOBAY: Along with that,
25 there's been some, I guess, misinformation or maybe 116
1 confused information that has come out from some of
2 the other locals.
3 Obviously, the Pittsburgh Plumbers Local 27
4 out of Pittsburgh, as far as you're concerned, have
5 job losses. Everything we've heard today so far kind
6 of leans a different way.
7 Has there been any conversation with those
8 folks by you or the AFL-CIO to quantify their
9 concerns?
10 AFL-CIO CHAIR WELSH: We're reaching out to
11 do that. We just became aware of the issue
12 yesterday.
13 REPRESENTATIVE SOLOBAY: I see.
14 AFL-CIO CHAIR WELSH: I mean, you've been
15 working on this issue for quite some time now, so we
16 were surprised. But we were going to go back and try
17 to address their problems because we're going to need
18 more people is the bottom line.
19 I mean, if you look at just the
20 neighborhood, if you're looking at how much
21 maintenance work may be in a neighborhood on a yearly
22 basis for how much work they get just to go out and
23 do maintenance calls as a contractor compared to
24 replacing a whole neighborhood, where out of 100
25 homes, you might have 2 or 3 percent that have some 117
1 type of problem per year, now you're going to go out
2 and replace the whole neighborhood. That's a lot
3 more jobs than just going out to do maintenance work
4 on two or three properties.
5 We want to find out what then concerns are
6 and try to work with them.
7 REPRESENTATIVE SOLOBAY: Have you been able
8 to reach out with your brothers and sisters in Ohio?
9 There's been some language there that talked about
10 the concerns they've had there. Obviously, we're not
11 Ohio and not really worried about what happens in
12 Ohio.
13 But is there any validity to the numbers
14 that they say have lost jobs because of similar
15 legislation in Ohio?
16 AFL-CIO CHAIR WELSH: I'm not sure what
17 they're saying. We didn't receive a copy of that
18 letter per se to look at the exact numbers. I am
19 going to go back though and try to get some
20 information from Ohio.
21 REPRESENTATIVE SOLOBAY: If you do get some
22 information to quantify that, could you pass it along
23 to the Committee, please?
24 AFL-CIO CHAIR WELSH: Yes, I will.
25 REPRESENTATIVE SOLOBAY: Thank you. 118
1 AFL-CIO CHAIR WELSH: Sure.
2 REPRESENTATIVE SOLOBAY: Thank you,
3 Mr. Chairman.
4 MAJORITY CHAIRMAN PRESTON: Chairman
5 Godshall.
6 MINORITY CHAIRMAN GODSHALL: Thank you,
7 Mr. Chairman.
8 I just have a couple of questions that I
9 don't understand the terminology. It says, all
10 contractor work shall be inspected by an appropriate
11 operator-qualified individual. Operator-qualified
12 individual by whom?
13 AFL-CIO CHAIR WELSH: The people that work
14 on gas pipelines have to have minimum training that
15 makes them operator qualified. So those individuals
16 that do the actual connections, you know, they have
17 advanced training that they must have in order to be
18 able to inspect the pipe or inspect the work that's
19 being done. They have to hold those qualifications,
20 too.
21 MINORITY CHAIRMAN GODSHALL: That's required
22 under Pennsylvania law?
23 AFL-CIO CHAIR WELSH: It's Federal law. The
24 gas line industry falls under Federal law and the
25 DOT. 119
1 MINORITY CHAIRMAN GODSHALL: Okay. And all
2 contractor work shall be done by a qualified
3 contractor. Is that also by Federal statute?
4 AFL-CIO CHAIR WELSH: It would be that if
5 they're making the connections, they would have to be
6 qualified, yes, to do that.
7 MINORITY CHAIRMAN GODSHALL: Okay.
8 AFL-CIO CHAIR WELSH: So we just want to
9 emphasize that they would have the training to be
10 doing that type of work.
11 MAJORITY CHAIRMAN PRESTON: Chairman, also
12 understand in a way, this is interstate commerce in a
13 lot of ways that we're looking at because of the way
14 it goes.
15 AFL-CIO CHAIR WELSH: We're just making sure
16 that that is where they have to have the
17 qualifications to be able to inspect that work, too.
18 We want those people to have that same qualification.
19 It's sort of reemphasizing, you know, what should be
20 taking place.
21 MINORITY CHAIRMAN GODSHALL: Okay. I just
22 wasn't familiar with that terminology and exactly
23 what it meant. I know probably I will be asked later
24 on, so I thank you for that information.
25 AFL-CIO CHAIR WELSH: Sure. 120
1 MAJORITY CHAIRMAN PRESTON: And just to
2 clarify the record, too, with what Chairman Godshall
3 was talking about is on page 5 of the bill, dealing
4 with lines 8 through 16 where it talks about a
5 qualified workforce and qualified contractors, also
6 verified by an appropriate operator-qualified
7 individual. And that's some of the things that we've
8 put in context in the language.
9 AFL-CIO CHAIR WELSH: Right.
10 MAJORITY CHAIRMAN PRESTON: And also to you,
11 Representative Solobay, I can't say that I don't care
12 about what happens in Ohio. But I think that we have
13 to have a clear preference of what goes on in
14 Pennsylvania and we'll just send a message that we'll
15 try to work with this.
16 REPRESENTATIVE SOLOBAY: Okay.
17 MAJORITY CHAIRMAN PRESTON: I don't have any
18 problem with that. I can stand in front of a
19 bulldozer, you know, one way or another. I don't
20 want to get hurt; but at the same time, if that's
21 what it takes, we can send a clear message so that we
22 will be able to deal with good workers for here in
23 Pennsylvania.
24 AFL-CIO CHAIR WELSH: And, of course, our
25 preference is that good qualified union workers be on 121
1 these jobs.
2 REPRESENTATIVE SOLOBAY: Amen.
3 MINORITY CHAIRMAN GODSHALL: I'd just like
4 to follow up on that. On page 5, it says, all
5 contractor work shall be done by a qualified
6 contractor.
7 That doesn't mean only connectors. I mean,
8 it says all. Does that mean everything?
9 AFL-CIO CHAIR WELSH: Well, when you're
10 dealing with the gas portion and the connections,
11 they have to have those qualifications.
12 There's other pieces of the job that may not
13 -- like, there's going to be a truck driver that
14 they're going to have certain qualifications that
15 they may have with a CDL license and whatnot, you
16 know, to be able to drive a truck.
17 There's different pieces of the job as you
18 replace the pipe. So the mechanics, the gas line
19 mechanics, they're going to require them to have
20 certain qualifications. Other portions of the job
21 might have certain qualifications they may have. And
22 there are some parts of the job that may not require
23 the same qualifications.
24 We want to make sure the people doing the
25 critical pass and the critical process do possess 122
1 those skills.
2 MINORITY CHAIRMAN GODSHALL: Welding and so
3 forth?
4 AFL-CIO CHAIR WELSH: Yes.
5 MINORITY CHAIRMAN GODSHALL: Okay. Thank
6 you.
7 AFL-CIO CHAIR WELSH: Sure.
8 MAJORITY CHAIRMAN PRESTON: Also, since he
9 was a movie star today, I'll recognize the President
10 of the AFL-CIO that just came in the House, Bill
11 George.
12 AFL-CIO PRESIDENT GEORGE: Mr. Chairman,
13 thank you for the opportunity. I don't care what
14 they say about you in Pittsburgh. You're all right.
15 MAJORITY CHAIRMAN PRESTON: Any other
16 questions from the members of the panel?
17 Well, thank you very much.
18 AFL-CIO CHAIR WELSH: Thank you.
19 MAJORITY CHAIRMAN PRESTON: We're looking
20 forward to working with you in the future.
21 AFL-CIO CHAIR WELSH: We look forward to
22 working with you, too. Thank you.
23 MAJORITY CHAIRMAN PRESTON: Next we have
24 Pamela Witmer, who is President of Pennsylvania
25 Chemical Industry Council, and Pamela Polacek, 123
1 Counsel for Industrial Energy Consumers of
2 Pennsylvania.
3 It's still good morning. Thank you very
4 much for coming. We appreciate you. You may begin
5 when you so choose.
6 PRESIDENT WITMER: Thank you.
7 Good morning, Chairman Preston,
8 Representative Godshall, and members of the Consumer
9 Affairs Committee. My name is Pam Witmer and I
10 represent the Pennsylvania Chemical Industry Council.
11 Unfortunately, I don't have any props. I
12 don't have a movie. I don't have popcorn. I don't
13 even have donuts. When I thought about that at
14 first, I thought I was concerned, but as you think
15 about it, the chemical industry, in fact, provides
16 everything that we have here today. It is the
17 building block for our economy, including the green
18 economy that we are all striving to achieve.
19 Pennsylvania has been fortunate to have a
20 strong history of a thriving chemical industry. But
21 like much of the manufacturing work force, we, too,
22 are struggling to maintain those good-paying jobs,
23 innovative people, and capital infrastructure in
24 Pennsylvania.
25 The chemistry industry, which provides an 124
1 average salary of over $76,000 per year, is
2 struggling. In just the past three years, the
3 industry has lost over 21 percent of its workforce in
4 Pennsylvania due to cut-backs and closed plants.
5 The chemical industry understands the need
6 to maintain and enhance and modernize capital
7 infrastructure. Without such investments, production
8 will degrade, customers will turn elsewhere,
9 environmental and labor regulators will levy fines
10 and ultimately plants will close.
11 PCIC is not opposed to
12 infrastructure-related improvements. In fact, it is
13 not uncommon for large industrial customers to help
14 finance utility infrastructure projects.
15 PCIC is opposed to proposals from any
16 industry, but especially an industry that must, by
17 law, be granted approval for the rates that it
18 charges, being granted the authority to automatically
19 assess a surcharge outside of the traditional
20 statutory and regulatory process.
21 What is proposed in House Bill 744 or at
22 least the portion of House Bill 744 that most
23 concerns PCIC is a distribution system improvement
24 charge, or the DSIC, that we've been talking about
25 today. 125
1 As outlined in the bill, a utility would
2 submit a plan to the Public Utility Commission for
3 approval of a sliding scale of rates. It's this
4 sliding rate scale that would be the DSIC.
5 This process is completely outside the
6 rate-making process, so the PUC won't have the
7 ability to review the financial situation of the
8 utility in the full scope of what is needed to
9 determine whether or not the sliding scale is
10 appropriate and to ensure that there is no
11 cross-subsidization between customer classes.
12 The utility may then, without further notice
13 or review by the PUC, undertake a distribution line
14 infrastructure project and assess a surcharge on all
15 customers. The surcharge, whether it's 3, 5, 7
16 percent, because it's silent in the proposed bill, is
17 a significant cost factor for industrial consumers.
18 It is especially difficult for the chemical
19 industry when applied to natural gas utilities as
20 proposed in 744, given the large volumes of natural
21 gas that are consumed by the industry.
22 At the beginning of my comments, I mentioned
23 some of the areas that the chemical industry
24 touches -- the health care industry, the colors in
25 our clothing, the safe water that we all like to 126
1 drink out of our tap or in a bottle.
2 They all are made possible by the chemistry
3 industry. They are possible not only because plants
4 are heated, cooled, and boilers operated largely
5 through natural gas, but because natural gas is often
6 the feedstock or the building block for those
7 materials.
8 One PCIC member spent over $3 million for
9 natural gas in 2008. They have estimated that
10 increasing that cost by even 3 percent could
11 effectively cost that particular site two jobs. I
12 might add that these figures are not from one of
13 Pennsylvania's larger chemical sites. Maintaining
14 the jobs we have is as important as creating new
15 jobs.
16 You may hear that utility infrastructure is
17 in dire need of repair and therefore utilities cannot
18 undergo the long and rigorous Public Utility
19 Commission base-rate-making process.
20 The types of distribution line
21 infrastructure projects that would fall under House
22 Bill 744 are not emergency projects but rather
23 capital infrastructure projects. Capital projects
24 are identified well in advance of when they should
25 require emergency or immediate attention and 127
1 therefore should be part of the normal capital
2 budgeting process.
3 Whatever industry you have, the chemical
4 industry, the construction industry, the medical
5 industry, all have capital infrastructure projects
6 for which they undertake a capital project planning
7 and budgeting process. The utility industry should
8 not be any different when it comes to capital
9 projects.
10 You may hear that utility distribution
11 system improvement charge capability is necessary to
12 handle the flood of stimulus money that's hopefully
13 headed to Pennsylvania and put thousands of people to
14 work.
15 PCIC is not opposed to infrastructure
16 projects. They do indeed provide many related
17 spin-off benefits. However, the capital
18 infrastructure projects should be planned well in
19 advance to ensure they are being undertaken with the
20 correct economics for current as well as future
21 needs. They should not be undertaken simply because
22 someone else's free money is available.
23 You may hear that utilities are frustrated
24 by the time it takes to undergo a base-rate case at
25 the PUC. That may be true. And PCIC members are 128
1 very sensitive to that concern, given the many
2 different regulatory bodies from which they must
3 receive approval for projects regardless of the
4 number of retrained or new jobs a project might
5 create.
6 If the PUC base-rate-making process is too
7 slow, perhaps that is where the Committee should
8 focus its efforts. Make a study of the PUC
9 base-rate-making procedure to determine if there are
10 opportunities to make changes, to streamline the
11 process and shorten the proceeding, while keeping
12 consumer safeguards in place.
13 PCIC is not opposed to utilities making
14 infrastructure improvements, but we oppose the
15 process of automatically assessing surcharges against
16 customers for capital improvements outside the
17 base-rate process.
18 Thank you. And if you have any questions,
19 I'm happy to answer them.
20 MAJORITY CHAIRMAN PRESTON: Thank you.
21 COUNSEL POLACEK: Good morning, Chairman
22 Preston, Representative Godshall, and members of the
23 House Consumer Affairs Committee.
24 My name is Pam Polacek and I am counsel to
25 the Industrial Energy Consumers of Pennsylvania, 129
1 which is also known as IECPA.
2 Mr. Peter Tarapchak, who is the chair of the
3 Natural Gas Committee for IECPA, was originally
4 scheduled to testify. Unfortunately, his duties at
5 the Carpenter Technology Plant had to take precedence
6 today. He and the other IECPA members have asked me
7 to convey the organization's view on House Bill 744,
8 which IECPA opposes.
9 Our prepared testimony is available to the
10 Committee for you to read and review so I'll depart
11 from that a little bit. I am going to address both
12 the DSIC, the distribution system improvement charge,
13 and also the ownership and maintenance of the lines.
14 IECPA agrees with much of what Mr. Popowsky
15 has said, what Ms. Witmer has said previously about
16 the need for a DSIC. But we also agree that there is
17 a need for reliability with other people who have
18 spoken today.
19 The question we have is whether the
20 improvements that have been discussed today should
21 have been done already all along as part of the duty
22 to provide safe, adequate, and reliable service or
23 whether that should just be part of the ongoing duty
24 and obviously the process to review once those
25 projects are undertaken. 130
1 We appreciate the PUC's attempt to commit in
2 advance in its presentation to some of the content of
3 the regulations that it would seek to use to review
4 distribution system improvement charge changes.
5 But I think, as we all know, despite their
6 best intentions, it's not certain that that will be
7 the content of the final rule-making. In addition,
8 this is the first time today that I've had a chance
9 to look at whether the processes and procedures that
10 they anticipate using are going to fully and
11 adequately address my clients' needs in terms of
12 having consumer review of these projects and rate
13 changes.
14 But if these are important enough provisions
15 and safeguards to give you the comfort to pass DSIC
16 legislation, then from our perspective, they're
17 probably important enough to include in the statute.
18 And we would urge you to consider that if you're
19 going to go forward.
20 Now, Mr. Love previously discussed that
21 there is an annual or a quarterly adjustment
22 mechanism that applies to larger utilities when they
23 adjust those commodity rates, the purchase gas cost
24 rates.
25 That process is not entirely consistent with 131
1 what at least I was able to review in the PUC's
2 presentation about how they intend to review these
3 types of filings.
4 And just to explain that, that is a process
5 under Section 1307, Subsection F, of the Public
6 Utility Code. That process is approximately a
7 seven-month litigation that the parties go through
8 every year.
9 The parties have extensive information about
10 both the planned projects that are going to be done
11 or the planned -- in that case, the planned cost or
12 the projected cost. They get to look at the costs
13 that were incurred last year. That goes through the
14 Administrative Law Judge Office and goes to a PUC
15 order.
16 I'm not entirely sure that that's the
17 process that, again, the Commission contemplated in
18 its presentation in terms of review of the DSIC
19 proposals.
20 Now, you've heard a lot, I think, about the
21 cost of a rate case and how it is an expense. But I
22 thought maybe it would be important to understand the
23 value of a rate case to a customer and especially to
24 some of the larger customers.
25 In the rate case, we get to examine all of 132
1 the costs of the utility, all of the plant. But
2 there's another aspect of that rate case, too. And
3 that's when we get to look at those costs in that
4 plant and we get to allocate it to the customer
5 classes in that cost-of-service study and we get to
6 try and move rates closer to cost of services.
7 For some of the utilities that have been out
8 and have not had a rate case for a long time, it's
9 our belief -- and we don't have the cost information
10 to prove this, but it's our belief that the
11 industrial and larger commercial rates may be set
12 very much in excess of costs.
13 And so the rate case is an opportunity to
14 try to move those rates closer to cost and to
15 eliminate the inter-cost subsidization.
16 Also, I also note that with some of the
17 plans that people already have in terms of
18 improvements in projects they're going to do, again,
19 that's something that can be picked up in the
20 rate-case process.
21 If it is a project that they can show is
22 going to be done, will be used and useful in the
23 future test year, it goes into their rates. It goes
24 into their utility plant. The depreciation goes into
25 that revenue requirement process that Mr. Trego 133
1 discussed earlier.
2 In terms of why the DSIC may be especially
3 unfair to larger customers -- and I think Ms. Witmer
4 referenced this earlier. A lot of times larger
5 customers actually do pay a portion or all of the
6 costs to do the service extension to serve them.
7 So they paid for their original service
8 extension and essentially the DSIC, again, is trying
9 to get them in asking them to pay for improvements in
10 other areas of the system that may not benefit them.
11 Now, you may say, well, that would happen in
12 the rate case? Well, in the rate case, we'd have the
13 opportunity to say, no, that improvement is primarily
14 for residential districts. It's primarily for this
15 type of customer. Therefore, it should not be placed
16 into the larger customers' rates.
17 And finally, to touch just briefly on the
18 section of House Bill 744 related to the maintenance
19 and ownership of the lines. As we explained in the
20 prepared testimony, there are situations where
21 industrial customers, larger commercial customers,
22 currently own and maintain a portion of that line
23 between the gas main and the meter inlet.
24 Essentially, the utility and the customer
25 agree on a service connection point where that 134
1 responsibility changes hands. We recognize, though,
2 obviously, that this is an issue that is important to
3 residential customers. It is a benefit to
4 residential customers. We've already started the
5 process of trying to work with the Office of Consumer
6 Advocate to develop mandatory language on that issue.
7 Again, thank you for the opportunity to
8 provide this testimony today. I'm available to
9 answer any questions.
10 MAJORITY CHAIRMAN PRESTON: Representative
11 Solobay.
12 REPRESENTATIVE SOLOBAY: Thank you,
13 Mr. Chairman.
14 The industrial customers, do they have the
15 opportunity because of the volume of gas they use to
16 negotiate separately with their provider as far as
17 what their costs may be?
18 COUNSEL POLACEK: Normally -- first of all,
19 we'll take the commodity portion. And obviously, a
20 lot of the large industrial customers are
21 transportation customers. They purchase that from a
22 competitive supplier and have been doing that for
23 years.
24 On the transportation rate side, yes, some
25 of those rates are negotiated. But the tariffs for 135
1 the utilities also contain a maximum rate, which
2 essentially is the ceiling.
3 So again, the rate-making process is still
4 important in terms of setting that maximum rate.
5 PRESIDENT WITMER: And I'd like to add that
6 at least within the -- and this is true, I think, of
7 many different industries but also in the chemical
8 industry.
9 You have varying class sizes of members, so
10 not everyone would be taking natural gas to the
11 volume where they would be able to negotiate a price.
12 It would be in a commercial class or not necessarily
13 an industrial class.
14 REPRESENTATIVE SOLOBAY: But in most cases
15 with that ability to negotiate and/or even develop
16 maybe long-term contracting, doesn't that normally
17 kind of help in your overall cost or your fixed cost
18 of that utility or what you would normally be drawing
19 down and using it? It would be a benefit more so
20 than what, you know, residential customers or smaller
21 users would be able to benefit by.
22 COUNSEL POLACEK: Well, certainly, I mean,
23 if a contract can be negotiated on a long-term basis
24 and it is at the right price, that is a benefit to
25 industrial customers. 136
1 However, most of the contracts that I have
2 reviewed would then place this DSIC surcharge on top
3 of that cost. So it would not be -- you would not be
4 entitled to your contract cost. A surcharge such as
5 this in many of those contracts would flow through
6 and apply to the customer.
7 REPRESENTATIVE SOLOBAY: Thank you.
8 COUNSEL POLACEK: Sure.
9 REPRESENTATIVE SOLOBAY: Thank you,
10 Mr. Chairman.
11 MAJORITY CHAIRMAN PRESTON: I want to say to
12 you, as we just did with the rate mitigation and the
13 public hearings, as we've been through this before,
14 I'm encouraging you if you have thoughts or ideas and
15 want to be able to try to put them in writing, that
16 you would get with Representative Solobay along with
17 Gail Davis, the Executive Director. He has been
18 sitting down and meeting with different individuals
19 who have different interests to be able to see, as
20 you already heard with Mr. Popowsky in these things.
21 I guess coming from -- you know, I'm a
22 resident from a small town near Pittsburgh. And you
23 sit down and figure 40, 45 years ago, and I know a
24 lot of residents may not be able to hear that or
25 those people who may be listening or watching this 137
1 later on PCN, basically the gas industry subsidized
2 their residents to where they had some of the lowest
3 gas prices in the world.
4 In the United States, we live very well.
5 And when those steel mills closed, it changed an
6 awful lot of things. I'm not saying that cost is
7 being passed on. But when you still have almost the
8 same footprint, maybe the population may not be gone,
9 but in some sense, consumption has gone up.
10 It's a very tough issue to be able to handle
11 when you have infrastructure, whether some of the
12 companies bought a company and now it's theirs. You
13 know, maybe we can point a little finger sometimes.
14 But then you have other companies in the
15 last 10 or 20 years that have been bought that have
16 been in business for 40, 50, or 60 years that now
17 somebody else has bought up and picked up their
18 infrastructure.
19 So when things were going great, nobody
20 fixes anything unless it breaks. And now they're
21 looking at the cost as far as capital programs and
22 also have to answer to certain stockholders.
23 I think it is something that we have to be
24 responsible and look at. I'm not saying it answers
25 all things. But as you already heard me say, people 138
1 need to be more accountable about what we're doing.
2 The new Chairman of the Public Utility
3 Commission, when he and I and our staffs have met --
4 and we met with each individual Commissioner at least
5 an hour to an hour and a half for each Commissioner
6 separately with their appropriate staff.
7 I remember what we went through, Chairman
8 Godshall, a couple of years ago of just trying to let
9 the industry submit electronically. Because until
10 people see that you almost need a push-cart to bring
11 in all the paperwork that was necessary and then the
12 time it took just to copy it just to send it to --
13 excuse me for saying it -- the attorneys, to get it
14 to them, and how many copies were needed to be made.
15 It is under review. And really we have to
16 get to the modern day. I'm not defending the issue
17 of Representative Solobay's bill. I'm just saying
18 the process itself. I think it's starting to go
19 under more scrutiny in the last 18 months and
20 probably in the next 12 to 15 months in dealing with
21 the PUC.
22 And I think Commissioner Cawley and some of
23 the other ones, the Commissioners, are really looking
24 at what do they need to do to update some things.
25 Should everything still be under there or should it 139
1 not be so they can concentrate on what they're going
2 to be doing best?
3 I just wanted to be able to say that if you
4 weren't aware, because some of the people here -- and
5 you've heard us for the last four months where we're
6 going and forcing them to be able to say that. So
7 we're getting there.
8 PRESIDENT WITMER: Chairman Preston, I
9 appreciate that. And I think that's a long overdue
10 process. Thank you for pushing them and
11 Representative Godshall pushing them in that
12 direction.
13 I would like to just comment. I don't think
14 any of us here are saying that utilities don't have
15 infrastructure needs. I think what we are saying is
16 that they have, as any private entity does, the
17 responsibility to their stockholders and to their
18 customers to maintain their system, regardless of
19 what kind of a system or kind of a business you're
20 in.
21 And it's that process that they should have
22 been doing perhaps more aggressively all along. And
23 we certainly applaud Columbia for coming in with this
24 very aggressive proposal. But it had been 12 years
25 prior to that before they came in for a base-rate 140
1 case.
2 MAJORITY CHAIRMAN PRESTON: And that's one
3 of the ones worth looking at. And I'm happy to say I
4 wasn't here 12 years ago with the Committee.
5 And the issue -- and the word really is
6 accountability. And I agree with that.
7 PRESIDENT WITMER: Right.
8 MAJORITY CHAIRMAN PRESTON: I want to be
9 able to commend you for coming forth. And, you know,
10 I always have an open-door policy. And I encourage
11 you if you have written thoughts in dealing with
12 those things, don't wait until the last minute.
13 That's why we're addressing all of these issues now
14 because we do anticipate having a vote, as I said
15 earlier in the week, in the next three and a half to
16 five or six weeks on these issues.
17 Let's get to work on these things.
18 PRESIDENT WITMER: I'd be happy to.
19 MAJORITY CHAIRMAN PRESTON: We've gone all
20 the way through and I'm making sure that everybody,
21 to the best of my ability, is represented to be able
22 to offer their opinions. I've never had a public
23 hearing where we did not have those people who were
24 for or against, because that's the way you have real
25 competition for the consumer. 141
1 PRESIDENT WITMER: Absolutely.
2 MAJORITY CHAIRMAN PRESTON: Thank you.
3 PRESIDENT WITMER: Thank you.
4 COUNSEL POLACEK: Thank you.
5 MAJORITY CHAIRMAN PRESTON: We have Philip
6 Riley, Jr., who is President of the Utility Service
7 Partners, Incorporated, and John T. Glaneman, Manager
8 of Retail Network Operations for Dominion Products
9 and Services.
10 Please come forward. It's good to see you,
11 gentlemen. It's been a long time since I've seen you
12 yesterday. When you're comfortable, pull the
13 microphone a little closer to you and you can begin
14 as you so choose.
15 PRESIDENT RILEY: Thank you,
16 Mr. Chairman.
17 Good morning. I have submitted a copy of my
18 testimony for the record. I thank you for giving me
19 the opportunity to testify about the negative impact
20 of Pennsylvania House Bill 744 and how it impacts on
21 my company, my employees, and the 40 plumbing
22 contractors that we engage.
23 My company, Utility Service Partners, sells
24 warranties for water, sewer, gas, and other service
25 lines to Pennsylvania homeowners. If a warranted 142
1 service line breaks or leaks, the homeowner calls our
2 800 number and we dispatch a contractor to fix the
3 line at no additional cost to the homeowner.
4 In Western Pennsylvania, homeowners own the
5 natural gas service line that serves their home.
6 This is true in Eastern Ohio and West Virginia as
7 well. House Bill 744 would transfer the ownership of
8 those natural gas service lines to the local gas
9 utility.
10 If this legislation passes, then natural gas
11 consumers in Pennsylvania, already struggling with
12 the weak economy, unemployment, potential new taxes
13 to offset increasing state budget deficits, and
14 increasing energy costs will be saddled with
15 automatic increases to their gas bill, increases that
16 will not be reviewed or approved by the Pennsylvania
17 Public Service Commission, to pay for reliability and
18 safety projects that the gas utility should already
19 be undertaking as a matter of course.
20 In addition, this legislation will make
21 consumer gas service lines less safe, deprive gas
22 customers in Western Pennsylvania of their property
23 rights, increase their gas bill to pay for the repair
24 and maintenance of all consumer gas lines, and deny
25 them the choice to acquire an already available 143
1 inexpensive warranty for their gas line.
2 Proponents of House Bill 744 make two
3 arguments. The first is that the homeowner's safety
4 would somehow improve as a result of transferring
5 ownership of the homeowner's gas line from the
6 homeowner to the gas utility. Proponents of the
7 legislation also argue that homeowners would avoid
8 paying for repairing a gas leak.
9 Neither of these arguments necessarily make
10 sense. First, there is absolutely no evidence
11 consumer-owned gas service lines are a greater safety
12 risk than utility-owned gas lines.
13 In fact, House Bill 744 would increase
14 safety risks. Current Federal pipeline regulations
15 require gas utilities to maintain distribution
16 systems that are safe and reliable.
17 Those regulations require the gas company to
18 periodically check customer-owned service lines for
19 leaks and to supervise and inspect repairs or
20 installations of customer-owned gas service lines.
21 Transferring ownership of those gas service lines
22 from the homeowner to the gas company would not
23 affect those requirements at all.
24 Under current regulations, only
25 DOT-certified personnel are allowed to repair or 144
1 replace gas service lines. House Bill 744 would
2 result in gas company employees doing work that is
3 now done by independent DOT-certified plumbers and
4 will eliminate an important safety check.
5 Under current practice, after an independent
6 DOT-certified plumber has completed work on a
7 customer-owned gas service line, the gas company must
8 inspect the work before turning the gas back on.
9 If House Bill 744 becomes law, then the
10 independent plumber will be out of the picture and an
11 employee for the company that has to pay the cost of
12 the repair will also inspect his own work. An
13 important check and balance would be eliminated.
14 This is hardly a safety enhancement.
15 With respect to eliminating the repair bill
16 for homeowners to fix their gas service line,
17 consumers who own their gas service lines have that
18 option right now.
19 In the territories served by Columbia Gas,
20 Equitable Gas, Dominion Peoples, and T.W. Philips,
21 there are competing utility service line warranty
22 providers, including my company, that provide gas
23 service line warranties for a low monthly charge.
24 Typically, the people who purchase service line
25 warranties are people who have older homes and older 145
1 gas service lines.
2 Homeowners with new service lines, or even
3 older plastic lines, generally have no need for the
4 gas line warranties because there's little chance of
5 their service line developing a leak.
6 If House Bill 744 becomes law, then the
7 option to purchase low-cost protection for older
8 lines will be eliminated and homeowners with newer
9 plastic lines will be forced to subsidize homeowners
10 with older service lines.
11 In addition, if this legislation is adopted,
12 many independent plumbing companies in Western
13 Pennsylvania will be forced to lay off employees or
14 file for bankruptcy.
15 It is hard to really believe that
16 eliminating an existing competitive business, driving
17 independent DOT-certified plumbers out of business,
18 and relying instead on monopolies will actually
19 decrease gas service line costs.
20 An illustration of that, the gentleman from
21 Columbia Gas this morning reported that the average
22 cost -- I'm assuming that they're saying for
23 replacing a gas consumer line -- was $2,200. The
24 average cost for that repair in our company is less
25 than half that cost. 146
1 The arguments I am making are not
2 theoretical. You have only to look at Ohio where
3 last year ownership of gas service lines was
4 transferred from homeowners to the local gas utility
5 company.
6 Here's what's happening in Ohio today as a
7 result. Submitted with my testimony are two letters
8 from plumbing contractors that my company used in
9 Ohio for repairing customer-owned gas service lines.
10 Both companies have laid off employees as a
11 direct result of the changed law in Ohio. Overall,
12 in Ohio, Utilities Technologies International, one of
13 the largest third-party providers of operator
14 qualification services reports that it expects to
15 lose 80 percent of their current operator
16 qualification business as a result of the changes.
17 That equates to approximately 4,500 plumbers
18 who were doing gas line repairs or installs in Ohio
19 but who now have either been laid off or forced into
20 different lines of work in order to continue to earn
21 a paycheck.
22 I urge you to read the letters from Perry
23 McAtee and Timothy Phipps, the owners of independent
24 plumbing companies in Ohio who have had to lay off
25 employees. If House Bill 744 becomes law, it will be 147
1 your constituents who are being laid off or put in
2 danger of losing their businesses.
3 The gas companies supporting this
4 legislation want to increase their rate base, thereby
5 increasing their profits, by taking on responsibility
6 for customer-owned gas lines.
7 I have nothing against companies wanting to
8 do things to positively affect their bottom lines.
9 I'm all for it. But it should not be done by
10 changing the law at the expense of Pennsylvania's
11 independent plumbers, companies like my company;
12 public safety; and Pennsylvania's natural gas
13 consumers.
14 The safety and consumer protection arguments
15 posed by the supporters of House Bill 744 are red
16 herrings. If House Bill 744 becomes law, jobs will
17 be lost, independent businesses will fail, public
18 safety will be diminished, and natural gas consumers
19 will pay more, not less, than they are paying today.
20 That, in my opinion, is bad public policy.
21 In addition to diminishing safety,
22 eliminating jobs, and bankrupting businesses, House
23 Bill 744 would violate both the U.S. and Pennsylvania
24 Constitutions.
25 House Bill 744 amounts to an 148
1 unconstitutional taking without just compensation and
2 an unconstitutional impairment of contractual
3 obligations.
4 Under both the Fifth Amendment to the United
5 States Constitution and Article I, Section 10, of the
6 Pennsylvania Constitution, a taking of private
7 property is unconstitutional without the payment of
8 just compensation to a property owner.
9 The Pennsylvania Constitution specifically
10 provides, "nor shall private property be taken for
11 public use, without authority of law and without just
12 compensation being first made or secured."
13 A taking occurs when a property owner is
14 deprived of the use and enjoyment of his or her
15 property rights by the government or with authority
16 from the government. House Bill 744 would permit the
17 taking of customer-owned gas service lines without
18 any compensation.
19 House Bill 744 would also violate the
20 Contracts Clause of Article I, Section 10, of the
21 United States Constitution and Article I, Section 17,
22 of the Pennsylvania Constitution.
23 The Pennsylvania Contracts Clause states
24 that "no law impairing the obligation of contracts
25 shall be passed." It is a violation of the Contracts 149
1 Clause under both the United States and Pennsylvania
2 Constitution when a change in State law substantially
3 impairs an existing contractual relationship.
4 The passage of House Bill 744 would not only
5 substantially impair but would nullify altogether the
6 existing contractual relationship between service
7 line warranty providers and homeowners who have come
8 to rely upon the quality of service provided under
9 these contracts.
10 House Bill 744 will make Pennsylvania less
11 safe, will result in Pennsylvania losing their jobs,
12 will increase costs for Pennsylvania natural gas
13 consumers, and House Bill 744 is unconstitutional.
14 House Bill 744 is bad legislation and bad public
15 policy. I urge this Committee to reject House Bill
16 744.
17 Thank you for the opportunity to testify
18 here today. I will be happy to respond to any
19 questions.
20 MAJORITY CHAIRMAN PRESTON: John.
21 MANAGER GLANEMAN: Good morning.
22 I would like to congratulate this Committee,
23 especially Chairman Preston, on the foresight of
24 saving the best for last.
25 MAJORITY CHAIRMAN PRESTON: Thank you. 150
1 MANAGER GLANEMAN: Your lunch breaks are now
2 in my hands.
3 MAJORITY CHAIRMAN PRESTON: Don't worry
4 about it. Take your time.
5 MANAGER GLANEMAN: Committee members, my
6 name is John Glaneman. I'm employed by Dominion
7 Products and Services.
8 I think it would be interesting to note that
9 the beginning of my career started with Peoples Gas
10 as a pipe fitter in Utility Workers Union Local 666
11 where I actually replaced main lines and worked on
12 service lines for several years. So of everyone
13 testifying today, I probably have the most
14 operational experience and knowledge of anyone that
15 you've heard from.
16 And I would like to start off by saying that
17 our company does not oppose the DSIC portion of House
18 Bill 744. However, we would like to raise our
19 objections and present a possible compromise to the
20 current wording of HB 744 to meet almost everyone's
21 arguments that have been made here today for or
22 against.
23 We've heard a lot about safety. Well,
24 historically speaking, anytime there's been loss of
25 property or loss of life from a natural gas cause, 151
1 that cause has come from a main line issue, not a
2 customer service line issue.
3 And almost always that main line had been in
4 some way ruptured or intervened by human causes.
5 There's no evidence to show that service lines have
6 caused any of these major problems.
7 Transfer of ownership will not make things
8 safer. In fact, I would like to potentially
9 demonstrate how transfer of ownership will make
10 things worse.
11 Currently, when lines are replaced by
12 operator-qualified plumbers, of which I am one -- I
13 am an operator-qualified individual. I'm going to
14 speak a little bit more on that later.
15 Once the line is replaced, the service line
16 is replaced, and pressure is put on that line to test
17 it, there's also inside lines, the pipes inside your
18 house that need to go through a testing procedure.
19 When the test is done by an
20 operator-qualified independent small business plumber
21 who lives right down the street from you, that person
22 by regulation puts a 3-pound test for 10 minutes on
23 your inside pipes.
24 If a leak is shown within that time frame
25 under that pressure, then that leak must be repaired 152
1 before service is restored. Natural gas pressure
2 normally to our residents is five to seven ounces --
3 ounces.
4 When a connecting test is done on a service
5 that has been renewed by the utility, they use
6 minimum testing standards. Not that it's wrong,
7 don't get me wrong here. They're not in violation of
8 any code. But what they do is they pressurize the
9 house with the operating pressure.
10 They put six -- five to seven ounces on your
11 house lines and they watch the meter for ten minutes.
12 If the half-pound dial moves, you have a leak. If it
13 does not move, you do not have a leak.
14 And 45 to 75 percent of houses -- more
15 houses will show a leak and/or possibly future leak
16 with a 3-pound test. Transferring ownership to the
17 utilities will effectively eliminate the 3-pound
18 test. Is that what you want for your house? Is that
19 what you want for your mom's house?
20 Also, the private property portion of HB 744
21 with the DSIC, they are not married items. They are
22 mutually exclusive as evidenced when the water
23 companies came for their DSIC, there was no mention
24 of a transfer of private property, the ownership of
25 the service lines. So therefore we can address these 153
1 as separate issues.
2 And the arguments have been made that, well,
3 is it fair for one person to have their line replaced
4 and not another? Or is it fair for one utility to
5 own in an area or one part of the State own and not
6 another part of the State?
7 What you have to realize is that the people
8 who have been under the policy of the utility owning
9 the service line have always paid for that.
10 Somewhere in there rate case is buried the money to
11 replace and own and maintain those service lines.
12 Additionally, here in Southwestern
13 Pennsylvania, we estimate pretty closely that 70
14 percent of the existing service lines are already
15 plastic or what we call plastic-coated steel.
16 In the '90s, the Utility Commission mandated
17 that the utilities survey the plastic-coated steel
18 lines for corrosion potential and augment those lines
19 that did not meet minimum requirements with the
20 magnesium anode.
21 So money has already been spent on these
22 lines that we're now going to spend again to replace
23 when theoretically their life is another 50 to 60
24 years? I don't see the cost savings in that.
25 And also, the people who have not owned 154
1 their lines or who do own their lines and have for
2 the life of them have seen the benefits of not paying
3 for that within the rate base and for the last 15, 16
4 years have had the opportunity if they chose -- if
5 the customer chose to purchase a low-cost warranty
6 from a reliable warranty provider such as my company
7 or Mr. Riley's company.
8 Therein lies the crux. We have -- do we let
9 the choice ride with the customers? And the argument
10 has also been made that potentially we need to make
11 everything the same. Because it's one way in the
12 eastern part of the State, we need to now make the
13 western part of the State the same.
14 Well, no one in the country owns their water
15 line. No one in the country owns their sewer lateral
16 off of the right of way. So here we have the gas
17 companies owning the service lines with no
18 demonstrable benefit to the consumer. So if 90
19 percent of the people are doing it, does that mean
20 that 90 percent of the people are right?
21 As far as the OQ goes, every time my company
22 employs one of our 60 or so businesses in
23 Southwestern Pennsylvania to replace a gas line, do
24 you know who does the work? The guy with the OQ card
25 who has actually been through the training. 155
1 Now, what does the OQ law read? Does
2 anybody know? That's a trick question. I've been
3 intimate with this, which is why I know it. The OQ
4 law reads that an OQ-certified person must be on
5 site. It doesn't say they have to do the work. It
6 means they have to be on site.
7 So what you're going to have is in the
8 replacement of these lines, you could have somebody
9 hold the card and not do the work.
10 This flows right along with Mr. Riley's
11 comments that local testing agencies that provide
12 these qualifications are seeing an 80 percent drop in
13 the territories where ownership has been already
14 transferred.
15 If you leave it the way it is, status quo,
16 an operator-qualified individual will replace those
17 lines and they will test the inside service lines at
18 3 pounds. Does that not sound safer to you?
19 We have come up with a compromise. And it's
20 basically just this: To leave the ownership
21 component out of HB 744. What would that do? It
22 would accomplish a couple of things.
23 First of all, it would allow the DSIC to
24 roll through with the Committee. It would also allow
25 us to stay in business for a number of years with the 156
1 gas lines. And it would also leave and guarantee
2 that the dollars we spend stay in the community with
3 local plumbers.
4 And to talk to that, if a may, for just a
5 second. The corporation I work for has a supplier
6 diversity goal of 11 percent. Now, that means that
7 11 percent of the money we spend we have to account
8 for as going to diverse suppliers.
9 Diverse suppliers are minority owned or
10 businesses that are located in a HUD zone, which is
11 basically a depressed area. They research those
12 firms to see if they qualify and only then are those
13 dollars allowed to be accrued toward the supplier
14 diversity program.
15 Chairman Preston, there's an individual that
16 does a lot of gas lines. His name is Anderson Gas
17 Line Services. You probably know him.
18 MAJORITY CHAIRMAN PRESTON: Yes, I do.
19 MANAGER GLANEMAN: You know, I really don't
20 want to go tell Ed Anderson to find a new line of
21 work.
22 MAJORITY CHAIRMAN PRESTON: You can bring
23 him to see me.
24 MANAGER GLANEMAN: I'm going to tell him
25 that tomorrow. 157
1 MAJORITY CHAIRMAN PRESTON: If I don't see
2 him first.
3 MANAGER GLANEMAN: Well, these are the kinds
4 of people that are going to be impacted. Our
5 neighbors are going to be impacted by this. And I
6 know Pennsylvania, being the great State that it is,
7 doesn't have a whole lot of caring about what goes on
8 in Ohio.
9 In the seven months that ownership
10 transferred in Ohio, it is worth noting that it is a
11 debacle. Services that used to cost 100 to 150
12 dollars are being charged 800 and 900 dollars for.
13 How does that make sense?
14 And while they're employing local
15 businesses, these main line contractors are bringing
16 in out-of-state workers, so that money is leaving
17 Ohio. It could potentially again leave Pennsylvania.
18 We have to be very careful.
19 And transferring ownership, if I may
20 summarize here -- I know I'm going long. I'm sorry.
21 MAJORITY CHAIRMAN PRESTON: That's okay.
22 MANAGER GLANEMAN: Transferring ownership
23 would adversely affect local small businesses, your
24 neighbors, the plumbers next door.
25 If you go with the compromise to eliminate 158
1 Section 3 of the bill referencing the service lines
2 and instead at the end of Section 1 add the provision
3 under customer service line replacement that would
4 allow the utilities only to replace the gas service
5 lines during the course of the main line replacement
6 that have failed, that language would accomplish many
7 goals. It would allow us to stay in business and
8 offer our low-cost warranties. It would protect
9 customers' property rights under the Constitution of
10 the United States and the Commonwealth of
11 Pennsylvania. And it would continue revenue flowing
12 into local businesses from our coffers.
13 I know I covered a lot. And I really
14 appreciate this opportunity, Chairman Preston, and
15 especially Representative Solobay, who he and I have
16 some history together. So thank you very much. I
17 would gladly answer any questions that the Committee
18 may have or meet with anyone after the adjournment,
19 if you so desire.
20 MAJORITY CHAIRMAN PRESTON: Representative
21 Solobay.
22 REPRESENTATIVE SOLOBAY: Thank you,
23 Mr. Chairman.
24 And if I depart quickly, I need to open up
25 the House at 12:30, so I may have to run out and not 159
1 be able to be here through the whole course of the
2 questions. I don't want anyone thinking I was
3 bailing out for any particular reason.
4 A question I do have, the cost of the
5 monthly insurance, what cost is that right now per
6 customer?
7 PRESIDENT RILEY: It ranges. But the
8 average cost is about $3.75.
9 REPRESENTATIVE SOLOBAY: With the DSIC bill,
10 the planned increase on a customer, because they're
11 both going to be paying the monthly bill regardless,
12 the increased cost of the DSIC with this bill that
13 will cover that line replacement issue is less than a
14 dollar.
15 So in that case then in our bill it is about
16 a dollar compared to your $3.75, which is
17 significantly higher, almost a 400 percent higher
18 cost per month for that customer for basically the
19 same result.
20 PRESIDENT RILEY: It is for the customer
21 that chooses to have our warranty. For those
22 customers that don't want or need our warranty, it's
23 an infinite amount of increase for them under the
24 DSIC because they're not paying anything today.
25 REPRESENTATIVE SOLOBAY: Although with the 160
1 replacement of the line under the DSIC bill, whether
2 it's $1,200, as you said your charges are, or $2,500
3 that we've heard from other folks and other
4 suppliers, a dollar a month is going to take a long
5 time to get to that $1,200 and/or the $2,500 figure.
6 So I still think it's a bargain or a deal
7 for the consumer. Ultimately we're trying to make
8 sure the consumer is protected. I'm just trying to
9 make a comparison.
10 PRESIDENT RILEY: I understand and
11 appreciate that. But if you're a consumer that has a
12 plastic line, which is probably in the range of 60 to
13 70 percent of the population, you don't need the
14 warranty. You don't need to pay a dollar a month.
15 You don't need to pay our $3.75 a month.
16 So for those folks, it's not a bargain.
17 REPRESENTATIVE SOLOBAY: Those aren't the
18 numbers we heard this morning from some of the other
19 testifiers as far as the number of lines that are
20 already plastic.
21 We'll get all that information and try to
22 bring it together.
23 PRESIDENT RILEY: Sure.
24 REPRESENTATIVE SOLOBAY: I guess the last
25 issue is on the constitutionality of the line issue, 161
1 the first portion of the constitutionality. The
2 second part I'm going to have to research myself as
3 far as the contractual agreements.
4 Again, this had been done, I think,
5 initially the rest of the State was 1997 and there
6 was no constitutionality issues that I was aware of
7 that have been brought up or any case history of any
8 constitutionality.
9 I'm not quite sure if you've been able to
10 see that somewhere or just a comment that you felt
11 that it was unconstitutional.
12 PRESIDENT RILEY: I don't know that it's
13 been challenged, but we'll find out.
14 REPRESENTATIVE SOLOBAY: Okay.
15 PRESIDENT RILEY: We're challenging in Ohio.
16 And if it passes in Pennsylvania, we'll challenge it
17 in Pennsylvania.
18 REPRESENTATIVE SOLOBAY: Thank you very
19 much, gentlemen.
20 Thank you, Mr. Chairman.
21 MAJORITY CHAIRMAN PRESTON: Thank you.
22 Just to help you gentlemen out, let's talk
23 about Western Pennsylvania because this has been a
24 very interesting Committee.
25 PRESIDENT RILEY: Okay. 162
1 MAJORITY CHAIRMAN PRESTON: On the majority
2 side from Western Pennsylvania -- or let's just say
3 Southwestern Pennsylvania are myself from Allegheny
4 County, Readshaw from Allegheny County, Gergely from
5 Allegheny County, Barbin from Cambria County, Haluska
6 from Cambria County, Kortz from Allegheny County,
7 Kotik from Allegheny County, Matzie from Beaver and
8 Allegheny Counties, Petrarca from Westmoreland and
9 Armstrong Counties, Sainato from Beaver and Lawrence
10 Counties, Solobay from Washington County, and White
11 from Washington County.
12 So within your purview or even driving
13 distance -- as most people here know I talk about.
14 And I don't think any member on this Committee has
15 ever heard me say, I need you to vote this way.
16 I'm encouraging you, just like I've
17 encouraged the industry. They all can tell you that.
18 Every member will tell you they've never heard me ask
19 a particular way one way or the other on an
20 amendment.
21 That is where your work is just from the
22 majority side. The other side doesn't have that
23 problem.
24 MINORITY CHAIRMAN GODSHALL: We have no
25 problem in Southwestern Pennsylvania. 163
1 MAJORITY CHAIRMAN PRESTON: They are all,
2 except for Representative Reed from Indiana County,
3 primarily from the east.
4 So the issue that you're relative to, you
5 have ready access that you don't have to fly, you can
6 drive -- you really can't walk unless you're close to
7 Solobay. And I guess the issue relative to
8 constitutionality is why we have -- I hate to say
9 this word -- attorneys -- with all due respect, sir.
10 The other thing that I raise is, I was
11 thinking about is, I understand what you're saying
12 about from the house to the curb or some areas not
13 having a curb. But I also thought about the same
14 thing about the electric, you know, the electricity,
15 which is not mine up to my house but to the box on my
16 house. I wouldn't want that responsibility.
17 So there are comparisons sometimes that are
18 competitive one way or the another, so you need to
19 think about that then because I wouldn't want the
20 utility or the electric company saying, well, why
21 don't we just give that from the pole to the house
22 and let the owner be responsible for that because I
23 don't want my constituents to say, let's go get Joe
24 Preston. Okay?
25 PRESIDENT RILEY: Understood. 164
1 MAJORITY CHAIRMAN PRESTON: So you need to
2 balance the two. I ask you to think about that.
3 PRESIDENT RILEY: Sure.
4 MAJORITY CHAIRMAN PRESTON: But you've heard
5 me encourage people, if you have a thought and you
6 want to be able to see it in writing, no one can stop
7 you.
8 Any member can tell you that if they want to
9 prepare another amendment when we come up for the
10 vote, fine, if we can't work it out and put it in one
11 amendment which we like to try to do.
12 Okay. Any other thoughts or questions?
13 PRESIDENT RILEY: Thank you for your time.
14 MAJORITY CHAIRMAN PRESTON: There being
15 none, thank you very much for coming. This has been
16 very informative for us as well as I think for the
17 general public.
18 We are adjourned.
19 (The hearing concluded at 12:20 p.m.)
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25 165
1 I hereby certify that the proceedings and
2 evidence are contained fully and accurately in the
3 notes taken by me on the within proceedings and that
4 this is a correct transcript of the same.
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8 Jean M. Davis 9 Notary Public
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