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TESTIMONY OFTHOMAS E. KNUDSENPRESIDENT & CEOOF THEPHILADELPHIA GAS WORKSBEFORE THEHOUSE CONSUMER AFFAIRS COMMITTEEHARRISBURG, PATHURSDAY, OCTOBER 9,2003

Good morning, Representative Bunt and members of the Committee, I am TomKnudsen, President and Chief Executive Officer of the Philadelphia Gas Works (PGW). .Thank you for this opportunity to testify before this committee.PGW is the largest municipally owned gas distribution company in the country and wasfounded in 1836. PGW has over 500,000 customers, 485,000 of whom are residentialcustomers. The remainder are commercial customers and a relatively few industrialcustomers. Our service territory is restricted to the City of Philadelphia proper. Our totalrevenues are approximately 800 million of which 445 million or 55% is the commoditycost of gas. We have no ability to grow the system other than new development withinthe city limits or conversion of other forms of energy to natural gas. We face problemsand constraints that utilities in growth areas do not.The impending increase in the commodity cost of gas will more than adversely affectour customers, for many it will be a disaster. PGW has a very large population ofpayment challenged customers. Over one-third of our customers live at or below 150%of the federal poverty guidelines and approximately one-half, or 250,000 families,regularly experience difficulty in keeping bills current.The size of the increase in the commodity charge is a unique development for ourratepayers and for the company and is creating risk for them and for PGW. What isimportant to understand about PGW's customers is that the economic and demographicconditions of Philadelphia exacerbate our position. Philadelphia has over 50% of thewelfare cases in Pennsylvania. Of the 485,000 residential customers, 231,000households or only 48%, have the financial capability to faithfully pay their bills - andthey seldom ask for anything other than getting the gas service they need when theyneed it. Of the remaining 254,000 customer, or 52%, most have limited income and thusrequire some kind of annual customer assistance or intervention by PGW (e.g. LIHEAPfunding, Crisis grants, weatherization, budget payment plans, welfare programs, etc.).Such intervention assures at least some payment to defray the cost of service. Thislevel of intervention is proportionately many times that required of other utilities.2

To further place this increase in gas costs in perspective, the average residential bill fora PGW customer was around 900 per family per year throughout the 1990's and aslate as FY 2001-2002. Over these years, people of limited means were generally able tocope, although it was difficult. This past year the bill rose to 1200. We know from ourdaily receipts that the low-income customers are clearly struggling, right now. Lookingforward, we are projecting the bill to increase to 1400 to 1500 in fiscal year 2004.Already challenged customers simply cannot absorb a 50-60% increase over just twoyears. Nor, of course, can we afford the social cost of their going without natural gas forheating and cooking. I ask the committee to take note that a 1400 average annual billrepresents 20% of the 6,800 average anrwal income of our customers on PGW's CAPor Customer Assistance Program and 8.5% of an approximate average senior citizenincome of 16,000. Please also note that the last step before home abandonment is thediscontinuance of heating service.The first line of defense for low-income customers in our state is the LIHEAPICrisisgrants. But the benefits are limited -. both for the customer and the companies. First,LIHEAPICrisis grant levels are fixed by the U.S. Congress and Pennsylvania makes nosupplementary contribution to these programs. As a result, LIHEAPICrisis grants areonly available to 25 - 30% of our payment challenged customers who can apply beforemoney runs out. Once the funds are disbursed, the program is over for the year.Without an increase in the amount of dollars available, the burden of the increase in gascosts falls on the utilities. For the last15 or so years when PGW's bills averaged 900per year and we garnered 300 to 400 dollars per year from LIHEAPICrisis, thecustomer had a responsibility to pay the 500 difference. In the present circumstance,as bills are projected to move toward 1400 this coming year and LIHEAPICrisissupport is not slated to increase beyond current levels, the obligation on the customerwill have doubled. The out of pocket requirement will be 1000 to 1200 per family. Asnoted, we know that people are already struggling this year. This coming winter is apotential disaster for customers and company alike.

The second line of defense for low-income customers is PGW's Customer AssistanceProgram, or CAP. The beneficiaries of these programs are qualified low-incomecustomers who certify that they are only able to pay a small, set percentage of theirincomes for the service they receive. The balance of the bill is then spread among all ofthe other customers as part of their bills. This program or one like it is a standardoffering by many utilities across the country and one ordered by many state PublicUtility Commissions. The problem here is similar to that with LIHEAPICrisis. If our lowincome customers can afford to pay no more than they have historically - 300- 350 then the support level required from the paying customers will shoot up from the 600level to the 1200 level.When gas prices were under 3.50/mcf as they were for almost two decades, PGW andits customers struck an uncomfortable, but workable, equilibrium. Management couldhandle the workload, low-income people struggled with payments and our payingcustomers were tolerant of their bills. But, PGW now has among the highest rates in thestate and the CAP transfer has grown from 12 million a decade ago to a projected 50million this fiscal year. The historic paradigm of transferring cost burdens from thosewho can't pay to those who do simply is not working anymore. Our concern is that thecost of gas is outstripping the ability of many of our customers to pay for an essentialservice. The basic cost of the commodity - which has increased from 274 million in FY2001 to 450 million in FY 2004 - is ratcheting upward with absolutely no indication thatthe overall trend will reverse any time soon. As these levels continue to grow we aregoing to reach the point that middle class customers will begin struggling, as well.My comments are based on issues at PGW. But my counterparts in other gasdistribution companies in the Commonwealth are having similar experiences. Thecollections problems I am describing are more severe at PGW than at other utilities inthe state, but every gas company is feeling this increasing burden of non-payment forservice. The underlying cause of our difficulty -the unprecedented increase in gascommodity costs - is also a problem over which the gas distribution companies have noreal control. No gas company makes money from the commodity charge itself. There is4

no mark-up. This cost is a pass through to our customers. And, we all buy gas prettyefficiently.Rather, this is national problem borne of a public policy that has allowed the supply ofgas for a basic, life giving service to decline to a level that puts hundreds of thousandsof our families at risk - both physically and financially. At a time when one nationalpolicy encourages use of natural gas for generation of electricity, another severelyrestricts where drilling can occur to support the new demand. For several decades, gasprices were stable. Federal, state and local governments did not have to address theproblem of providing fuel assistance on a massive scale. Those days are over. As muchas anything, without substantial help for some of our customers from some quarter, weare facing a humanitarian crisis in Philadelphia.I want to say as candidly and as forcefully as possible: the increase in gas costs thispast year and the further increase in anticipated gas prices this winter constitutes athreat both to many of Philadelphia Gas Works more that 200,000 limited .incomecustomers and to the financial viability of PGW. It is going to take every device I canmuster to make sure PGW is capable of purchasing the necessary amount of gas forour customer's heating needs. At the top of the list of considerations is a hope.- a hopethat December is a warm one on the East Coast. With warm weather, the anticipatedspike in prices in January and February may be abated, if not averted. Unfortunately, inthe short term, a favorable weather outlook is our best scenario for mitigating thefinancial burdens that loom for our customers and our enterprise.Because this is a national problem, PGW, along with many utilities has taken its case tothe federal government. In testimony that I submitted to the Congressional Task Forcefor Affordable Natural Gas Costs in early August, my appeal was a simple one: sincetermination of service to needy customers must not be a public policy option, the U. S.Congress must materially and substantially increase the amount of funding forLIHEAPICrisis grants. As you may be aware, the lobbying effort before members ofCongress is a challenging one. Three weeks ago, proposals to increase LIHEAP and5

Crisis funding for FY 2004, starting in October 2004, from 2 billion to 3 billion werederailed. But that discussion was misdirected. We need more money THIS winter, notnext, I appeal to the Pennsylvania legislature and state government agencies at alllevels to pressure Congress to grant supplementary funding for FY 2003 for a totalamount for the program of AT LEAST 3.4 billion. We absolutely must increase the sizeof the appropriation now.There are other things that are being and can be done at the state level, as well, bothhere in the legislature and in the agencies and departments.First, all of the difficulties of the budgeting process notwithstanding, the legislature mustprovide supplementary LIHEAPICrisis grants as a long term solution. Many states havealready done so. Such funding can either be done as a block increase within the currentprogram structure, or, if the eligibility is moved from 135% to 150% of the federalpoverty level as the Energy Association of Pennsylvania is proposing in order to reachmore troubled customers, the State could fund the difference which would not becovered by federal moneys under federal law.Second, although Pennsylvania receives the second highest amount of LIHEAPICrisisfederal grant funding behind New York, we ought to be assured that the allocationformula gives us the maximum pool of money for low-income customers, as is possible.Third, the core problem is the fundamental imbalance between supply and demand. Thetestimony of Mike Love of the Energy Association addresses the issue of explorationwithin the state. Pennsylvania is blessed with real options in this regard and we ought totake advantage of those opportunities.Fourth, PGW and the Energy Association are working with the Department of PublicWelfare to both clarify and simplify regulations and procedures surrounding theLIHEAPICrisis program. Included in the discussions are such items as:

assuring that funds will be directed exclusively for payment for primary heatingonly. At present, under federal law, and as the law is applied here inPennsylvania, customers have a right to choose any utility or vendor forLIHEAPICrisis grants even though they don't provide heating fuels. Customerswho are at risk for heat in their homes should be required to designate theirsupplier of heat or heating fuel for these funds.assuring that the formulas for distribution of funds among utilities and fuelvendors and in various parts of the state is equitable. For this winter in particular,all funds expended must be for those for whom the risk to life and health is themost severe.assuring that the utilities and agencies have as simplified and as streamlined aprocess as is possible to get the maximum number of low-income peopleregistered for these programs with the fewest impediments. PGW has tens upontens of thousands of customers eligible for these programs. We would like towork with all levels of government to assure as close to "one stop shopping" as ispossible with full use of data bases and automation that are available now. It isalso imperative that sufficient resources be made available in terms of numbersof service centers and trained personnel to receive and process applications fromutility customers.Last, the Public Utility Commission is encouraging the utilities to reach out to ourcustomers at risk to notify them of the financial problems they will be facing, offer themoptions for at least partial payment of their bills, encourage conservation, encouragebudget billing and doing whatever is possible to mitigate the consequences of thisunprecedented increase in costs. The PUC recently held hearings on what the industrycould do which very effectively highlighted customer difficulties. We commend the PUCfor their efforts and interest and pledge our support and cooperation.

Just to be specific with regard to PGW, we are notifying customers, through bill insertsand public announcements in the media, of the pending gas cost increases. We areproviding them with energy saving tips that can make their homes warmer and reducethe cost of their heating bills. We are encouraging them to prepare accordingly. PGWhistorically has provided these types of notices regarding gas price movement andrecommended energy conserving actions. Second, our LIHEAPICrisis outreachcampaign will be as aggressive as ever. Our target is to enroll well over 70,000customers in these programs this year. Third, we have prepared special noticesinstructing our customers how to conserve energy. Additionally, we offer freeconservation services to qualified low-income customers. This season we will also bepartnering with a major hardware chain to offer energy conservation workshops.Last, we know that many of our customers could qualify for customer assistanceprograms but simply don't apply- for whatever reason. Presently, we are reaching out toapproximately 60,000 customers who are potentially low-income to inform them aboutPGW's customer assistance program.I would be remiss if I did not mention the consequences of this increase in gas costs oncommercial and industrial customers. Although PGW does not have many industrialcustomers, it is clear from testimony given in different forums that increased energycosts on industry in this state and across the country is having a devastating effect. Iwould just note that we are aware that many of our smaller commercial customers arefalling behind in their payments. For the information of this Committee I have attachedto my testimony the just-released report of the Hastert Special Congressional TaskForce on Affordable Natural Gas Costs wherein many of the issues that I havediscussed today are presented within a national framework. (Attachment 1)Permit me to summarize our situation with a picture, which is the last page of writtentestimony (Attachment 2). On the right axis is the average bill per year per residentialheating customer in Philadelphia over the past 10 years and projected through 2004. 1have made reference to some of these numbers already. On the left axis is our fiscal8

year-end accounts receivable balance. Two insights are important. First, gas costs hadbeen low and relatively stable for the last decade and when they peaked in 2000-2001,they adjusted downward if not totally to prior historical levels. But, in 2003-2004, there isprojected to be a material back to back increase in gas costs - the first such occurrencein many years and one that will severely exacerbate customers' inability to pay. There isno breathing space for customers to catch up. This phenomenon is raising the financialrisk to gas distribution companies. Second, this growing inability to pay is reflected inthe accounts receivable trend. Aside from a weather-related build up in PGW's serviceterritory in early 1990's that corrected itself, the fiscal year end receivable balance hasmoved from 33 million in 1998 to a projected 123 million in 2004. This translationfrom increasing bill size to days revenues in receivables is playing out in everydistribution company to varying degrees.As a city-owned gas utility, PGW has no deep financial pockets. Our only recourse is tothe ratepayer. And even if we had recourse to Philadelphia's General Fund, the burdenfalls largely on the same people. For investor-owned utilities the issue is similar: raiserates or tap the investors for the working capital and/or losses that are resulting fromthis change in gas cost structure. These increasing financial burdens for both publiclyand privately owned gas distribution companies are forcing both groups to considerservice termination as an option to protect the financial viability of the enterprise. Tofollow such a course is not appropriate on any grounds. A different answer must befound .This is a time when all efforts: federal, state and local are crucial to all of our customersbut most directly and immediately to those of low-income. We need to increaseresources and clear away all obstacles to assure access to safe and affordable gasservice to all customers but particularly to our most vulnerable population.Thank you for your attention. I would be pleased to answer any questions you mayhave.

ATTACHMENT 1Final Report from the Speaker'sTask Force For Affordable Natural GasSeptember 30, 2003NATURAL GAS: OUR CURRENT SITUATIONWhile America has abundant domestic natural gas resources, our current supply chain isnear the breaking point. Low supply levels are resulting in natural gas prices that are twoto three times above the historic average. High prices are hurting our economy, puttingadditional strain on the current economic recovery. Every economic recession sinceWorld War II has followed a period of significant increases in energy costs. Energy is thelifeblood of our economy. When energy prices go up, so do the costs of manufacturing,farming, transportation, and all of the goods and services Americans consume andprovide. Higher prices mean that paychecks buy less and families do without. Highenergy prices are an insidious tax affecting everyone. Our lowest income citizens arehurt the most. They have to make unthinkable choices - like going without necessitiessuch as food, medicine, heat and clothing.Because domestically produced natural gas is so vital to our nation's energy balance,rising prices make our nation less competitive. When prices rise, factories close. Good,high paying jobs are imported overseas. Today's high natural gas prices are doing justthat. We are losing manufacturing jobs in the chemicals, plastics, steel, automotive,glass, fertilizer, fabrication, textile, pharmaceutical, agribusiness and high techindustries. The industrial and electric sectors are huge consumers of natural gas in theU.S., and more than 40 percent.of our natural gas supply is used in the industrial sectorfor a variety of uses including space heating, steam generation, and electricitygeneration. These uses support hundreds of thousands of jobs.Chemical Manufacturing and Industrial Use:Natural gas is a critical building block for many products, including specialty chemicalslike ammonia-based fertilizers. As a direct result of sky-rocketing gas prices, ourdomestic fertilizer industry is becoming uncornpetitive with foreign producers. Since mid2000, when the natural gas shortage began, eleven ammonia plants representing 21percent of U.S, capacity have been forced to close. The remaining industry has operatedat levels approaching 50 percent of capacity. Workers have been laid off because ofplant closings. More permanent closings are inevitable if prices remain high, increasingthe dependence of the U.S. farmer and industrial consumer on foreign sources. Thedestruction of the American fertilizer industry hurts the American farmer. In the pastyear, fertilizer prices have more than doubled. This is shrinking profit margins foragricultural products, increasing the cost of food on the table and putting additionalpressure on the already endangered family farm, farm states, and the agricultural sectorof the economy.Since the 1980s, industrial use of natural gas has soared with consumption increasingby 2.5 trillion cubic feet. This is the largest demand growth area for natural gas over theperiod. Outside of chemical manufacturing, industrial uses for natural gas include theuse of needed heat and electricity through a process known as co-generation. Thisprocess enables industrial facilities to use modern equipment to produce, capture andutilize energy and heat that would otherwise be wasted. Industrial facilities through the

use of natural gas for cogeneration are increasing their overall efficiency andcompetitiveness. But high natural gas prices threaten to reverse this trend, making themless competitive and more likely to relocate abroad.Electrical Generation:Because natural gas is clean-burning, domestically available, traditionally affordable andabundant in North America, it has been a highly desirable fuel for electrical generationsince the mid-1980s. In fact, public policy has promoted increased use of natural gas forpower generation for over a decade. As a result, over 90 percent of proposed new powerplants plan to use natural gas. But current supplies and prices will likely delay or put anend to many of these planned power plants. At current prices, most of these plantswould not be competitive in a deregulated power market. This is a critical turn of events.America's power generation and transmission system is severely antiquated, due to anumber of factors, including government policy initiatives that are at odds with oneanother.Commercial Use of Natural .Gas:A wide range of commercial facilities such as supermarkets, retailers, restaurants, malls,hotels, computer data centers, health care facilities, and schools use natural gas forspace-heating, lighting, water-heating, cooling, dehumidification, and cooking. Naturalgas accounts for more than 40 percent of commercial energy consumption. This sectorconsumes about 7.7 trillion cubic feet of natural gas per year and is expected to increaseits use by 25 percent by the year 2020. However, to sustain this growth rate, affordable,domestically produced natural gas must be available at a reasonable cost.Energy is often the second largest cost for American businesses, just behind labor.Increases in energy costs, like the doubling or tripling we have seen in natural gas costs,have a severe negative impact on profitability - especially on small businesses whichemploy the majority of the U.S. workforce. High gas prices are crippling the commercialsector of the economy just when the economy is poised to grow. Continued high naturalgas and energy costs will force more businesses into bankruptcy and Americans out ofjobs.Residential Use:More that 56 million homes, or 55 percent of all U.S. households use natural gas, afigure that has accelerated in recent years. Today, over 70 percent of new homes built inthe U.S. use natural gas. American families depend on natural gas to heat and cool theirhomes, cook their food, dry their clothes and warm their water. Recent spikes in naturalgas prices are taking their toll on American families. While consumers faced bill shocklast winter when prices rose, they were not exposed to the full brunt of gas prices in theirgas and electricity bills. This winter, after adjustments are made by utility companies tomake rates reflect the present cost of natural gas, home heating and electric bills willincrease further, especially if we have a cold winter which draws down natural gasstorage. While some seek to blame the local distribution companies, their costs ofnatural gas are passed on to the consumer with no added fees whatsoever.Energy costs have a direct impact on family budgets. High energy prices mean lessmoney for other needs such as food, rent, clothes, school tuition, medicine, vacations,

entertainment, charitable contributions and basic quality of life. It also means less moneyflowing into the economy which hurts all Americans. Low income families and the elderlyare the hardest hit by rising natural gas costs. Because their budgets are smaller, anyincrease in the cost of energy forces them to make larger sacrifices by denyingthemselves other basic necessities like food, medicine and clothing. While there areprograms at the state and federal levels to provide financial relief to low-income families,money is not the answer if the fuel cannot be obtained because of lack of supply.Access to America's Abundant Gas Resources:While the U.S. is currently suffering from a shortage of gas supply, natural gas resourcesin the U.S. are plentiful. In fact, recent studies estimate that the total technicallyrecoverable North American natural gas resource is sufficient to meet our currentdemand needs for many generations. Unfortunately, government policies are preventingus from being able to produce and use that gas.Much of the natural gas located on private lands in states like Texas, Oklahoma, andLouisiana has already been produced. After decades of use, those regions are now inproduction decline. Over 60 percent of our nation's future natural gas reserves liebeneath lands such as the Intermountain West and Alaska, and offshore waters that arecontrolled by the government. These vast resources, on non-park federal lands andbeneath offshore waters, offer years of supply for American consumers and theeconomy. But government policies are making it increasingly difficult, if not impossible,to access these promising reserves.Numerous overlapping environmental regulations are preventing or slowing access tonatural gas resources on federal lands. In order to obtain the right to drill for oil or gas onfederal lands or in federal waters, a lease must be obtained from a federal agency.Before a lease is issued, environmental reviews must be performed to determine ifenergy development activities on that land can be done without adversely affecting the.multiple uses for which federal lands are maintained and without negatively impactingthe environment.In recent years, a number of administrative land use decisions have reduced the amountof land available for leasing. Additionally, numerous lawsuits filed by opposition groupsfrom the environmental community and locals fearful of industry near theirneighborhoods have attempted to block leasing on those lands deemed by land useagencies to be suitable for natural gas or oil development. These lawsuits can tie up aproject for months or years and significantly increase the cost of the development offederal energy resources. Those costs and time delays often stop energy projects deadin their tracks and help decrease the supply and increase the cost of natural gas to theconsumer.Finally, bureaucratic red tape has slowed down the amount of time that it takes toreceive a lease for energy production in many areas of the country. It can actually takeyears for an energy company to receive a lease. In today's natural gas supplyldemandbalance, this time means less gas to meet demand, resulting in higher prices andpotential shortages of supply at critical times of the heating season when demand ishigh.

Once an applicant receives a lease, he must apply for a permit to access natural gasand oil. In order to receive that permit, environmental reviews are often necessary.However, federal agencies are increasingly experiencing long delays in performingnecessary reviews and completing the paperwork needed to approve applications. Infact, the average time that it takes the Bureau of Land Management to approve an oiland gas application to drill has increased from 30 days to 175 days. These long andcostly delays for reviews and applications are slowing down oil and gas development onfederal lands at a time when we need the resource the most.Development of our natural gas resources is also thwarted by land withdrawals andmoratoria on oil and gas development. Federal land grabs during the 1990s took millionsof acres of land, long intended for multiple public uses, and made them unavailable foroil and gas leasing. Additionally, Congress and the Executive Branch have put 85percent of the Outer Continental Shelf surrounding the lower 48 states off-limits tonatural gas and oil development. These areas have trillions of cubic feet of recoverablenatural gas that could be used to warm American homes and fuel our economy.Efforts to develop natural gas reserves on public lands are increasingly highly polarizedand fraught with uncertainty, litigation, and delay. Thousands of frivolous lawsuits,bureaucratic red-tape, and political mismanagement are locking up these resources andkeeping them from the American consumer. As a result, existing supplies are dwindlingat the same time that demand for this clean-burning fuel is rising.Technology and Responsible Development:While groups opposed to natural gas development usually attempt to block production inthe name of environmental protection, modern gas production has very little, if any,negative impact on the environment. In recent years, technological advances, such asthree and four dimensional seismic imaging (the geologic equivalent of an x-ray,performed with sound waves), have greatly enhanced the ability to find and producenatural gas, and to produce the maximum amount possible from a given location.Technological advances, such as directional and extended reach drilling, have alsoreduced the temporary surface disturbance needed to explore and produce natural gas,reducing or even eliminating any disruption to the ecosystems or habitats in the areas ofproduction. These technologies enable a single, small drilling pad to access multi

PGW is the largest municipally owned gas distribution company in the country and was founded in 1836. PGW has over 500,000 customers, 485,000 of whom are residential customers. The remainder are commercial customers and a relatively few industrial customers. Our service territory is restricted to the City of Philadelphia proper. Our total

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