High social costs likely to be a factor in sale of PGW

Every gas and electric utility in the region assists its neediest customers, but the burden falls heaviest by far on Philadelphia Gas Works.

PGW customers on average paid $200.58 in 2010 to subsidize their neighbors, three times as much as the next closest gas utility in Pennsylvania, according to the Public Utility Commission.

PGW customers paid eight times as much for social programs as suburban gas customers served by Peco Energy Co., and 12 times more than gas utility customers in New Jersey.

PGW's low-income subsidy, along with the cost of bad debts and other discount programs, amounts to about 20 percent of a PGW customer's monthly bill. In a 2005 filing with the PUC, the utility warned that social-program costs could escalate to a "breaking point" where customers who are paying the subsidies "can no longer afford the high rates and the entire service is negatively affected."

PGW's high social costs are likely to command attention in the coming months as the city engages a financial adviser to explore selling the nation's largest municipal gas utility to a private buyer.

The social costs, which are the reason PGW's rates are the highest in the state, may be a hindrance to attracting a buyer since the costs hinder collections, lower revenue, and raise bad-debt expenses. Low-income advocates say they are concerned that the poor would suffer if a private owner was not committed to supporting the programs.

"It's almost self-defeating for utilities to charge those customers the standard rate because they just can't pay it," said Philip A. Bertocci, a Community Legal Services lawyer who acts as the city's consumer advocate.

PGW officials say there is little they can do about the social costs because they are required by the state and approved by the PUC.

They say the high costs are a function of the city's demographics: A third of PGW's 500,000 customers are classified as low-income, far more than any other Pennsylvania utility.

While not all low-income customers get subsidies, about 80,000 are enrolled in PGW's Customer Responsibility Program (CRP), which allows them to pay a percentage of income rather than the full bill. PGW's other customers pick up the rest of the tab.

Apprise Inc., which evaluated PGW's program in 2010, said the average CRP customer got a credit of $1,167 in 2008. In 2010, PGW customers picked up $96.2 million in costs.

Apprise said there may be ways to reduce costs by putting a ceiling on subsidies and providing more incentives for participants to conserve gas.

"There is a question as to whether PGW's program is more generous than it needs to be or more generous than what is sustainable for other ratepayers to continue to subsidize," Apprise said.

Only in recent decades have utilities formally taken on a social-service function. PGW's program was started in 1989, on the theory that it was cheaper to give the discounts than it was to go through an endless cycle of shut-offs, collection, bad-debt write-offs, and litigation.

"The benefit of these programs is that it's better to collect something from these customers than nothing," said Irwin A. "Sonny" Popowsky, Pennsylvania's consumer advocate.

In the 1990s, when state legislatures in the region enacted laws to allow competitive suppliers to enter utility markets, lawmakers formally required utilities to provide "universal service" programs for low-income customers. The rules allow distribution companies to recover the costs of the programs from all utility customers, regardless of who supplies their energy.

Pennsylvania's approach requires utilities to devise and manage the low-income programs and to recover the costs from their own customers. That created a scenario in which utilities with large numbers of low-income customers bear a bigger cost than utilities that serve affluent populations.

According to the PUC, universal-service programs cost Pennsylvania utility customers $417 million in 2010. Almost half that amount - $205 million - was paid by customers of PGW and Peco Energy, which supplies electricity in Philadelphia.

New Jersey, in establishing its universal-service programs, followed a different route. It required the state Department of Community Affairs to administer the low-income energy assistance as part of its package of welfare programs. The costs are recovered from a uniform charge on the rates of all utility customers across the state, as part of the "societal benefits charge."

"Perhaps they thought it was a more fair system to spread the financial costs across the state's entire population," said J. Gregory Reinert, spokesman for the New Jersey Board of Public Utilities.

Like PGW's program, New Jersey's plan limits utility payments to a percentage of income - no more than 6 percent of income for households that do not exceed 175 percent of the federal poverty line. The cutoff would be $40,337 for a family of four. The utility credit is capped at $1,800 a year, so customers have an incentive not to exceed the limit.

New Jersey's program costs have escalated dramatically since it went into effect in 2003, when officials estimated it would cost $30 million, or about $3 a year for customers.

New Jersey's program is expected to cost $240 million this year, according to the BPU, costing the average electric customer $20, and gas customers $16 a year.

In Pennsylvania, adoption of a statewide funding model would require legislative approval, considered unlikely. Apprise, in its assessment of PGW's program, acknowledged that spreading the costs across the commonwealth "may not be politically feasible in Pennsylvania."

PGW's Customer Responsibility Program limits utility costs to 8 percent of income for the poorest customers. The limit increases to 10 percent of income for households that do not exceed 150 percent of poverty levels (the poverty level is $23,040 for a family of four). The program requires a minimum payment of $25 a month.

But PGW's plan has no cap on the credit customers can receive, which some critics say gives participants no incentive to conserve gas. The Economy League study in 2008 said that CRP customers used 47 percent more gas on average than customers paying the full rate.

But the Apprise study said there is no evidence that customers consume more natural gas after they are accepted into the program. Rather, the poorest customers generally live in older houses with inefficient heating systems.

"It's not that the customers in the program use more gas, but they tend to live in poorly insulated houses," said Popowsky, the consumer advocate.

PGW is trying to address the issue by spending $37 million over five years on weatherization programs targeted to low-income customers who consume the most gas. By reducing their energy use, their subsidies should decline, directly benefiting a broad range of PGW customers who now pay the freight.