Under pressure: Taking Philadelphia Gas Works green could mean bigger bills, a billion-dollar hole

After Philadelphia City Council blocked the $1.9 billion privatization of the city’s gas utility in 2014, officials pondered a multitude of opportunities for Philadelphia Gas Works to practically mint money for the benefit of the city and ratepayers through the sale of abundant natural gas.

But the conversation over PGW’s future has now shifted dramatically, and City Council is considering whether the city-owned utility is doomed to decay painfully in a carbon-constrained world as prices rise and more affluent customers flee to other energy suppliers, leaving the city saddled with debt and a costly 6,000-mile network of aging gas mains.

“It is absolutely clear that the current PGW business model is not sustainable in the world,” Mark Alan Hughes, director of the University of Pennsylvania’s Kleinman Center for Energy Policy, told a City Council committee that is exploring the city utility’s future in a world that’s getting warmer.

The cloud over the 183-year-old utility casts a shadow on nearly 1,600 workers and $1.4 billion invested in pipes and plant, a potential taxpayer liability if they become stranded assets. A green future could mean higher costs for its 500,000 residential and commercial customers, especially for 146,000 low-income customers who currently struggle to pay their bills.

The city is undertaking a study to explore a “just transition” for PGW, the nation’s largest municipal utility, said Christine Knapp, the city’s director of sustainability. The study, whose budget is undetermined, will be financed under an award from the Bloomberg American Cities Climate Challenge and is expected to be completed by the end of 2020, she said.

“We already know that this utility is having basic business problems and will continue to do so especially when you think about a future where there’s a carbon tax or other policies that would restrain fossil fuels,” she said.

PGW could continue to operate as a natural gas utility — there is no shortage of low-priced hydraulically-fracked natural gas in Pennsylvania, which has become the nation’s second-largest gas producer in the last decade. The gas boom has pushed down prices for energy, including electricity.

But climate activists say fossil fuels are unacceptable and incompatible with the city’s formal pledge to uphold the goals of the Paris climate accords, which call for an 80 percent reduction in carbon emissions by 2050.

A parade of witnesses who testified April 26 before Council’s Committee on Transportation and Public Utilities outlined options for PGW to reduce carbon emissions, including a switchover from fossil fuels to renewable gas, which would utilize the utility’s existing infrastructure as well as customers’ existing heating systems.

Renewable gas produced from landfill waste and livestock manure is expensive and in short supply, and potential new sources of carbon-neutral synthetic gas are not being produced in commercial quantities.

Rather, a more dramatic alternative that has gained traction among activists is to run everything on electricity because the electrical power grid will get cleaner over time as fossil-fuel power plants are retired.

Skeptics question whether the cost of switching residential gas users to electricity will appreciably reduce greenhouse-gas emissions. An American Gas Association report last year found that even if 60 percent of the nation’s residential customers switched to electricity by 2035, it would reduce carbon emissions by only 1.5 percent.

Switching PGW’s 500,000 customers would involve a massive and expensive swap of heating systems, and a neighborhood-by-neighborhood decommissioning of the gas distribution system to avoid spending millions of dollars repairing old pipes. PGW estimates that it would cost $12 billion just to replace the city’s residential gas heating systems -- about $25,000 per household. That doesn’t count higher annual operating costs for electrical heating systems.

A switch to electricity would also require a huge expansion of the electric generation and distribution system to serve the new demand for electrical load, particularly during the winter. Those costs would be spread among all electricity customers, not just those who switched from gas.

Fuel delivered by PGW is responsible for 22 percent of the city’s carbon footprint, according to the Rocky Mountain Institute. About 15 percent of PGW’s volume is consumed by a single customer, Veolia Energy’s power plant on Christian Street, which provides steam heat to about 500 buildings in and around Center City, including hospitals, universities, skyscrapers, City Hall, and the Art Museum.

One repercussion of electrification is that “the folks in the city who would be able to electrify their homes would do so, and everybody else would be left with the bill for PGW’s infrastructure,” said Knapp.

Nearly 31 percent of PGW’s residential customers are low-income households, many of whom qualify for rates subsidized by other customers. PGW already has the highest rates in the state -- a typical PGW residential customer pays 40 percent more than a customer of Pennsylvania’s nine other gas utilities, according to Robert W. Ballenger, a Community Legal Services lawyer who acts as ratepayer advocate.

But if PGW loses customers, those who remain on the system will still have to pay the utility’s fixed costs. As long as PGW has customers, state regulators require it to maintain and repair its system to keep it safe.

The utility says it supports the city’s ambitious emissions-reduction goals and is “excited” about the forthcoming study “to understand future energy services that will help the utility continue to thrive in a low-carbon future.”

But the electrification scenario also poses a fundamental challenge for PGW, whose business plan in recent years has focused on developing new customers and uses for natural gas to make up for the loss of sales due to population declines, more efficiency and reduced demand because of warming winters.

Some suggest that PGW could simply become an electricity provider. Peco Energy, owned by Exelon Corp., has a state-protected monopoly to provide electric distribution service in the city, and would not relinquish its franchise easily, without seeking compensation.

Other experts suggest that a diminished PGW and its 1,600 employees could be refocused on providing services — financing, installing, and maintaining new heating systems, or operating community solar systems or district-heating systems.

“In this scenario, the utility provides services such as comfort and heat, rather than commodities like cubic feet of gas or kilowatt hours of electricity,” said Mark Silberg, an associate with the Rocky Mountain Institute, a nonprofit think tank that is working with the city through the Bloomberg Climate Challenge. The institute has also been a strong advocate for electrification.

The issue of PGW’s possible diversification is coming into focus just as Council is set to consider the city’s plans to partner with a developer to build a liquefied natural gas (LNG) facility at PGW’s Passyunk Plant. Under the agreement, Liberty Energy Trust would pay the costs to build the $60 million plant. PGW would get at least $1.35 million a year to operate it, reducing the need for rate increases. LNG is a liquid form of natural gas that is in demand primarily for power generation, often to replace dirtier fuel oil or diesel.

Though the LNG plan involves no city investment, other than the use of PGW’s land and an existing LNG storage tank at Passyunk, it has drawn sharp criticism from climate activists, who have made its passage a political issue. Green activists are opposed to any expanded fossil-fuel use.

PennEnvironment and other environmental groups in February promised to oppose any Council incumbents who voted for the LNG plant. Council delayed a vote on the LNG project until after the May 21 primary.

The climate activists say that PGW’s status as the nation’s largest municipal utility puts Philadelphia in a unique position to lead the way to a response on climate change.

But Councilman Derek Green, who chairs the Philadelphia Gas Commission panel that in December recommended approval of the LNG plan, urged caution about rushing into the wrong decision on a climate response.

Green likened the choice the city now faces to the decision confronting television viewers during the videotape format war of the 1970s.

“I’m looking at these different technologies that us, being the city of Philadelphia, being a public entity, we have a limited amount of resources, we have to decide: Pick VHS or pick Beta? But don’t pick the wrong one, because we only have a small amount of dollars.”

Green said that private companies, with more resources and a bigger appetite for risk, were in a better position to “find ultimately what works best.”