PGW audit recommends using Pa. suppliers to cut costs
Philadelphia Gas Works could save as much as $9.4 million a year, mostly by switching more of its natural gas supplies from the Gulf Coast to less expensive Pennsylvania producers, according to a state audit released Thursday.
Philadelphia Gas Works could save as much as $9.4 million a year, mostly by switching more of its natural gas supplies from the Gulf Coast to less expensive Pennsylvania producers, according to a state audit released Thursday.
The audit, commissioned by the Pennsylvania Public Utility Commission, said PGW could save $6 million to $7 million a year by buying 60 percent of its gas from the Marcellus Shale region, up from 33 percent last year. Before 2013, the PGW secured all of its supply from Louisiana and Texas.
The audit also said the city-owned utility could save $500,000 a year by streamlining its corporate governance structure to combine the Philadelphia Gas Commission and the Philadelphia Facilities Management Corp. (PFMC) into a single board of directors.
PGW's oversight bodies and their overlapping responsibilities have long been a source of frustration and rivalry between City Council, the mayor, and the state utility commission.
The 572-page audit made 76 recommendations. PGW, in its response, accepted all but the recommendation that it reorganize its governance structure, which is determined by City Council, not the utility.
"I understand that PGW is not in a position to accept this recommendation," said Commissioner Robert F. Powelson. "However, this is an important area that needs action and I will continue to urge Philadelphia's mayor and City Council to address the inefficiencies and confusion of having two governing boards for PGW."
The PUC on Thursday voted 5-0 to accept the audit, which was conducted by Schumaker & Co., a Michigan management consulting firm with offices in Newtown.
Some of the recommendations already have been implemented, and PGW pledged to complete the vast majority of other items by December 2016.
PGW spokesman Barry O'Sullivan called the audit "a great source of feedback."
"The audit acknowledges our operational efficiencies and it offers expert guidance for additional improvements," O'Sullivan said in an email. "It's also another indication - along with our recent bond rating increases - of the great strides we're making."
Many of the recommendations concern back-office functions, such as procurement and materials management. The auditors suggested improvements to an inventory auditing procedure would generate $1.1 million in one-time savings by reducing spare-part inventories, with $220,000 in ongoing savings.
By far the largest savings could be generated by switching more of the utility's gas supply from Gulf Coast suppliers to nearby Marcellus Shale producers. Since 2009, Pennsylvania has become the nation's second-largest gas producer because of the growth of hydraulic fracturing of shale formations.
PGW's shift of one-third of its supply to Marcellus gas already has generated $7.9 million in savings, the auditors said. While the utility should maintain a diverse gas supply, the auditors said PGW could generate an additional $7 million in savings by buying 60 percent of its gas from producers in the region.
The audit's thorniest recommendation is the idea of consolidating PGW's governance structure, which numerous experts have recommended revamping.
PGW's corporate governance was set forth in the city's 1972 Management Agreement Act that created PFMC, a nonprofit corporation under mayoral control that functions as PGW's board of directors. The ordinance also created the Philadelphia Gas Commission, which performed regulatory functions until the PUC took over rate-making and customer-service oversight in 2000. It now exercises control by approving PGW's budget.
The audit report recommended the combination of the two entities into a single board, which could generate an estimated annual savings of about $500,000 of the gas commission's current $800,000 budget.
Jim Kenney, the Democratic mayoral candidate in the Nov. 3 election, said in a recent interview that revamping PGW's governance "might be on my agenda."
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