Philadelphia's policy of slapping municipal liens on real estate to collect unpaid gas bills has suffered a second significant legal setback, potentially putting thousands of property owners in line for refunds from Philadelphia Gas Works.
Without fanfare, the Pennsylvania Public Utility Commission fined PGW $27,000 and ordered the city-owned utility to refund $566,000 in late charges to the owner of two apartment buildings hit with a total of 39 gas liens.
PGW has asked the PUC to reconsider its "far-reaching decision," which calls into question late fees assessed on thousands of liens applied to private property ranging from rowhouses to large businesses. PGW said there are more than 81,000 liens currently on the city's books, valued at $122 million.
Liens are a powerful tool that PGW uses to recover unpaid gas bills, and they generate about $30 million a year.
"The potential impacts are significant," PGW's attorneys, Daniel Clearfield and Carl R. Schultz of the Eckert Seamans law firm, said in the request for reconsideration. "PGW and the city rely upon the municipal liens for PGW's fiscal stability."
The PUC's decision could have broader implications on PGW customers than a federal court ruling this month that was also aimed at the city's practices related to gas liens.
U.S. District Judge J. Curtis Joyner declared PGW liens on rental properties for unpaid tenant bills "invalid, null, and void" in his ruling, which stemmed from a federal class-action lawsuit. That decision applies only to landlords hit by liens for unpaid tenant bills. The PUC's ruling applies to late fees assessed on any lien, not just those of landlords.
The PUC's ruling, delivered in December, said the utility improperly imposed late fees of 1.5 percent a month -- 18 percent a year -- on debts after PGW had filed liens against the properties. The commission ruled that PGW could no longer apply PUC-approved late fees on an arrearage once it filed a municipal lien, which transfers the debt from the commission's jurisdiction to the civil courts.
The commission also invalidated PGW's practice of applying customers' partial payments first to reduce the balance of late fees, rather than to pay off the customers' underlying debt. That effectively compounded PGW's ability to collect more late fees. PGW also failed to explain to customers how it calculated its late fees, the commission said.
The PUC ordered the utility to rework its billing system to reflect the ruling. What's unclear is what recourse there is for other customers hit with late fees on amounts under liens who might also claim they are entitled to refunds.
"Isn't that the million-dollar question?" said Donna S. Ross, attorney for SBG Management Services Inc., the Abington rental-property manager that brought the PUC action in 2012. SBG still has seven similar complaints against PGW pending before the commission.
PGW said the ruling lacked "a solid legal foundation" and was inconsistent with previous commission rulings. Though PGW can still put liens on properties, the utility said the ruling would increase uncollectible accounts and increase administrative costs, which would be borne by its other customers.
If the PUC declines to reverse its decision, PGW is expected to appeal the ruling to Commonwealth Court. It is also expected to appeal the federal landlord-lien case to the U.S. Court of Appeals.
Both disputes deal with the esoteric law surrounding municipal liens -- legal encumbrances for debts placed against a property until they are paid off, often when the property is sold. Governments typically impose liens for unpaid taxes. The tool is also available to municipal utilities such as PGW.
In the last decade, PGW automated its lien system and now issues 200 to 300 new liens a day as part of a more aggressive collection strategy it undertook to improve its historically high rate of customer delinquencies.
As the only municipal utility under the PUC's jurisdiction – Harrisburg assumed oversight in 2000, during a city financial crisis -- PGW is the only state-regulated utility with the power to use liens. The PUC typically declines to intervene in customer objections to PGW's lien authority, derived from a different law than the state utility code.
"Since PGW came under the PUC's jurisdiction, we have been able to reconcile PUC jurisdictional issues with our legal ability to place liens without undue difficulty," said Barry O'Sullivan, the utility's spokesman. PGW's ability to subject nonpaying customers to liens is "vital to protecting our customer base from the burden of those customers who don't pay their bills," he added.
In this case, the customers did not challenge PGW's authority to file liens, but rather the way it calculated fees associated with liens. The PUC's 112-page order equates the liens to civil judgments and said they are no longer entitled to be treated as debts subject to PUC late fees.
"The legal effect of the City of Philadelphia's having obtained municipal liens on the subject accounts is to remove the indebtedness for the unpaid utility bills from the commission's purview," the PUC said.
The commission suggested that the outstanding liens might be subject to interest payments for unpaid civil judgments, which state law sets at 6 percent per year. But that is out of the PUC's jurisdiction.
The utility said the PUC's ruling was "erroneous," and maintains that liens are only "markers" on a property and that debts are still subject to 18 percent late fees.
The PUC case derives from complaints filed in 2012 by SBG, which manages a number of rental properties in North and Northwest Philadelphia. The decision addresses bills associated with Colonial Gardens, a 72-unit complex at 5427 Wayne Ave. in Germantown, and Simon Garden, a 72-unit complex at 6731 Musgrave St. in Mount Airy.
SBG disputed the accuracy of billings going back to 2005, questioned the validity of gas-meter readings or bill estimates, and disputed the calculation of interest and penalties. In protest, it refused to pay its bills over long stretches.
"We are not deadbeats," said Ross, SBG's lawyer. "We have been trying to address these issues for many years, and PGW has ignored our complaints."
PGW's lawyers said the apartment managers were engaged in an "unfair form of cash flow management" by not paying their bills on time.
"Essentially, what the complainants are doing is borrowing money from paying customers while they refuse for years to pay significant portions of the bill," the utility's lawyers argued.
Administrative Law Judge Eranda Vero, in a 75-page decision delivered in 2015, dismissed SBG's billing and meter-reading disputes because they occurred more than three years before the complaint was filed, which made them ineligible for review under the statute of limitations. She also was not sympathetic to SBG's decision to allow undisputed bills to go unpaid.
But she found merit in SBG's arguments that the utility improperly collected the 18 percent annual late-payment charges on arrearages after it placed liens on the property.
Taking more than a year to craft its opinion largely upholding the administrative law judge's decision, the PUC ordered PGW to refund the $566,000 in late-payment charges, plus interest.
The commission also gave PGW 45 days to reconfigure its billing system to comply with its order.
PGW said it would take more than a year to write and test the computer code to redo the billing.
The commission also invalidated PGW's method of applying customers' partial payments first toward accumulated late fees, rather than underlying account balances. SBG had argued that PGW's reordering of partial payments was a deliberate "scheme" to compound interest and generate revenue.
PGW only disclosed its method of calculating the fees during the course of the three-year hearing process, which ended in 2015, despite years of pleas from customers. The $27,000 in fines were a rebuke for PGW's refusal to provide "a reasonable response" to customers' questions, the PUC said.