UGI UTILITIES, INC
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
EVALUATING THE IMPLEMENTATION OF SELECTED RECOMMENDATIONS FROM
THE JANUARY 2001
STRATIFIED MANAGEMENT AND
OPERATIONS AUDIT
Prepared By The
Pennsylvania Public Utility Commission
Bureau Of Audits
Issued May 2005
Docket No. D-03MEI020
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
TABLE OF CONTENTS
|Chapter | |Page |
|I. |INTRODUCTION | |
| | A. Background |1 |
| | B. Objective and Scope |1 |
| | C. Approach |2 |
| | | |
|II. |SUMMARY OF MANAGEMENT EFFECTIVENESS AND |4 |
| |OPERATING EFFICIENCY | |
| | | |
|III. |CORPORATE PLANNING |22 |
| | | |
|IV. |STAFFING LEVELS |24 |
| | | |
|V. |SUPPORT SERVICES |28 |
| | | |
|VI. |ONGOING OR PLANNED EFFORTS |32 |
| | | |
|VII. |CORPORATE GOVERNANCE |34 |
| | | |
|VIII. |CUSTOMER SERVICE, BILLING AND COLLECTION |46 |
| | | |
|IX. |GAS DISTRIBUTION AND SUPPLY MANAGEMENT |67 |
| | | |
|X. |FINANCIAL MANAGEMENT |78 |
| | | |
|XI. |INFORMATION TECHNOLOGY |94 |
| | | |
|XII. |HUMAN RESOURCE MANAGEMENT |102 |
| | | |
|XIII. |DIVERSITY AND EQUAL EMPLOYMENT OPPORTUNITY |114 |
| | | |
|XIV. |PROPOSED WORK MANAGEMENT AND MANPOWER PLANNING PROGRAM |125 |
| | | |
|XV. |ACKNOWLEDGEMENTS |127 |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
| |LIST OF EXHIBITS | |
| | | |
|Exhibit | |Page |
| | | |
|I-1 |Philadelphia Gas Works Organization Chart as of July 10, 2003 |3 |
| | | |
|II-1 |Summary of January 2001Management Audit Recommendations and Staff’s Follow-up Findings, Conclusions, and |7 |
| |Recommendations | |
| | | |
|III-1 |Preferred Practices Checklist: Corporate Planning |22 |
| | | |
|IV-1 |Span of Control Analysis |25 |
| | | |
|V-1 |Workers’ Compensation Expenses |29 |
| | | |
|V-2 |Calendar Year Safety Record |30 |
| | | |
|VII-1 |Responsibilities for Oversight |35 |
| | | |
|VII-2 |Philadelphia Gas Commission Expenses |37 |
| | | |
|VII-3 |Philadelphia Gas Works Organization as of July 10, 2003 |41 |
| | | |
|VIII-1 |Customer Bills Based on Estimated and Actual Meter Readings |47 |
| | | |
|VIII-2 |Meters by Type and Customer Classification |49 |
| | | |
|VIII-3 |Aging of Delinquent Accounts Receivable |51 |
| | | |
|VIII-4 |Bad Debt Write-offs 1995-1999 |51 |
| | | |
|VIII-5 |Bad Debt Write-offs 2001-2003 |52 |
| | | |
|VIII-6 |Aging of Delinquent Accounts Receivable |53 |
| | | |
|VIII-7 |Steps Required to Shut Off Residential Service and Timeline – |54 |
| |Year 2000 | |
| | | |
|VIII-8 |Steps Required to Shut Off Residential Service and Timeline – |55 |
| |Year 2003 | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
| |LIST OF EXHIBITS – CONTINUED | |
| | | |
|Exhibit | |Page |
| | | |
|VIII-9 |Customer Service Field Appointments Made and Completed |58 |
| | | |
|VIII-10 |Customer Responsibility Program Costs to Customers |63 |
| | | |
|VIII-11 |Customer Responsibility Program Design |66 |
| | | |
|IX-1 |Historical Cast Iron Main Replacements |68 |
| | | |
|IX-2 |Bare Steel Service Replacements |69 |
| | | |
|IX-3 |Coated-but-not-Cathodically Protected Steel Main Replacements |70 |
| | | |
|IX-4 |Engineering Staffing Levels |71 |
| | | |
|IX-5 |Contractor Utilization Levels |73 |
| | | |
|IX-6 |Inventory Turnover Data |75 |
| | | |
|X-1 |Comparison of Selective Cash Flow Indicators |81 |
| | | |
|X-2 |Comparison of Selective Balance Sheet Categories |82 |
| | | |
|X-3 |Comparison of Selective Income Statement Categories |82 |
| | | |
|X-4 |Latest Revisions Made to the Controller’s Procedural Manual |90 |
| | | |
|XI-1 |IT Functions Costs |96 |
| | | |
|XI-2 |IT Components Costs |97 |
| | | |
|XI-3 |Estimated Fiscal Year Project Costs and Cost Savings for ADP Payroll/HIRS System |99 |
| | | |
|XI-4 |IT Costs Per Customer |101 |
| | | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
| |LIST OF EXHIBITS – CONTINUED | |
| | | |
|Exhibit | |Page |
| | | |
|XII-1 |Comparative Sales Employees Salaries Examples |103 |
| | | |
|XII-2 |Rate of Annual Wage Increases/Estimated Savings Realized |106 |
| | | |
|XII-3 |Safety Results |109 |
| | | |
|XII-4 |Comparison of Lost Time to Accidents per 100 Employees to Panel Companies |109 |
| | | |
| |Fringe Benefit Costs | |
|XII-5 | |113 |
| |Number of Employees by EEO Category | |
|XIII-1 | |116 |
| |2003 Job Group Utilization Analysis | |
|XIII-2 | |119 |
| |New Hires Summary for 2001 through 2003 | |
|XIII-3 | |121 |
| |Total Utility Purchases for Minority, Women, and Disabled Person Businesses for the Years 1999 - 2002 | |
|XIII-4 | |124 |
| | | |
| | | |
| | | |
I. INTRODUCTION
A. Background
On April 27, 2000 the Pennsylvania Public Utility Commission (PUC or Commission) accepted the Barrington-Wellesley Group, Inc’s. (BWG or Consultant) proposal to perform a stratified management and operations audit of the Philadelphia Gas Works (PGW). BWG subsequently completed its work, and in January 2001, issued a final report containing 76 recommendations for improvement. PGW submitted its Implementation Plan in response to the audit, in March 2001, classifying 68 recommendations as accepted, 5 as accepted in part, and three as rejected. On April 5, 2001, at D-0099M038, the Commission made the audit report public and directed PGW to:
1. Proceed with its March 2001 Implementation Plan.
2. Submit progress reports on the implementation semiannually for the next three years, with the first report to be submitted by October 1, 2001.
From April 2001 to January 2004, PGW had submitted five semiannual Implementation Plan updates as required by the Commission to ascertain the Company’s progress in implementing recommendations from the management audit report. Based on a review of these updates, the Management Audit Division elected to conduct a Management Efficiency Investigation (MEI) of PGW’s progress in implementing 48 of the original 76 recommendations. Specific items of management effectiveness and operational efficiency may be investigated pursuant to Title 66 Pa. C.S. §516(b).
B. Objective and Scope
The objective of this MEI was to review and evaluate the effectiveness of PGW’s efforts to implement certain recommendations contained in the previous BWG Stratified Management and Operations Audit Report. The scope of this evaluation was limited to PGW’s efforts in implementing 48 prior management audit recommendations in the functional areas of:
3. Corporate Planning
4. Staffing Levels
5. Support Services
6. Ongoing or Planned Efforts
7. Corporate Governance
8. Customer Service, Billing and Collection
9. Gas Distribution and Supply Management
10. Financial Management
11. Information Technology
12. Human Resource Management
13. Diversity and Equal Employment Opportunity
14. Proposed Work Management and Manpower Planning Program
C. Approach
This MEI was performed by the Management Audit Staff of the PUC’s Bureau of Audits (Audit Staff). Actual fieldwork began on October 6, 2003, and continued through January 21, 2004. The fact gathering process included:
• Interviews with key PGW personnel.
• Analysis of selected PGW records, documents, reports, and other information for the period 1999 through 2003 and selected 2004 as available; including the Company’s organization chart as shown on Exhibit I-1.
• Visits to select Company facilities.
II. SUMMARY OF MANAGEMENT EFFECTIVENESS
AND OPERATING EFFICIENCY
The Audit Staff found that Philadelphia Gas Works (PGW) has effectively or substantially implemented 19 of the 48 prior management audit recommendations reviewed and has taken some action on the remaining 29 recommendations. Among the more notable improvements achieved by the management of PGW are:
• Salary and wage increases for union and non-union employees for the period 2000 to 2004 occurred at a rate less than the Consumer Price Index resulting in estimated savings of $24.0 million for the period 2000 to 2003 and continuing estimated annual savings beginning in 2004 of approximately $9.4 million.
• The implementation of a labor relations strategy that promotes productivity improvement and reductions in labor costs.
• The reduction of employee absenteeism from an average of 16 days to an average of 7.5 days, which resulted in estimated annual savings of $3.4 million.
• The increase in inventory turnover from 2.0 to 2.6 resulted in one-time savings of $2.7 million and annual carrying cost savings of $405,000.
• The partial closing of two district Customer Service Centers resulted in annual savings of approximately $876,000.
• The development of corporate planning documents that more accurately reflects the current realities of the Company’s operating environment.
15. The reduction in the Company’s workers’ compensation expenses and rate of accidents has resulted in annual savings of approximately $456,000.
16. The reduction of monthly disability payouts resulted in annual savings of approximately $80,000.
17. The provision of timely information and improvement initiatives to the Company’s stakeholders.
18. The implementation of a new organization structure and encourage managers to communicate policies on a departmental and Company-wide basis.
19. The establishment of an ethics hotline and an Ethics Officer to manage the program.
20. The acceleration of the Company’s cost iron main replacement program to reasonable levels.
21. The use of engineering firms to augment staffing needs to reduce the engineering work backlog has resulted in a one-time savings of $200,000.
22. The development and implementation of a formal information technology planning process.
23. Taken appropriate steps to reduce and control IT costs resulting in annual savings of $4.2 million.
24. The annual preparation and filing of an Affirmative Action Plan.
25. The implementation of a vehicle management information system that allowed PGW to identify and implement operational improvements resulting in estimated annual savings of $300,000.
26. Phased-out the Senior Citizens Discount Program resulting in estimated annual savings of approximately $850,000 over the next 16 years.
While these accomplishments are commendable, the Audit Staff has identified further improvement opportunities in certain areas. In particular, PGW needs to:
• Reduce the accounts receivable write-off rate to industry averages which would result in annual savings of $29.0 million.
• Reduce the number of accounts that have not been read for at least six months and complete the installation of AMR meters which would result in $44.0 million of net present value savings over the next eleven years and estimated annual savings of $14.0 million during 2004.
• Increase inventory turnover from 2.6 to 3.0 which will result in estimated one-time savings of $633,000 million and annual carrying cost savings of $95,000.
• Reduce the meter read to bill mailing cycle down to one day which would result in a one-time savings of $22.0 million and annual savings of approximately $883,000.
• Reevaluate closing the six district Customer Service Centers which would result in annual savings of approximately $1.25 million.
• Continue efforts to eliminate the Senior Citizens Discount program which would result in estimated annual savings of approximately $19.3 million ($20.2 million current SCD cost less $850,000 savings from modifications addressed above) offset by the cost of senior citizens who would be eligible for universal service fund assistance.
• Reduce fringe benefit costs for current and retired employees which would result in annual savings of approximately $246,000.
• Reduce the number of supervisory positions which would result in annual savings of approximately $1.4 million.
• Take additional steps to reduce the cost of the Philadelphia Gas Commission and eliminate any redundancies and overlap in responsibilities which would result in annual savings of $1.3 million.
• Apply due diligence efforts to meet corporate governance guidelines and recommendations of the Commission, the Securities and Exchange Commission and the Public Company Accounting Oversight Board.
• Reduce the size of the Company’s uncollectible accounts (bad debt write-offs) and delinquent receivables.
• Increase cathodic protection/replacement efforts for coated but unprotected protected steel mains to more reasonable levels.
• Update the Company’s accounting procedures manual and set a schedule for taking inventory and tracking of its capital assets.
• Proceed with efforts to outsource Human Resource mainframe applications which would result in estimated annual savings of $300,000.
• Develop and implement a formal pay-for-performance plan.
• Set goals and develop strategies to increase diversity purchases and document the effort to obtain purchases from MWDBE vendors.
• Develop a work management and manpower planning program, which the consultant estimated would produce annual savings of $10 million within three to five years of implementation.
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|III. CORPORATE PLANNING | |
| | | | | |
|Ensure that the planning process incorporates bottom-up input|September 2001 |1 |The Company has made significant improvements to |None. |
|from individual departments, is linked to the budgeting | | |its corporate planning process. | |
|process, and reflects the realities of PGW’s operating | | | | |
|environment. | | | | |
| | | | | |
|IV. STAFFING LEVELS | | | | |
| | | | | |
|Reduce the number of positions that have high or low spans of|March 2002 |2 |While the Company has made some progress in |Periodically analyze each position that has a |
|control. | | |reducing the number of positions that have high and|span of control outside a 1:4 to 1:9 reporting|
| | | |low span of control ratios, further improvement is |range, and adjust job duties as appropriate |
| | | |possible. |based on the results of this review. |
| | | | | |
|Develop and implement a labor relations strategy that will |October 2001 |3 |The Company has implemented a labor relations |None. |
|promote improved productivity and lower labor costs. | | |strategy to promote improved productivity and | |
| | | |control labor costs. | |
| | | | | |
|V. SUPPORT SERVICES | | | | |
| | | | | |
|Take steps to reduce workers’ compensation claims costs. |January 2002 |4 |The Company has been able to control its workers’ |None. |
| | | |compensation expenses and effectively reduce the | |
| | | |rate of accidents. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|VI. ONGOING OR PLANNED EFFORTS | | | |
| | | | | |
|Develop and implement a status reporting system that will |December 2001 |5 |PGW has been successful in providing timely |None. |
|provide timely and specific information regarding improvement| | |information regarding a broad range of topic areas,| |
|initiatives to the PUC, the Philadelphia Facilities | | |including improvement initiatives and on-going and | |
|Management Corporation (PFMC) Board of Directors, the City | | |planned corporate efforts, to its various | |
|Council, and the Mayor. | | |stakeholders. | |
| | | | | |
|VII. CORPORATE GOVERNANCE | | | | |
| | | | | |
|Revise the governance structure of PGW to make it more |Rejected |6 |While the Company established a formal management |Continue efforts to work with City Council and|
|accountable and to eliminate overlapping responsibilities. | | |selection process, sufficient responsibility was |the Mayor’s Office to revise the corporate |
| | | |not assigned to the PFMC Board, the Philadelphia |governance structure of PGW to make it more |
| | | |Gas Commission was not eliminated, and the |accountable and eliminate overlapping |
| | | |projected annual savings of $1.3 million was not |responsibilities. |
| | | |realized. | |
| | | | | |
| | |7 |The Company has not made a due diligent effort to |Make a due-diligence effort to comply with the|
| | | |meet those guidelines recommended by the |intent of corporate governance guidelines |
| | | |Commission, the Securities and Exchange Commission |recommended by the Pennsylvania Public Utility|
| | | |(SEC), and the Public Company Accounting Oversight |Commission and the related standards |
| | | |Board (PCAOB). |established by the SEC and the PCAOB. |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|VII. CORPORATE GOVERNANCE (continued) | | | |
| | | | |
|Complete implementation of the new organization structure, |May 2002 |8 |PGW has implemented a new organization structure |None. |
|and take steps to encourage managers to set and communicate | | |and has taken steps to encourage its managers to | |
|consistent policies to employees in all PGW departments. | | |set and communicate consistent policies on a | |
| | | |departmental and corporate-wide basis. | |
| | | | | |
|Take steps to improve PGW’s interfaces with outside parties. |February 2002 |9 |PGW has a program in place that allows it to |None. |
| | | |respond positively and expeditiously to the needs | |
| | | |of those governmental agencies that influence its | |
| | | |day-to-day operations. | |
| | | | | |
|Establish an ethics “hotline” reporting directly to PGW’s |February 2002 |10 |PGW established an ethics hotline which is managed |None. |
|manager of internal audit or its chief legal counsel. | | |by its Ethics Officer, an attorney who works in the| |
| | | |Company’s Office of General Counsel. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|VIII. CUSTOMER SERVICE, BILLING AND COLLECTION | | |
| | | | | |
|Take steps to reduce the number of estimated bills and ensure|Ongoing |11 |The number of meters not read for several months |Establish procedures to arrange field visits |
|that no customer goes over six months without a meter read. | | |has been significantly reduced, but too many meters|to all customers who have not had their meter |
|Update factors for calculating estimated bills on an annual | | |are still not read for an extended period of time |read for at least six months and to |
|basis. | | |and the Company has not updated its factors for |periodically update the factors used to |
| | | |calculating estimated bills. |calculate the estimated bills. |
| | | | | |
|Complete the installation of automated meter reading (AMR) |FY 2005 |12 |PGW has not completed the installation of AMR |Complete the installation of AMR devices on |
|devices on commercial/industrial accounts to improve the cost| | |meters for its commercial/industrial accounts. |commercial/industrial accounts to improve the |
|effectiveness of reading their meters. | | | |cost effectiveness of reading their meters. |
| | | | | |
|Take steps to improve delinquent payments and uncollectible |March 2002 |13 |The Company has not significantly reduced the size |Strengthen credit and collections policies and|
|accounts. | | |of its uncollectible accounts (bad debt write-offs)|procedures, and implement changes as necessary|
| | | |and delinquent receivables have increased |to reduce the write-offs of uncollectible |
| | | |substantially. |accounts. |
| | | | | |
|Revise policies so that PGW can shut off customers after 32 |September 2003 |14 |PGW’s current shut-off procedures comply with |None. |
|days compared to its current 48-day termination. | | |Commission regulations. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|VIII. CUSTOMER SERVICE, BILLING AND COLLECTION (continued) | |
| | | | | |
|Review the feasibility of reducing the meter read-to-billing |September 2001 |15 |PGW has modified its meter read-to-billing cycle |Implement changes to the billing process in |
|cycle lag to one day. | | |procedures, but has failed to shorten its billing |order to mail bills to customers the day after|
| | | |cycle. |their meter readings are acquired. |
| | | | | |
|Measure appointments kept for field service work from the |January 2002 |16 |PGW now has daily customer service metrics that |None. |
|standpoint of the customer, that is, actually accomplishing | | |measure completion of appointments and show the | |
|the work desired, and not on whether the employee says he or | | |status of a service order. | |
|she was at the job site at a specific time. | | | | |
| | | | | |
|Conduct a study to determine which district offices should be|February 2002 |17 |PGW conducted a cost/benefit study of its Customer |Reevaluate any further CSC closures by |
|closed and the timing of their closing. | | |Service Centers (CSCs) or district offices which |performing an analysis which considers the |
| | | |identified substantial potential savings from |impact of current laws and regulations and |
| | | |closure; however, as an alternative the Company has|takes into account other relevant |
| | | |reduced the CSCs days of operation and closed two |circumstances. If further closures are deemed|
| | | |of the eight offices from March through October. |appropriate, develop and implement an action |
| | | | |plan and establish a time schedule for |
| | | | |implementation. |
| | | | | |
|Improve the cost-effectiveness of the Customer Responsibility|March 2001 |18 |PGW has procedures in place to enforce CRP payment |None. |
|Program (CRP). | | |requirements and improve the cost-effectiveness of | |
| | | |CRP. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|VIII. CUSTOMER SERVICE, BILLING AND COLLECTION (continued) | |
| | |
|Appeal to the City administration to tighten eligibility |June 2001 |19 |PGW has been unsuccessful in transferring the cost |Continue efforts to eliminate the Senior |
|rules for PGW’s social programs and/or transfer the cost of | | |of its social programs to the City, but has |Citizen Discount (SCD) from the cost of |
|the social programs from PGW to the City general fund. | | |modified them since the management audit to conform|service provided to ratepayers. |
| | | |to the Public Utility Code and PUC regulations. | |
| | | | | |
|IX. GAS DISTRIBUTION AND SUPPLY MANAGEMENT | | |
| | | | | |
|Accelerate the cast iron main replacement program to 27 miles|Ongoing |20 |The Company has accelerated its cast iron main |None. |
|per year. | | |replacement program to reasonable levels. | |
| | | | | |
|Accelerate the replacement or cathodic protection programs |Ongoing |21 |PGW has adequately replaced bare steel services, |Increase cathodic protection or replacement |
|for coated-but-not-cathodically protected steel main, and | | |but has not achieved targeted replacement levels |efforts for coated but unprotected steel mains|
|continue to replace bare steel services. | | |for coated-but-not-cathodically protected steel |to more reasonable levels and, at a minimum, |
| | | |main. |maintain current bare steel service |
| | | | |replacement levels. |
| | | | | |
|Evaluate engineering staffing levels and trends to determine |May 2002 |22 |PGW has adequately addressed its engineering |None. |
|the most cost-effective way to obtain engineering services. | | |staffing levels and has begun using engineering | |
| | | |firms to augment its staff for specialized needs | |
| | | |and to meet peak workload conditions. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|IX. GAS DISTRIBUTION AND SUPPLY MANAGEMENT (continued) | | |
| | | | | |
|Reduce PGW crews’ wages and/or increase their productivity to|October 2001 |23 |PGW has implemented measures to mitigate |None. |
|make them more cost-effective, or contract out more | | |construction labor costs. | |
|construction work. | | | | |
| | | | | |
|Solicit bids to perform janitorial services from union and |August 2002 |24 |The Company has begun to use outside |Expand the use of contractors to perform building |
|non-union contractors as well as from PGW’s Building Services| | |contractors to perform janitorial services on |service janitorial maintenance as staffing levels |
|Department and select the most cost effective bid. | | |a limited basis with plans to expand |decline and periodic cost/benefit analyses warrant.|
| | | |utilization of contractors to additional | |
| | | |facilities in the future. | |
| | | | | |
|Take steps to increase the inventory turnover ratio from 2.7 |2003 |25 |The Company has increased turnover levels |Complete efforts to increase the turnover ratio to |
|to 3.0. | | |since the BWG audit, but they are still below |3.0 or higher. |
| | | |the target ratio. | |
| | | | | |
|Undertake a comprehensive fleet operations improvement |August 2003 |26 |PGW has initiated fleet operation improvement |Continue to improve fleet operations by utilizing |
|program. | | |measures; however, due to an increasingly |the vehicle management information system to |
| | | |aging fleet, its vehicle maintenance costs |closely monitor fleet activities and, when |
| | | |have continued to increase. |financial conditions improve, replacing the aging |
| | | | |fleet based on a cost and benefit analysis. |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|X. FINANCIAL MANAGEMENT | | | | |
| | | | | |
|Take the necessary steps to mitigate the current financial |February 2002 |27 |Although PGW has taken a number of steps in an|Continue efforts to improve the Company’s financial|
|crisis and implement appropriate measures to ensure that PGW | | |attempt to improve its financial condition, |situation, particularly as those efforts relate to |
|is not allowed to make the types of questionable transactions| | |the Company’s financial situation has not |generating additional cash flow. |
|that have compromised its financial position and impaired its| | |improved significantly. | |
|credibility with lenders, the rating agencies, and others in | | | | |
|the financial community. | | | | |
| | | | | |
|Establish a functioning audit committee on the Philadelphia |September 2001 |28 |The PFMC Board has reconstituted the Audit |Periodically review and update all PFMC committee |
|Financial Management Corporation (PFMC) Board of Directors, | | |Committee; updated the Audit Committee Charter|charters, and expeditiously implement internal |
|and restore a viable internal audit function either | | |to reflect the current organization of the |audit recommendations. Revise the Audit Committee |
|internally or by outsourcing it. | | |Company, and the committee members’ roles and |Charter to establish the Director of Internal |
| | | |responsibilities; and outsourced most of PGW’s|Audits as the Company’s direct contact with the |
| | | |internal audit functions. |Audit Committee. |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|X. FINANCIAL MANAGEMENT (continued) | | | |
| | | | | |
|Require the external auditing firm to adhere to SEC |December 2001 |29 |The Company’s current external accounting firm|Establish a written policy that assures the |
|guidelines that require the rotation off the assignment if | | |has a policy to rotate its partner-in-charge |rotation of the accounting firm’s partner-in-charge|
|the partner-in-charge has served in that capacity for seven | | |from the assignment after serving five |relative to the PGW audit assignment after serving |
|or more years. | | |consecutive years; however, the PFMC Audit |seven consecutive years, similar to the policies |
| | | |Committee and PGW have not enacted this |and procedures required for SEC registrants and by |
| | | |requirement. |the Sarbanes-Oxley Act. |
| | | | | |
|Establish a finance committee on the Philadelphia Financial |March 2001 |30 |A PFMC Finance Committee was created by Board |Complete the development of a PFMC Finance |
|Management Corporation (PFMC) Board of Directors with | | |Resolution; however, a Charter spelling out |Committee Charter with specific responsibilities to|
|specific responsibilities to monitor PGW’s capital and | | |specific roles and responsibilities has not |track and monitor PGW’s capital and operating |
|operating budget processes and budget variances. | | |been prepared. |budget, variances, and earnings and cash flow |
| | | | |projections; and, prepare and file the appropriate |
| | | | |minutes of the Finance Committee with the PFMC |
| | | | |Board Minutes Book. |
| | | | | |
|Assign responsibility to the treasurer’s department for |March 2002 |31 |The Treasurer’s current job duties include |Update the job description for PGW’s Treasurer to |
|establishing and enforcing cash management policies including| | |responsibility for cash management. |reflect current job duties and responsibilities. |
|accounts receivable collection policies and procedures. | | | | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|X. FINANCIAL MANAGEMENT (continued) | | | |
| | | | | |
|Update accounting procedures manuals and implement procedures|May 2003 |32 |PGW has not updated its accounting procedures |Update the Company’s accounting procedure manual, |
|for the inventory and tracking of capital assets. | | |manual, nor has it implemented a schedule for |and expeditiously implement a procedure to track |
| | | |taking inventory or tracking its capital |and verify its capital assets on a regular |
| | | |assets. |scheduled basis. |
| | | | | |
|Take steps to implement all appropriate recommendations from |May 2002 |33 |The Company claims to have taken the |Complete the disposition of the forensic audit |
|the forensic audit currently being performed by an external | | |appropriate steps to resolve the findings |findings. Provide a summary to the PUC’s Bureau of|
|accounting firm. | | |identified in the draft forensic audit. |Audits of the problem areas identified by the |
| | | | |forensic audit and how PGW addressed the |
| | | | |recommendations for improvement. |
| | | | | |
|XI. INFORMATION TECHNOLOGY | | | | |
| | | | | |
|Develop and implement a formal information technology (IT) |Ongoing |34 |PGW now has a formal IT Department planning |None. |
|planning process. | | |process and an up-to-date IT strategic plan. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|XI. INFORMATION TECHNOLOGY (continued) | | | |
| | | | | |
|Emphasize outsourcing as a means for developing and |May 2001 |35 |PGW now out sources most of its projects; |Develop a comprehensive IT application strategy |
|implementing new information technology (IT) applications to | | |however, the IT Department does not currently |that defines the process for evaluating which |
|the extent possible. | | |have a comprehensive sourcing strategy. |projects to outsource or to perform in house, |
| | | | |selecting vendors, and project oversight. |
| | | | | |
|Continue efforts to select and implement a new Human Resource|January 2003 |36 |PGW has outsourced its current human resources |Proceed with the effort to outsource mainframe |
|Information System (HRIS). | | |database; however, its human resource history is |applications to a qualified vendor as resources |
| | | |still on the Company’s mainframe database. |allow. |
| | | | | |
|Take steps to reduce and control IT costs, and make the IT |April 2003 |37 |PGW has taken steps to control IT costs and has |None. |
|and user departments accountable for IT costs. | | |made the IT Department and user departments | |
| | | |accountable for IT costs. | |
| | | | | |
|XII. HUMAN RESOURCE MANAGEMENT | | | |
| | | | | |
|Develop an ongoing plan to manage the wage and salary levels |September 2001 |38 |PGW has taken steps to alleviate the compensation|Implement a salary and wage policy that includes |
|in an effective manner. | | |compression problems; however, it has not |monitoring the pay of top union earners and |
| | | |developed an ongoing salary and wage policy or a |ensuring that first-line supervisors earn more |
| | | |process to assure that compensation compression |than their union subordinates. |
| | | |is monitored and addressed in the future. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|XII. HUMAN RESOURCE MANAGEMENT (continued) | | | |
| | | | | |
|Develop and implement an incentive compensation program that |September 2001 |39 |PGW has not initiated an ongoing performance |Develop and implement a pay for performance program|
|rewards personnel for high-level achievements that are | | |based incentive compensation program. |that uses merit and incentive increases for meeting|
|specifically tied to supporting PGW’s strategy. | | | |specific business objectives. |
| | | | |
|Limit future compensation increases to a level no greater |October 2001 |40 |PGW has achieved cost savings of approximately|None. |
|than the consumer price index (CPI). | | |$24 million by limiting base wage increases | |
| | | |for 2000 through 2003 to rates well below the | |
| | | |rates of CPI increase. | |
| | | | | |
|Take steps to insure that the Code of Ethics and conflict of |May 2002 |41 |PGW’s 2002 Ethics Policy was distributed to |Negotiate a provision in the next collective |
|interest policy are understood by all employees, and obtain | | |non-union personnel at ethics training |bargaining agreement whereby it is stated that the |
|proof that each employee has a copy of the policies. | | |sessions; however, there continues to be no |Company’s Ethics Policy applies to employees as a |
| | | |documentation indicating which employees |condition of employment. Provide ethics training |
| | | |received Ethics Policy training, nor |and a copy of the Ethics Policy to all employees, |
| | | |confirmation that they have seen the policy |requiring them to evidence receipt and agreement |
| | | |and agreed to its terms. |with the terms of the Policy. |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|XII. HUMAN RESOURCE MANAGEMENT (continued) | | | |
| | | | | |
|Enhance union-management safety training efforts and develop |August 2003 |42 |PGW has improved safety levels substantially |None. |
|specific annual goals for achieving improved safety levels. | | |as a result of a comprehensive safety training| |
| | | |program that includes specific safety goals. | |
| | | | | |
|Reduce absenteeism through consistent treatment and increased|January 2002 |43 |PGW has centralized its attendance policies, |Establish an automated process to quantify and |
|focus on “back to work” programs. Establish a process to | | |implemented an Attendance Tracking System |monitor the cost of absenteeism and link the |
|monitor and quantify the cost of absenteeism. Review the | | |(ATS), and significantly reduced its employee |certification process to the Attendance Tracking |
|cost effectiveness of PGW’s attendance reward plan. | | |absenteeism, but has not yet established a |System. |
| | | |process to quantify its cost of absenteeism. | |
| | | | | |
|Take steps to reduce fringe benefit costs. |December 2001 |44 |PGW’s fringe benefit costs continue to rise |Expedite and expand efforts to control fringe |
| | | |and exceeded 50 percent of payroll in the |benefit costs. |
| | | |fiscal years ending August 31, 2002 and August| |
| | | |31, 2003. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|XIII. DIVERSITY AND EQUAL OPPORTUNITY EMPLOYMENT | | |
| | | | | |
|Ensure that the Philadelphia Financial Management Corporation|December 2001 |45 |PGW is preparing AAPs annually in accordance |None. |
|(PFMC) Board of Directors requires that PGW file an | | |with direction from the PFMC Board of | |
|Affirmative Action Plan (AAP) on an annual basis. | | |Directors. | |
| | | | | |
|Identify the employment areas that are below parity in the |August 2002 |46 |PGW has identified its under-utilized job |Strive to improve utilization in under-utilized job|
|year 2000 and develop feasible approaches for reaching | | |groups and has developed approaches for |groups. |
|parity. | | |reaching parity. | |
| | | | | |
|Hold senior management accountable for implementing the |January 2002 |47 |PGW is now holding senior management more |None. |
|diversity policy approved by the PFMC Board of Directors. | | |accountable for improvement in the diversity | |
| | | |program and increases in employee utilization.| |
| | | | | |
|Develop and implement a meaningful minority business |March 2001 |48 |PGW has not developed a program to address |Set goals and develop strategies to increase |
|enterprise, women business enterprise, and persons with | | |purchases made outside the normal purchasing |purchases from (MWDBE) vendors, and document the |
|disabilities owned business enterprise (MWDBE) program for | | |process and has not established goals and |results. |
|making purchases outside the normal procurement process. | | |strategies to improve diversity purchases. | |
PHILADELPHIA GAS WORKS
MANAGEMENT EFFICIENCY INVESTIGATION
SUMMARY OF JANUARY 2001 MANAGEMENT AUDIT RECOMMENDATIONS AND STAFF’S FOLLOW-UP FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
|Public Utility Commission |Originally |MEI |Staff’s Follow-up Findings |Staff’s |
|Bureau of Audit’s |Targeted |Finding Number |And Conclusions |Follow-up |
|Prior Recommendations |Completion Date | |as of January 21, 2004 |Recommendation |
| | | | | |
|XIV. PROPOSED WORK MANAGEMENT AND MANPOWER PLANNING PROGRAM | |
| | | | | |
|Implement the proposed work management and manpower planning | In Process |49 |PGW has delayed implementation of the proposed|Implement the work management and manpower planning|
|program | | |work management and manpower planning program.|program as soon as possible. |
III. CORPORATE PLANNING
Prior Recommendation – Ensure that the planning process incorporates bottom-up input from individual departments, is linked to the budgeting process, and reflects the realities of PGW’s operating environment.
Prior Situation – BWG found that PGW’s interim senior management had initiated some steps to implement an effective corporate planning process; however, the process did not meet all of BWG’s preferred practices (see Exhibit III-1). Essentially, PGW’s planning process at the time of BWG’s review was only in a draft stage of development with input from individual department and the PFMC Board of Directors still pending. While each individual department was being asked to prepare functional and performance goals, BWG was not sure if departmental goals would coincide with overall corporate goals. In addition, BWG found that the planning process was not adequately linked to the budgeting system and did not reflect the realities of PGW’s financial, operating and regulatory environment.
|Exhibit III-1 |
|Philadelphia Gas Works |
|Preferred Practices Checklist: Corporate Planning |
|BWG Preferred Practices |Yes |No |
| | | |
|Directed by the CEO and approved by the Board of Directors |X | |
|Includes well-documented and understood processes and responsibilities |X | |
|Includes significant senior management involvement |X | |
|Uses dedicated resources |X | |
|Addresses a wide range of issues |X | |
|Includes detailed functional and departmental performance goals | |X |
|Reflects realities of the operating environment | |X |
|Includes appropriate bottom-up input | |X |
|Links to the budgeting system used for allocating and committing operating and capital resources | | |
| | |X |
Source: Exhibit III-2, from A Stratified Management and Operations Audit of Philadelphia Gas Works, January 2001, BWG.
Follow-up Finding and Conclusion No. 1 – The Company has made significant improvements to its corporate planning process.
As of early 2004, the Company is following the traditional corporate planning approach that joins together the corporate planning and budget processes. PGW is setting goals and aligning its budget to meet those goals on an annual basis. The budget process is a department-by-department strategic planning process, in which new or continuing goals coincide with the Company’s Strategic Plan. PGW sets goals and aligns its budget to meet those goals on an annual basis.
PGW annually submits its Strategic Plan along with its operating and capital budgets to the Philadelphia Gas Commission (PGC). The Company’s Strategic Plan is a bottom up approach that incorporates departmental and divisional objectives. PGW operates on a September 1st to August 31st fiscal year basis. The Company’s operating budget is usually approved by the PGC in late fall, and by early spring of the following year the capital budget is approved by the Philadelphia City Council.
It is important that PGW have a corporate planning and budgeting process that enables departmental managers, at all levels, to drive performance through clearly-defined objectives and metrics that are aligned with the Company’s overall vision and mission. However, the Company has now taken the entire process a step further. Under the direct guidance of PGW’s President and the Vice President of Strategic Planning, the Company has begun implementing a more refined management-by-objectives process called a Strategy Focused Organization (SFO) approach. Moreover, the Company anticipates that implementation of a more sophisticated planning process, as spearheaded by the President and Vice President of Strategic Planning, will be achieved over time.
PGW’s new SFO approach is intended to be more continuous and flexible in terms of planning and budgeting, as well as more integrated in terms of the process. It is intended to be more of a rolling (i.e., an ongoing, or modify and add to procedure) rather than an annual budget process. The SFO will consist of business goals and a metrics tracking process for achieving the business goals. However, if the SFO is to be successful, PGW must involve every department in the initial development of their goals and objectives.
Based upon our review, it appears that the Company has made significant improvements to its corporate planning process, and that BWG’s audit concerns have been substantially addressed. The documents we reviewed show functional and departmental performance goals that reflect the realities of the operating environment, and utilize a bottom-up input process. The planning documents are linked to the budgeting process, which allocates and commits operating and capital resources.
Staff’s Follow-up Recommendation – None.
IV. STAFFING LEVELS
Prior Recommendation – Reduce the number of positions that have high or low spans of control.
Prior Situation – The Consultant found that PGW had an inordinate number of positions having high or low spans of control. As stated in the BWG report, organizations attempting to minimize layers of management, streamline communications, and, at the same time, promote managerial effectiveness seek spans of control in the range of 1:4 to 1:9. However, in mid-2000, more than a third of PGW’s reporting relationships were 1:3 or less and roughly another quarter were 1:10 or greater. Thus, less than 40% of the Company’s reporting relationships were within the normally targeted range of 1:4 to 1:9.
It was noted that some high and low spans of control were understandable as in certain circumstances (e.g., legal and regulatory affairs departments) changes may not be possible without rendering the work functions ineffective. Therefore, the consultant recommended that PGW evaluate each position with a reporting ratio of 1:3 or lower and 1:10 or greater to determine where there might be a more efficient management structure. The Consultant believed that savings could be generated if supervisory positions could be eliminated. At the same time, if increased supervision was needed in certain circumstances, enhanced productivity and performance could result.
Follow-up Finding and Conclusion No. 2 – While the Company has made some progress in reducing the number of positions that have high and low span of control ratios, further improvement is possible.
PGW has reviewed its reporting ratios, assessed individual reporting relationships, and made adjustments to its organization structure in an effort to improve spans of control. A comparison of the span of control ratios found by BWG in 2000 to those in 2003 is shown on Exhibit IV-1. This comparison indicates that the percentage of positions with reporting ratios in the desired range of 1:4 to 1:9 increased only slightly from 38 to 43 percent. While the number of positions with reporting ratios of 1:3 or less decreased from 69 in 2000 to 60 in 2003, the number of supervisors with 10 or more direct reports increased from 45 in 2000 to 53 in 2003. The data also shows that the number of supervisors increased from 184 to 198.
While PGW has improved its ratios somewhat, it appears that there is still considerable room for improvement if the Company applies more scrutiny to its positions with high or low spans of control. As recommended by the Consultant, PGW should periodically (e.g., annually and when circumstances change) evaluate each position with a reporting ratio of 1:3 and lower, or 1:10 and higher, to determine where job duties may
be adjusted such that positions with small spans of control might be eliminated or to
Exhibit IV-1
Philadelphia Gas Works
Span of Control Analysis
Fiscal Year 2000 Compared to Fiscal Year 2003
| | | |Relationships as of 2000 | |Relationships as of 2003 | |
| |
| | | | | | | |
| | | | | | |Percentage |
| |FY 1998/1999 |FY |FY |FY |FY |of Change |
|Categories |$ |1999/2000 |2000/2001 |2001/2002 |2002/2003 |1998 – 2003 |
| | |$ |$ |$ |$ | |
| | | | | | | |
|Medical |572,000 |647,336 |510,761 |754,706 |734,006 |28.3% |
|Indemnity |1,651,000 |1,539,470 |1,206,005 |1,206,371 |1,149,658 |-30.4% |
|Administrative |33,000 |55,092 |84,219 |96,365 |45,348 |37.4% |
|Legal |---- |428,377 |427,910 |386,692 |300,553 |N/A |
|Vocational | | | | | | |
|Rehabilitation |1,000 |16,251 |2,371 |---- |640 |36.0% |
| | | | | | | |
|Total Expenses |2,256,000 |2,686,526 |2,231,266 |2,444,134 |2,230,205 |-1.1% |
| | | | | | | |
Source: Data Request SS-2.
It should be noted that management has been able to reduce the average monthly disability payout from approximately $21,500 in fiscal year 2000/2001 to approximately $14,800 in fiscal year 2002/2003 for an annual savings of approximately $80,000. In addition, PGW has reduced the number of workers’ compensation recipients. The latest available data shows that from fiscal year 2000/2001 to 2002/2003, the total number of recipients on total disability dropped from 33 to 32, and the number of recipients on partial disability dropped from 41 to 31 employees. Overall, this equates to a 14.9% decrease in total number of recipients on both partial and total disability. Moreover, the amount of time lost is a key determinate in the level of both medical costs, and claims and litigation expenses.
Exhibit V-2 depicts PGW’s safety information for calendar years 1999 through 2002. This exhibit shows a steady reduction in the number of reportable accidents as well as in other work-related categories. It indicates that management has had success in its efforts to emphasize worker safety at all departmental levels.
|Exhibit V-2 |
|Philadelphia Gas Works |
|Calendar Year Safety Record |
|1999 – 2002 and January – June 2003 |
| | | | | | | |
| | | | | |Percentage |YTD |
| | | | | |of Change |2003 |
|Categories |1999 |2000 |2001 |2002 |1999 - 2002 |(as of 6/30/03) |
| | | | | | | |
|Recordable Accidents | | | | | | |
| |225 |201 |145 |133 |-40.9 % |60 |
| | | | | | | |
|Lost Time Accidents (LTAs) | | | | | | |
| |75 |59 |47 |34 |-54.6 % |14 |
| | | | | | | |
|LTAs per 100 Employees | | | | | | |
| |4.33 |3.36 |2.73 |2.10 |-51.5 % |1.56 |
| | | | | | | |
|Lost Workdays |876 |845 |520 |461 |-47.4 % |144 |
| | | | | | | |
|Recordable Motor Vehicle | | | | | | |
|Accidents |127 |149 |95 |89 |-29.9 % |42 |
| | | | | | | |
|Preventable Motor Vehicle | | | | | | |
|Accidents |74 |76 |50 |56 |-24.3 % |22 |
Source: Data Request HR-5.
Sound business practice dictates that PGW should have overall corporate goals that emphasize the importance of operating in a safe work environment, and reducing the total number of accidents. The Company’s fiscal year 2003/2004 goal to reduce its total accident statistics rate by 15% (using fiscal year 1999/2000 as the basis) appears to be reasonable and achievable.
As a result of management’s increased efforts, PGW has been able to reduce its total workers’ compensation costs, especially indemnity expenses. Furthermore, the Company has enhanced its union-management safety training efforts and developed specific annual goals. This has helped PGW to significantly improve its safety rates (see Chapter XII – Human Resource Management Finding and Conclusion No. 42).
Staff’s Follow-up Recommendation – None.
VI. ONGOING OR PLANNED EFFORTS
Prior Recommendation – Develop and implement a status reporting system that will provide timely and specific information regarding improvement initiatives to the PUC, the Philadelphia Facilities Management Corporation Board of Directors, the City Council, and the Mayor.
Prior Situation – BWG found that, as a result of changes in senior management, the lack of direction from PGW’s various overseers (i.e., PFMC, PGC, the Mayor, City Council, City Controller, etc.), and interim management’s preoccupation with customer billing and financial issues, PGW was not making a serious attempt to implement all the improvement initiatives identified in their current Five-Year Plan. This plan, which had been issued in September 1999, was later determined by the management team to be inadequate for addressing PGW’s specific financial and operational needs and requirements. In response, the management team issued a new 3-year plan in March 2000. However, in November 2000, the Commission ordered PGW to implement the initiatives under development by a newly-created best-practices working group within PGW. In addition, PGW committed to implementing the recommendations reported by BWG in the management audit report, especially those flaws in the Company’s billing, credit and collection system (BCCS).
Follow-up Finding and Conclusion No. 5 – PGW has been successful in providing timely information regarding a broad range of topic areas, including improvement initiatives and on-going and planned corporate efforts, to its various stakeholders.
PGW has undertaken efforts to provide timely and specific information regarding improvement initiatives to the Commission, its Board of Directors, City Council, the Mayor, its gas customers, and the general public. The approach now used by the Company is a bulletin-type communication titled On Point, which is planned to be issued quarterly. Editions of the bulletin were issued in December 2001, July 2002, and December 2002. The 3rd edition, which was issued in December 2002, was renamed from On Point to the Philadelphia Gas Works. The Company indicated at the end of our field work that another edition of Philadelphia Gas Works would be released shortly.
Beyond the bulletin discussed above, the Company’s Marketing and Corporate Communications Department has continued to use other forms of media, including television and radio news interviews, and press releases (in both English and Spanish), to communicate its message to stakeholders. Also, PGW issues a monthly gas bill stuffer titled Good Gas News. The monthly publication is also posted on the Company’s electronic web-site. In addition, PGW publishes a monthly internal publication titled Blueflame to its workforce and retirees. In recent years, the Department has begun publishing marketing reports, which focus on specific initiatives for major accounts, residential and commercial accounts, as well as economic planning issues.
Based upon a review of all documents provided, it appears that the Company is making a concentrated effort to communicate its message effectively to all stakeholders.
Staff’s Follow-up Recommendation – None.
VII. CORPORATE GOVERNANCE
Prior Recommendation – Revise the governance structure of PGW to make it more accountable and to eliminate overlapping responsibilities.
Prior Situation – To revise the governance structure, BWG specifically recommended the following three actions:
1. Eliminate the Philadelphia Gas Commission (PGC), and assign its remaining responsibilities to the City Council or the Philadelphia Financial Management Corporation’s (PFMC) Board of Directors. This would reduce PGW’s costs by $1.3 million per year, and eliminate overlapping responsibilities in the governance structure.
2. Assign sufficient authority and responsibility to the PFMC Board of Directors to ensure that it can effectively operate PGW.
3. Comply with the PUC’s order of November 21, 2000, to conduct a formal process when selecting individuals for management positions. These individuals should have the appropriate independence, professionalism and experience to manage PGW cost-effectively.
BWG proposed this multi-faceted recommendation because it concluded that PGW had a fragmented corporate governance structure that did not clearly identify accountability and responsibility for the utility’s finances and operations. As indicated in Exhibit VII-I, the City of Philadelphia owned PGW’s assets. PFMC, a Pennsylvania nonprofit corporation incorporated by the City for the sole purpose of operating PGW, had a contract to manage and operate the Company. The City’s Mayor appointed all PFMC Board members. In addition, while the PGC approved PGW’s annual operating budgets, the City Council approved the Company’s annual capital budgets.
The Consultant believed that a revised corporate governance structure was necessary to provide PGW’s management with enough political independence to effectively manage the Company in a business-like and cost-effective manner. Furthermore, the Consultant recognized that the revised structure would need to provide sufficient checks and balances to protect the interests of various stakeholders. It was because these stakeholders had many competing points of view that little progress had been achieved in the past to solidify a consensus and improve PGW’s corporate governance structure.
Exhibit VII-1
Philadelphia Gas Works
Responsibilities for Oversight
|Party |Responsibilities |
|The City of Philadelphia |Owns PGW assets. |
|Philadelphia Facilities Management Corporation (PFMC) |Manages and operates PGW and its assets. |
| |Responsibilities for having PGW pay the City $18 million annually. |
|Mayor |Appoints all members of PFMC BOD. |
| |Appoints two members of the PGC. |
|City’s Director of Finance |Serves on PFMC BOD. |
| |Approves PGW short-term loans and commercial paper financing. |
| |May audit PGW’s books. |
|City Solicitor |Legal advisor for both PGW and the PGC. |
|City Council |Approves management agreement. |
| |Approves PGW capital budgets. |
| |Appoints two members of the Gas Commission. |
| |Approves PGW short-term loans and commercial paper financing. |
|City Controller |Member of the PGC. |
| |May audit PGW’s books. |
|Philadelphia Gas Commission (PGC) |Approves PGW’s operating budget and forecast. |
| |Reviews PGW’s capital budget and makes recommendations to City Council. |
| |Approves PGW short-term loans and commercial paper financing. |
| |May audit PGW’s books. |
|Pennsylvania Public Utility Commission (PUC) |Reviews and approves rates. |
| |Resolves customer service disputes. |
| |Approves changes to tariff. |
| |Conducts financial and operations audits of PGW. |
| |Oversees PGW adherence to federal pipeline safety regulations. |
Source: BWG January 2001 Audit Report.
Follow-up Finding and Conclusion No. 6 – While the Company established a formal management selection process, sufficient responsibility was not assigned to the PFMC Board, the Philadelphia Gas Commission was not eliminated, and the projected annual savings of $1.3 million was not realized.
Corporate oversight responsibilities as shown on Exhibit VII-1 were not changed, but the Company did take a few steps to improve accountability and reduce some of the overlapping responsibilities within the organization. For example, the Company:
• Complied with the PUC’s order of November 21, 2000, at Docket No. R-00005654, to conduct a more formal management selection process to identify candidates with the appropriate independence, professionalism and experience to operate PGW cost-effectively (see Chapter XII - Human Resource Management for further details).
• Assigned management responsibility to PFMC’s seven-member Board of Directors to review the monthly and quarterly budget tracking documents. In addition, the Board of Directors updated the Audit Committee’s Charter, established a new Finance Committee, and was in the process of developing a Finance Committee Charter.
However, further improvements are still possible. For example, PFMC Directors, who are selected by the Mayor for two-year terms, still do not receive stipends for services rendered, which would help attract and retain experienced professionals on the Board. Moreover, the Board still has the same four functioning committees it had at the time of the BWG audit. These committees include the Audit Committee; the Human Resources, Labor and Diversity Committee; the Compensation Committee; and, the Community Relations Committee. As our field work was ending for this follow-up review, the Company indicated that a separate Finance Committee had been established, and that a committee Charter would be developed shortly.
Additionally, the City of Philadelphia has not eliminated the PGC and reassigned its remaining responsibilities directly to City Council or the PFMC Board. Consequently, overall cost reductions have not yet materialized as estimated by BWG. As shown on Exhibit VII-2, PGW’s annual cost to fund the PGC has actually increased by approximately 7.6% over the last four fiscal years. However, it should be noted that at the end of our field work, PGW indicated that the number of PGC employees was reduced from seven to four as of December 2003, when three employees and their positions were transferred to PGW.
Staff’s Follow-up Recommendation – Continue efforts to work with City Council and the Mayor’s Office to revise the corporate governance structure of PGW to make it more accountable and eliminate overlapping responsibilities.
Follow-up Finding and Conclusion No. 7 – The Company has not made a due diligent effort to meet those guidelines recommended by the Commission, the Securities and Exchange Commission, and the Public Company Accounting Oversight Board (PCAOB).
Exhibit VII-2
Philadelphia Gas Works
Philadelphia Gas Commission Expenses
Fiscal Years 2001 - 2004
| | | | | |Percentage |
| |Actual |Actual |Estimated |Budgeted |of Change |
|Expense Categories |FY 2001 |FY 2002 |FY 2003 |FY 2004 |2001-2004 |
| |$ |$ |$ |$ |% |
| | | | | | |
|Payroll |458,000 |382,000 |388,000 |391,000 |-14.6 |
|Taxes |33,000 |27,000 |28,000 |24,000 |-27.3 |
|Expense of Employees |0 |2,000 |2,000 |4,000 |0.0 |
|General Materials |15,000 |11,000 |6,000 |12,000 |-20.0 |
|Postage |1,000 |1,000 |1,000 |1,000 |0.0 |
|Advertising |108,000 |9,000 |2,000 |20,000 |-81.5 |
|Dues and Subscriptions |4,000 |3,000 |2,000 |2,000 |-50.0 |
|Purchased Services |326,000 |517,000 |514,000 |636,000 |95.1 |
|Insurance |62,000 |86,000 |52,000 |59,000 |-4.8 |
|Equipment Leasing |11,000 |10,000 |9,000 |11,000 |0.0 |
|Rents |72,000 |51,000 |72,000 |67,000 |-6.9 |
|Maintenance of Office Equip. |4,000 |5,000 |0 |3,000 |-25.0 |
|Information Technology |64,000 |60,000 |21,000 |23,000 |-64.1 |
|Telecommunications |5,000 |5,000 |4,000 |0 |-100.0 |
|Amortization | 2,000 | 0 | 0 | 0 |-100.0 |
| | | | | | |
|Totals |1,165,000 |1,169,000 |1,101,000 |1,253,000 |7.6 |
| | | | | | |
|Number of Employees |8 |7 |7 |7 |-12.5 |
| |
Source: Data Request CG-1.
The Audit Staff noted some additional corporate governance inadequacies. For example, in August 2002, the PA Commission’s Bureau of Audits issued a survey report titled “Survey of Corporate Governance Controls and Audit-Related Practices Pertaining to the Financial Reporting Process” that, in-part, concludes that a number of PA utilities were in need of revising their corporate governance structure given the recent issuance of the Sarbanes-Oxley Act (SOX) of 2002. Although PGW is not subject to the SOX of 2002 requirements, PGW’s Board of Directors has a responsibility as a public utility to make a concerted effort to incorporate equivalent quality control and independence standards into the Company’s daily operation.
Some of the SOX of 2002 standards, which were identified in the Audit Bureau’s survey report, are as follows:
1. Corporate governance requirements – the Audit Committee must now be fully independent of Company’s management, with at least one “financial expert” serving as a full-time committee member.
2. Audit Committee authority and responsibilities – the Audit Committee must now hire, set the compensation of, and maintain oversight of the company’s registered outside public accounting firm; the Committee must also be able to engage independent counsel and other outside advisors; and must establish company procedures to deal with complaints filed by internal employees and outside parties regarding accounting and auditing matters.
3. Chief Financial Officer (CFO) responsibilities – the CFO must now certify that the financial reports that are submitted to the public, the Audit Committee, and the SEC do not contain untrue statements or omissions; must disclose to the Audit Committee all significant deficiencies; and must establish, maintain, and evaluate the Company’s (issuer’s ) internal controls.
4. Issuer’s Internal Control Report requirements – the Company’s management must now assess annually its internal controls that are in place, and make public an “assessment report”.
5. Outside External Auditor Independence – the external auditor is now prohibited from performing the following non-audit services: bookkeeping; financial information system design and implementation; appraisal or valuation services, fairness opinions, and contribution in-kind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer, investment adviser, or investment banking services; legal services and expert services unrelated to the audit; and other services the PCAOB later determines to be impermissible. However, exceptions to this list are those services directly related to the financial audit including tax preparation, advisory, and expert legal testimony provided in a court of law or in front of the Internal Revenue Service.
As PGW is a municipal utility owned by the City of Philadelphia and does not have publicly traded stock, the Company does not fall under the Securities and Exchange Commission (SEC) laws. Therefore, the Company’s senior management team is not absolutely required to comply with the corporate governance requirements in the SOX of 2002. However, the Audit Staff believes that PGW and its Board of Directors should act within the spirit of those corporate governance guidelines and best practices listed in the Audit Bureau’s survey report and those applicable standards imposed upon utility companies by the SEC and the Public Company Accounting Oversight Board (PCAOB).
Staff’s Follow-up Recommendation – Make a due-diligence effort to comply with the intent of corporate governance guidelines recommended by the Pennsylvania Public Utility Commission and the related standards established by the SEC and the PCAOB.
Prior Recommendation – Complete implementation of the new organization structure, and take steps to encourage managers to set and communicate consistent policies to employees in all PGW departments.
Prior Situation – BWG concluded that PGW did not have an effective organization structure and its senior management did not communicate effectively with its lower management ranks or its union employees. For example, department managers were not consistently applying Company-wide policies on such issues as employee absenteeism, employee discipline, and union relations (also see Chapter XII – Human Resource Management). Local labor agreements between PGW managers of specific work units and the unions had resulted in inconsistent treatment of union employees from department to department.
As of December 1, 2000, PGW had adopted a new functional organization structure which BWG believed would improve the accountability of individual officers and improve communication with management and union employees. BWG stated in its audit report that the new structure was similar to those used by other effectively managed gas utilities. BWG felt that the new structure simplified reporting relationships and logically grouped together work activities. As a result, a more appropriate span of control level was created for the Company’s senior management. While the new structure would still have President and Chief Executive Officer (CEO) and Chief Operating Officer (COO) positions, the Chief Financial Officer (CFO) position would be temporarily eliminated with the functional duties absorbed by the Senior Vice President of Finance.
Follow-up Finding and Conclusion No. 8 – PGW has implemented a new organization structure and has taken steps to encourage its managers to set and communicate consistent policies on a departmental and corporate-wide basis.
Since issuance of the BWG report in January 2001, PGW has revamped its organization structure (see Exhibit VII-3) to make it more functional. Specifically:
• The Company streamlined its departments by changing reporting relationships whereby the Governmental Affairs, General Counsel, Strategic Planning, and Finance functions now report to the President and Chief Executive Officer; and the Human Resources, Field Operations, Customer Affairs, Gas Management, Information Technology, Marketing/Communications, and Labor/Safety and Preparedness functions report to the Interim Chief Operations Officer and Senior Vice President.
• The CEO, who also serves as the Company’s President, no longer has shared responsibility with a CFO.
• The COO’s position was reestablished, and the individual in that position is currently serving on an interim basis (without a signed PFMC contract).
• The CFO position has been eliminated. The Senior Vice President of Finance has absorbed the CFO’s job duties, including the certification of the financial reports. The Controller, Treasurer, and Financial Accounting and Reporting Departments report directly to the Senior Vice President of Finance. According to Company officials, the change is temporary with plans to reevaluate the job assignments later, even though the PFMC management agreement calls for three PFMC executive positions (a CEO, COO, and CFO) to manage PGW.
• Five new Senior Vice President positions were created: Interim Chief Operations Officer and senior Vice President; General Counsel, Senior Vice President of Finance; Operations; and Senior Vice President of Marketing and Corporate Communications.
• Nine Vice President positions now exist. This includes the Vice President of Human Resources who is a contract employee (the one-year contract expires in the spring of 2004) and the Vice President of Information Technology, which has been vacant since the summer of 2003.
• The Internal Audit Department no longer has seven positions. The Department now has one employee (i.e., Internal Audit Manager), who manages all functional departmental duties, including the monitoring and tracking of the internal audits being performed now by external contract auditors.
• Permanent management status has been approved for the CEO (who is a contract employee) by the City and Mayor’s office. However, the Interim COO has yet to sign a contract, which according to some Company officials, is because of City residency requirement restrictions. The City’s residency requirement was also given as a key reason why the position of Vice President of Information Technology has not been filled for at least six months.
• A new department titled Policies and Compliance has been created to ensure that Company-wide policies, practices, and procedures are not only established but also applied consistently across all departmental lines. The Department has been assigned to conduct the necessary training and provide periodic compliance reporting to senior management regarding the standardization of programs.
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• PGW’s labor relations and human resources responsibilities have been split among two departments. The newly created Vice President of Labor, Safety and Preparedness position has the responsibility for corporate-wide polices and compliance, risk management, labor/safety/security matters, and loss prevention. The Vice President of Human Resources (currently managed by an outside contract employee) has responsibility for overall employee services and administration, EEO/AA, overall employee training, and departmental staffing.
Based upon our review, it appears that PGW now has an organizational structure that improves accountability of individual officers and improves communication with management and union employees. This structure resembles those used by other well-managed gas utilities. It shows reporting relationships and work activities that are logically grouped together with appropriate senior management spans of control levels (also see Chapter IV - Staffing Levels for other span of control issues).
While PGW has been able to streamline its corporate structure and improve its level of workforce performance accountability, management should be cautious about creating an additional Vice President position, and allowing the Vice President of Information Technology to remain vacant for much longer. At the end of our field work, the Company announced the hiring of a tenth Vice President, which is not shown on Exhibits I-1 and VII-3. This individual will manage a new department titled Community Development. The Company provided no further information on this new position.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Take steps to improve PGW’s interfaces with outside parties.
Prior Situation – BWG noted that PGW had a poor relationship with many of its outside parties. This occurred due to a combination of factors, including:
• An unsuccessful conversion to a new Billing, Credit and Collection System (BCCS);
• Submission of inaccurate data and information to the PGC and Philadelphia City Council with respect to cost overruns on BCCS;
• A contentious union relationship that received a lot of negative publicity; and,
• Poorly articulating the Company’s rate increases to all affected stakeholders, including its customers.
BWG also noted that PGW’s interim senior management team had begun making an intensive effort to respond to the needs of the various government agencies which influenced its day-to-day operations. For example, before BWG’s audit was completed, PGW and the PUC signed a memorandum of understanding (MOU) regarding the steps PGW would take to ensure that its customer service activities would operate in a manner consistent with PUC requirements (see Chapter VIII - Customer Service for further details).
Subsequently, in response to a PUC directive, PGW submitted a plan that outlined the steps the Company would take to mitigate potential safety problems in the 2000/2001 winter heating season (see Chapter IX - Gas Distribution for further details). Finally, PGW undertook efforts to articulate its financial needs to the PUC, Philadelphia City Council, and the PGC with a Gas Cost Rate filing and a request for interim base rate relief (see Chapter X - Financial Management for further details).
Follow-up Finding and Conclusion No. 9 – PGW has a program in place that allows it to respond positively and expeditiously to the needs of those governmental agencies that influence its day-to-day operations.
PGW now has a well-structured multi-media program that has improved its interface with outside parties. Some of the more notable accomplishments include the following:
1. Instituted a Customer Service Initiative to interface more effectively with its customers, address core customer service issues such as accuracy of bills, facilitate customer access to the call center, improve the competency of the service delivered, and attain industry standard customer service levels.
2. Prepared standardized communication plans and began using a multi-media approach for its annual outreach campaigns such as LIHEAP, Senior Citizen Discounts, etc.
3. Initiated personal briefing sessions with every available City council member and began publishing PGWorks (financial data for specific stakeholders) and On Point (overall consumer progress report for all stakeholders) quarterly, and Good Gas News (customer’s gas bill stuffer) and Blue Flame (internal workforce and retirees’ publication) monthly (see Chapter VI - Ongoing or Planned Efforts for further details).
4. Briefed interested state legislators and regulators on a variety of issues, especially rate case filings, to ensure a free exchange of information.
5. Conducted information tours of the Company’s facilities for various state legislators, regulators and interested stakeholders.
Continuation of PGW’s ongoing multi-media regulatory affairs approach should result in improved relationships with federal and state regulators, customers, and stakeholders.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Establish an ethics “hotline” reporting directly to PGW’s manager of internal audit or its chief legal counsel.
Prior Situation – BWG found that PGW did not have an ethics “hotline” to provide anonymity to employees who wish to disclose potential ethics violations by other employees. In the past, PGW’s public image suffered from a number of ethics violations by a few former senior executives that later resulted in indictments and convictions. As a result, a public perception existed that PGW was fraught with ethical deficiencies.
In contrast, utilities that have successfully established a corporate culture which places a premium on a high level of corporate ethics have established an ethics “hotline”. Generally, at these utilities, employees are provided a separate and private telephone number that they can call to disclose ethics violations. Typically, the “hotline” is the responsibility of either the utility’s head of the department of internal audits or its chief legal counsel. The individual responsible in this capacity is usually deemed independent because of having direct access to the Company’s board of directors, and should be able to investigate and resolve any reported violations.
Follow-up Finding and Conclusion No. 10 – PGW established an ethics hotline which is managed by its Ethics Officer, an attorney who works in the Company’s Office of General Counsel.
In January 2001, PGW hired an attorney to serve as its Ethics Officer, and to manage its new ethics hotline. The hotline, which became operational on February 5, 2002, was established to provide an anonymous method for employees to:
• obtain quick and easy answers, personal guidance, and general overall advice concerning basic ethics issues;
• ask specific questions regarding the contents of the Company’s periodically- updated Ethics Policy (see Chapter XII – Human Resources for further details); and,
• provide details on suspected violations being committed by other PGW employees and/or outside vendors.
The ethics hotline is a wireless telephone number that is separate from PGW’s land-line telephone system. The PGW Ethics Officer is the only person who answers the calls or has access to the hotline’s voice mail system. Other than messages that are left on the voice mail system, the phone calls are not recorded. The Ethics Officer personally and expeditiously responds to each phone call or inquiry received. Any caller who wishes to remain anonymous can do so and is not required to identify him or herself or where they work. Outside stakeholders, vendors, and/or customers can also use the hotline phone number without fear of reprisal.
Even though the Ethics Officer does not serve as the Company’s Chief General Counsel, he has direct access to the Board of Directors and has the authority to fully investigate and resolve any reported ethics violations. The Ethics Officer’s confidential Ethics Reports contain sufficient detail regarding the facts of the case, final resolution of the issue at hand, or a suggested recommendation(s) on how to resolve the violation. The timely reports include the citing of court cases, legal precedence, and other statutory requirements.
The Ethics Officer informs senior corporate staff members of each case’s final resolution and distributes copies of the final report to the appropriate department head, union representative, and/or legal authorities. The Ethics Officer usually acts as or assists the attorney prosecuting the case. The Board of Directors is also kept informed of each case and is provided with a final report, when appropriate.
Based upon the Audit Staff’s review, it appears that the Ethics Officer is sufficiently independent and has direct access to the PFMC Board of Directors. This independence and direct access to the Board enables the Ethics Officer to operate the hotline and perform his investigative assignments effectively.
Staff’s Follow-up Recommendation – None.
VIII. CUSTOMER SERVICE, BILLING AND COLLECTION
Prior Recommendation – Take steps to reduce the number of estimated bills and ensure that no customer goes over six months without a meter read. Update factors for calculating estimated bills on an annual basis.
Prior Situation – In 2000, meter readers manually read 54% of customer accounts, a radio-based automated meter reading (AMR) system was used to read about 45%, and a telephone-based AMR was used to read less than one percent. The Company had a 64% success rate in reading manual meters in fiscal year 2000 and a 97% success rate in reading its automated meters. The low success rate for manual reads resulted in the issuance of many estimated bills.
PGW was issuing numerous estimated bills for several billing periods in a row to the same customers because its meter readers did not have access to the customers’ meters. However, the Company did not know the number of estimated bills it had issued during the previous five years. As of August 31, 2000, PGW had not read over 17,000 residential meters for three months or more.
PGW estimated the bill for a customer if it had read the meter at least once within the previous nine months. However, if the meter had not been read for more than nine months, the Company’s policy was to bill only for the standard service and commodity charges. Due to problems with its new Billing, Credit and Collections System (BCCS), PGW often only billed the service charge and delayed billing the commodity charges.
Additionally, PGW had not updated the factors it used for calculating estimated bills for several years.
Follow-up Finding and Conclusion No. 11 – The number of meters not read for several months has been significantly reduced, but too many meters are still not read for an extended period of time and the Company has not updated its factors for calculating estimated bills.
PGW reduced the percentage of customers' bills based on an estimated meter reading from 8.6% for the first half of 2001 to 2.1% for the first half of 2003 (see Exhibit VIII-1). This improvement has primarily resulted from converting the vast majority of its meters to the radio-based AMR system. As of November 30, 2003, 99.1% of customer meters were read by the meter readers collecting read data from vans while driving by the meter and acquiring signals from the Encoder Receiver Transmitter (ERT). Meter readers and the telephone-automated system were collectively reading less than 1% of customer meters. The Company has a 98% success rate in reading automated meters versus it historical 63% success rate at reading manual meters.
Exhibit VIII-1
Philadelphia Gas Works
Customer Bills Based on Estimated and Actual Meter Readings
January to June 2001, 2002 and 2003
| | | | |
| |2001 |2002 |2003 |
| |Jan.-June |Jan.-June |Jan.-June |
| | | | |
|Actual Meter Reads |2,701,130 |2,803,596 |2,879,751 |
|Estimated Meter Reads | 253,428 | 163,456 | 62,679 |
|Total Accounts Billed |2,954,558 |2,967,052 |2,942,430 |
| | | | |
|% Accounts Billed Based on Estimated Meter |8.58% |5.51% |2.13% |
|Reads | | | |
Source: Data Request CS-8.
PUC regulations at 52 Pa. Code §56.12(4) require that PGW obtain an actual meter reading or ratepayer supplied reading at least once every six months to verify the accuracy of the estimated readings. In addition, even when PGW does obtain a ratepayer supplied reading(s), it is required by regulation to obtain an actual reading at least once every 12 months.
As a result of the continual installation of AMRs, the number of estimated reads declined rapidly. The AMRs eliminated the need to read the often inaccessible meters inside homes, resulting in far more actual meter reads. The primary cause of the inability to read AMR meters has been dead batteries in the Encoder Receiver Transmitter (ERT) that stores the meter reading on the outside of the building. The first generation ERT batteries had a shorter life (10 years) than the current generation (15 years). PGW has an AMR installation and ERT replacement program that is tracked by the Meter Reading Department. Another reason for failing to acquire AMR reads is bad weather.
The new BCCS meter reading subsystem now maintains a complete history of all meter reads, including “no reads”, any reads entered manually, or reads acquired by the telephone system. The Meter Reading Department tracks the number of “3 months or more no reads” for all meters and further identifies the number of meters that do not yet have an ERT and the number of meters that have non-working ERTs. As of October 1, 2003, PGW had 6,431 meters that had not acquired reads for three months or longer, of which 3,556 did not yet have an ERT and 2,875 that had non-working ERTs. PGW further reported that as of October 1, 2003, it had not read 5,452, or 1.1%, of its residential meters for six or more months. Commission records on residential meters not read for six months or more indicate that the percentage for other Pennsylvania regulated natural gas utilities ranged from .9% down to almost zero percent. The Company had also corrected its billing problems resulting in appropriate charges on the bills of unread/estimated bills.
Despite only needing to manually read meters for fewer than 1% of customer accounts, these difficult to access meters make up over half (i.e., 55.2%) of the meters that have not been read for over three months. On the other hand, PGW’s lackluster success rate of reading non-AMR meters, which often require entering a dwelling, has less impact now because only 4,460 manual and tele-metered accounts (see Follow-up Finding and Conclusion No. 12) remained in the distribution system at the end of November 2003. The installation of AMR meters and the replacement of ERTs have reduced the number of meters without reads for an extended number of consecutive billing periods and have brought the number of estimated bills down to levels that are more acceptable. However, even with these considerable improvements, the sizeable number of meters without reads for periods of six months or more indicates that PGW is not yet in complete compliance with Commission regulations.
Since relatively few customers are now issued estimated bills, PGW decided that it was not necessary to update its factors used to calculate these bills. However, based on PGW’s 98% AMR successful read rate, the Company will continue to estimate approximately 2% or more than 10,000 customer bills each month. Therefore there still is a substantial need for updating the billing estimation factors and improving the accuracy of estimated bills.
Staff’s Follow-up Recommendation – Establish procedures to arrange field visits to all customers who have not had their meter read for at least six months and to periodically update the factors used to calculate the estimated bills.
Prior Recommendation – Complete the installation of AMR devices on commercial/industrial accounts to improve the cost effectiveness of reading their meters.
Prior Situation – BWG concluded that PGW’s process for reading the meters of commercial and/or industrial accounts was not cost effective because the Company had not yet installed AMRs for all of these accounts. PGW had installed 6,745 AMRs on commercial/industrial accounts over the past two years, or 45% of the total accounts, and planned to install the remainder by 2003. In fiscal year 2000, PGW assigned ten meter readers and spent $500,000 to read its non-AMR commercial/industrial accounts.
Follow-up Finding and Conclusion No. 12 – PGW has not completed the installation of AMR meters for its commercial/industrial accounts.
All customer accounts within PGW’s distribution system have some type of metering device. As of November 30, 2003, PGW had 511,706 accounts, of which 507,246 or 99.1% had AMR meters and 4,460 had other types of meters. However, as indicated in Exhibit VIII-2, only approximately 86% of commercial/industrial accounts had AMR meters. The remaining customers who do not have AMRs are those who did not voluntarily respond to PGW’s initial request for a meter changeover or are one of the approximately 525 customers with a Metrotek/Metscan automated telephone-read meter. PGW intends to finish installation of AMR meters for those customers who did not initially respond to the meter changeover request during 2004.
Exhibit VIII-2
Philadelphia Gas Works
Meters by Type and Customer Classification
As of November 30, 2003
| | | | | |
| |Accounts | |Accounts | |Percentage | |
| |Receivable | |Receivable | |Of | |
| |Age | |Amount | |Total | |
| | | |($ millions) | |% | |
| | | | | | | |
| |30 to 59 days | |10.5 | |7.8 | |
| | | | | | | |
| |60 to 90 days | |7.2 | |5.3 | |
| | | | | | | |
| |Over 90 days | |115.0 | |86.9 | |
| | | | | | | |
| |Total | |134.7 | |100.0 | |
| | | | | | | |
Source: A Stratified Management and Operations Audit of Philadelphia
Gas Works, January 2001, BWG - Exhibit VIII-9.
Exhibit VIII-4
Philadelphia Gas Works
Bad Debt Write-offs
1995 -1999
| | | | |
| | | |Percentage of Revenues |
| | | |Written-off |
|Fiscal Year |Revenues |Write-offs | |
| |($ millions) |($ millions) |% |
| | | | |
|1995 |473 |37.9 |8.0 |
|1996 |569 |34.3 |6.0 |
|1997 |544 |39.6 |7.2 |
|1998 |486 |46.5 |9.6 |
|1999 |463 |36.7 |7.9 |
| | | | |
|Five-Year Average |507 |39.0 |7.7 |
| | | | |
Source: A Stratified Management and Operations Audit of Philadelphia Gas Works,
January 2001, BWG - Exhibit VIII-11.
PGW’s 1999 typical residential bill was $71.20 per month. On average, 178 days passed from the billing date until the ultimate write-off of a past due account. The 178 days represented almost six billing cycles resulting in, on average, a $427 past due balance on a customer bill.
Follow-up Finding and Conclusion No. 13 – The Company has not significantly reduced the size of its uncollectible accounts (bad debt write-offs) and delinquent receivables have increased substantially.
As indicated in Exhibit VIII-5, the 5.8% average percentage of revenues written-off during the four-year period 2000 to 2003 is lower than the 7.7% average write-offs during the 1995 to 1999 period (as shown on Exhibit VIII-4), but is still almost three times the industry average of approximately two percent. This is significant given the increase in average revenues since the BWG review.
Exhibit VIII-5
Philadelphia Gas Works
Bad Debt Write-offs
2001 - 2003
| | | | |
| | | |Percentage of Revenues |
| | | |Written-Off |
|Fiscal Year |Revenues |Write-offs | |
| |($ millions) |($ millions) |% |
| | | | |
|2000 |555.9 |25.4 |4.6 |
|2001 | 750.0 | 27.9 | 3.7 |
|2002 | 593.5 | 53.0 | 8.9 |
|2003 | 797.2 | 49.4 | 6.2 |
| | | | |
|Four-Year Average | 674.2 | 38.9 | 5.8 |
| | | | |
Source: PGW Financial Statements 2001 – 2003.
On the other hand, PGW’s delinquent receivables have increased significantly since the time of BWG’s review, which indicates that some of the savings from PGW’s decreases in bad debt write-offs may be lost as a result of future write-offs of these growing delinquencies. Exhibit VIII-6 shows that, PGW had $275.6 million in delinquent receivables (representing 34.5% of annual revenues) as of October 2003 which compares to $134.7 million (representing 29.1% of annual revenues) in 1999. When the delinquent receivables for Octobers 2002 and 2003 in Exhibit VIII-6 are compared to September 1997 and 1998 amounts in Exhibit VIII-3, several negative trends are observed. First, both the dollar amounts and delinquent accounts as a percentage of revenues increased. Secondly, the percentage of delinquencies over 90 days peaked at almost 91% in October 2003.
Exhibit VIII-6
Philadelphia Gas Works
Aging of Delinquent Accounts Receivable
As of October 2002 and October 2003
| | | | | | | |
| |Accounts |
| |Receivable |
| |Age |
|1 |Bill |
|20 |Due Date |
|27 |Reminder Notice Mailed |
|41 |First Telephone Call |
|43 |Field Call |
|48 |Shut-Off Notice Call |
|50 |Field Call/Shut-Off Notice Mailed |
|54 |Second Shut-Off Notice Mailed |
|58 |Possible Service Shut-Off |
Source: A Stratified Management and Operations Audit of
Philadelphia Gas Works, January 2001, BWG - Exhibit VIII-12.
As of late 2003, PGW’s first possible shut-off notice was day 40 and the service shut off was day 50, except in cases when a 48-hour termination notice was needed, and then it was day 52. The PUC’s Bureau of Consumer Services stated that this is the same shut-off timeline used by all regulated utilities in Pennsylvania to shut off customers. PGW’s most recent collection steps as per its tariff filed with the PUC are shown on Exhibit VIII-8.
Exhibit VIII-8
Philadelphia Gas Works
Steps Required to Shut Off Residential Service and Timeline - Year 2003
| | | |
|Day |Type of Notice |Communication Mode |
|1 |Bill – Month 1 | Mail |
|20 |Due Date | Mail |
|30 |Bill – Month 2 | Mail |
|40 |10 day termination notice | Mail |
|47 |72-Hour Notice |Field Visit or Phone Call |
|50 |Service Shut-Off or, if not home, 48-Hour Notice | Field Visit |
|52 |Possible Service Shut-Off | Field Visit |
| | | |
Source: PGW Tariff.
The 32-day shut off period proposed by the consultant is possible only if a termination letter is mailed the day after the customers’ billing due date. However, this is not standard practice throughout Pennsylvania. PUC regulations do not address how long after the billing due date that termination procedures may start, only the rules and timelines once the shut-off procedures begin.
PGW changed its procedures to move up the shut-off notice date by eight days which is more in line with other Pennsylvania regulated gas utilities. In effect, PGW’s customers now need to settle their bill eight days sooner to avoid service shut off.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Review the feasibility of reducing the meter read-to-billing cycle lag to one day.
Prior Situation – PGW’s customer bills were not mailed until two or more days after their meters were read. The consultant concluded that a reduction of one day in the meter read-to-bill mailing cycle would have resulted in a one-time cash flow benefit of $21 million and on-going annual savings of $1.3 million on based on an interest rate of six percent.
Follow-up Finding and Conclusion No. 15 – PGW has modified its meter read-to-billing cycle procedures, but has failed to shorten its billing cycle.
In response to BWG’s recommendation, PGW hired a vendor to assist in shortening the timeline of its billing process. This vendor now performs the necessary quality controls prior to mailing of billings and issues the bills in a shorter time frame than was done by PGW. As a result, PGW reported in its implementation progress reports that they had accomplished a one-day reduction in the billing lag. However, the Audit Staff’s analysis indicates that, on average, the billing lag went from 2 days to 1½ days for accounts read on the second day of the two-day meter reading cycle and from 3 days to 2½ days for accounts read on the first day of the cycle. Since this is still a two business day average and the mailing date does not appear to have changed, it does not appear that PGW has realized any savings as a result of the changes taken so far.
As discussed earlier in Follow-up Finding and Conclusions No. 11 and 12, most of PGW’s meter reads are acquired via the radio-based AMR system, with just a few telephone and manual reads. The Customer Service Department uploads the meter reading files to the BCCS system for bill processing at approximately 4:00 P.M. of each business day. The usage and billing amounts are then computed overnight and employees create billing files the following day. The Company then electronically sends the billing file to the new vendor who creates an error evaluation (i.e., unexpected variances, etc.) file and sends it to PGW for review. Once PGW researches the exceptions and accepts the billing file, the vendor prints, folds, stuffs, packages, and mails the bills. PGW’s bills are mailed on the morning of the second business day following the completion of the 2-day meter reading cycle, or approximately 1½ days after the last meter read in the cycle and approximately 2½ days after the first meter read in the cycle.
As implied by BWG’s one-day billing lag recommendation, most large utilities have a billing timeline that includes reading the meter and loading the data into their computer system on day one and issuing bills on day two for all accounts that are not flagged by an exception or variance analysis run. The few accounts identified as needing attention or a second read attempt are held for special processing, and when billed, given an appropriate due date based on when the bill is issued. In the next billing cycle, these meters are read with the rest of the meters and, if no problems are found, the reads are processed normally.
If more of PGW’s post-meter-read functions could be performed the night immediately after the meter read, the vast bulk of the bills would be ready for mailing the next day. This would be a full-day reduction to the Company’s revenue lag which, based on 2001 & 2002 revenues, would result in an approximate one-time $22 million increase in cash flow and annual savings of $883,000 assuming a four percent interest rate. In the alternative, PGW should be able to save half of this amount, or $11 million and $442,000 annually by merely converting the existing two-day billing cycles to twice as many single day billing cycles. This would eliminate the situation whereby one-half of PGW’s meter reads sit unprocessed for a full day until completion of the second day of the 2-day meter reading cycle.
Staff’s Follow-up Recommendation – Implement changes to the billing process in order to mail bills to customers the day after their meter readings are acquired.
Prior Recommendation – Measure appointments kept for field service work from the standpoint of the customer, that is, actually accomplishing the work desired, and not on whether the employee says he or she was at the job site at a specific time.
Prior Situation – BWG concluded that PGW’s management had not placed sufficient emphasis on the need to meet customer expectations in its field service operations. Customer Service Representatives (CSRs) scheduled customer visits, but had no assurance that field operations kept the appointments. PGW’s field operations was taking credit for meeting an appointment when its employees showed up at the work site; not when the employees completed work that the customer desired. This practice increased the number of calls to the call center and adversely affected the customers’ overall impressions of PGW.
Follow-up Finding and Conclusion No. 16 – PGW now has daily customer service metrics that measure completion of appointments and show the status of a service order.
PGW is now measuring the satisfactory completion of fieldwork instead of just measuring the arrival of a service employee at the job site. Daily metrics that measure completion of appointments were started in July 2001. They identify the percentage of service calls completed when the requested appointment time or window is met.
The BCCS application now ties together the CSRs and the operations department. The CSRs are now able to view the status of an order. Field supervisors have been equipped with laptop computers that provide access to the Mobile Dispatching System to check on both the order and the technicians’ status.
To further raise the percentage of appointment completion, CSRs now use a dial out system during the day to remind customers of their appointment scheduled for the next business day. Service technicians also now use cell phones to confirm their upcoming appointments.
PGW has developed a tracking system to measure the completion of appointments. This information (see Exhibit VIII-9) for the fourth quarter of 2003 is now part of PGW’s customer service metrics and the information as is currently supplied to the Commission. Of the 80,242 appointments recorded in the fourth quarter of 2003, PGW’s service technicians missed 14% of them. It should be noted that the Commission defines “can’t get ins” or CGIs as missed appointments, thus CGIs are counted as missed appointments. Two calls must be made to the customer prior to physically visiting the property and marking the appointment CGI.
Exhibit VIII-9
Philadelphia Gas Works
Customer Service Field Appointments Made and Completed
October – December 2003
| | | | | |
| |All Appointments |Appointments Made/Completed |Percentage Made/Completed |Percentage Missed |
|Month | | | | |
| | | | | |
|October |29,648 |25,736 |87% |13% |
|November |25,384 |21,901 |86% |14% |
|December |25,210 |21,711 |86% |14% |
| | | | | |
|4th Quarter 2003 |80,242 |69,348 |86% |14% |
| | | | | |
Source: Quarterly Progress Report to the Pennsylvania Public Utility Commission, January 22, 2004.
It appears that PGW is now properly monitoring its success in completing field service work. This should provide on-going measurements with which to trend performance and result in less complaint calls due to the increased accountability for completing job assignments.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Conduct a study to determine which district offices should be closed and the timing of their closing.
Prior Situation – PGW was operating eight district offices known as Customer Service Centers (CSCs) throughout the city in 2000. According to a PGW internal audit report prepared in late 1999, management should have considered closing some, or all, of these offices because of cost and declining usage.
The district offices’ cost for processing a payment was $3.20. In contrast, the approximately 185 contract payment collection sites spread around the city cost PGW $.50 for each payment.
Most utilities had either closed or substantially reduced their district office locations. In Philadelphia, PECO Energy Company had closed its neighborhood offices and the Philadelphia Water Revenue Bureau had only three offices compared to PGW’s eight district offices.
Follow-up Finding and Conclusion No. 17 – PGW conducted a cost/benefit study of its CSCs or district offices which identified substantial potential savings from closure; however, as an alternative the Company has reduced the CSCs days of operation and closed two of the eight offices from March through October.
Based on the District Office Closure Study (Closure Study), beginning in 2002 PGW reduced the number of weekdays each office is open to the public and began closing the two least utilized CSCs from March through October. The Closure Study demonstrated that PGW would save $13 million over five years (approximately $5.5 million from reduced building costs and approximately $7.5 million from reduced labor costs) if it would close all of its CSCs, and that it could save labor and building costs of more than $1 million annually ($1,355,222 in 2003) if it would close only the Northeast and North Central Offices.
Management has selected one of the alternatives identified by the Closure Study whereby it has initiated an operational change for its six most heavily utilized CSCs by reducing the number of weekdays each office is opened to the public. Additionally, PGW closed the Northeast and North Central District Offices, except for November through February when they are used as Low-Income Heat Energy Assistance Program (LIHEAP) cash grant intake sites. The Northeast and North Central District Offices were selected for partial year closure because they served the fewest number of LIHEAP customers, processed the least number of payments, are the least accessible by Public transportation, and are relatively close to other regional offices that will remain open.
At the time of our fieldwork, PGW had no plans to further reduce operations at any of the six CSCs that were operating throughout the year. However, personnel in the CSCs perform several functions that are already performed in the central call center, including:
• Payment arrangements,
• LIHEAP grant intake,
• Gas turn-ons and turn-offs,
• Customer deposits,
• Service orders,
• Bill payments, and
• Bill inquiries
Also, customers may pay their bills at approximately 200 contracted payment collections centers throughout the city. BWG found that the cost for payment center processing is far cheaper than PGW’s own payment processing costs (see Prior Situation above).
Furthermore, LIHEAP intake is available at community resource centers throughout the city. The Pennsylvania Consolidated Statutes at 66 Pa. C.S. 2203(8) states:
The Commission shall encourage the use of community-based organizations that have the necessary technical and administrative experience to be the direct providers of services or programs which reduce energy consumption or otherwise assist low-income retail gas customers to afford natural gas service.
District offices increase the costs to all customers who do not use them. Since PGW considers availability to low-income customers as the most important function performed by the CSCs, it has chosen to keep six of its eight CSCs or district offices open year round. In fiscal year 2001, the CSCs did generate over $4.7 million in LIHEAP cash grants for customers. However, PGW’s customers can obtain these grants without the use of the CSCs because LIHEAP grant intake already occurs at the city’s community resource centers and by telephone contact with the Company’s central call office.
The Closure Study’s estimated savings of $1,355,000 applicable to closing the Northeast and North Central District Offices was based on reducing the total CSC workforce from 57 to 34 employees through retirements and reassignment of personnel. However, the partial year closing of these two offices along with operation changes at the other six CSCs actually results in a reduction in workforce to 44 employees and the realization of approximately $876,200 ($625,100 in labor costs and $251,100 in building operating costs) in annual savings. While PGW’s reduction in operations has provided some savings, management needs to reevaluate the CSC closure issue, taking into account current laws, regulations and other relevant circumstances, and the impact on LIHEAP, CRP, SCD, etc.; develop a plan to implement the decisions made; and establish a specific time schedule for completion. Nonetheless, if appropriate at some point in time, the permanent closing of the eight CSCs or district offices could result in additional annual savings of approximately $1.25 million (approximately $841,000 from reduced building costs and approximately $409,000 from reduced labor costs). The Audit Staff fully understands that the CSC closures would have ramifications; however, the Company must appreciate that the potential savings are significant enough to warrant further evaluation.
Staff’s Follow-up Recommendation – Reevaluate any further CSC closures by performing an analysis which considers the impact of current laws and regulations and takes into account other relevant circumstances. If further closures are deemed appropriate, develop and implement an action plan and establish a time schedule for implementation.
Prior Recommendation – Improve the cost-effectiveness of the Customer Responsibility Program.
Prior Situation – The last external evaluation of the Customer Responsibility Program (CRP) was issued in 1997 for the 1995 and 1996 fiscal years and concluded that PGW’s CRP was not cost effective. The 1997 evaluation analyzed consumption, transactions, both operational costs and general service costs for customers while they were on the program, and the overall financial effects of the CRP. The report made two general recommendations for improving the CRP are as follows:
• Control the size of the CRP and, if necessary, limit the number of good-paying customers who join. At that time PGW was under the jurisdiction of the Philadelphia Gas Commission which could apply budgetary or cost controls on the program that would limit the number of qualified participants.
• Systematically enforce the payment requirements for CRP participants to help customers maintain payment discipline.
PGW indicated to BWG that they had corrected many of the problems associated with the 1997 evaluation. The consultant concluded that the Company should proceed with an evaluation planned for the summer of 2001.
Follow-up Finding and Conclusion No. 18 – PGW has procedures in place to enforce CRP payment requirements and improve the cost-effectiveness of CRP.
Working with the PUC’s Bureau of Consumer Services, PGW developed a universal service restructuring plan that includes, in part, its CRP. PGW had an external evaluation of the CRP conducted in 2002 that evaluated the program’s processes and compliance with the PUC’s Customer Assistance Program and universal service regulations. The independent evaluation was based on a comparison of PGW’s CRP with the PUC’s regulations and policies. The evaluation found 11 CRP design features that were out of compliance with the PUC’s CAP Policy Statement. PGW redesigned its CRP to address the deficiencies found in the evaluation. The PUC approved the CRP re-design proposed by PGW in its restructuring plan.
PGW has written procedures to enforce the payment requirements of CRP customers. If CRP participants do not pay by the due date, their status is changed to “default” and they are sent another bill. If they do not pay within 44 days after their first bill, they receive a 10-day shut-off notice. CRP participants must be recertified annually.
PGW’s CRP is open to all qualified customers. PGW does not place cost or budgetary controls on the program that limit the number of qualified participants. Low-income, payment-troubled customers at or below 150% of the federal poverty level and not enrolled in the senior citizen discount program are entitled to enroll in the program. The Company bills its CRP customers according to their income level instead of their usage level.
PGW should have effective processes in place to control the administrative costs of PUC-mandated customer assistance programs and should have an independent evaluation of the cost-effectiveness of these programs in accordance with PUC regulations at 52 Pa. Code §69.265. PGW officials indicated that they have agreed with the PUC to conduct this evaluation within three years of the initial process evaluation. However, in accordance with the Public Utility Code at 66 Pa. C.S. §2203(8) the Company must allow all qualified customers who apply to participate and that the PUC provide appropriate funding for its CRPs to cover all qualified customers.
Furthermore, the Public Utility Code at 66 Pa. C.S. §2203(8) requires the PUC to ensure that universal service programs are available, appropriately funded, and to ensure that the programs are operated in a cost-effective manner. The Commission’s Bureau of Consumer Service (BCS) encourages utilities to concentrate on how to make programs more cost-effective and efficient rather than focusing on whether or not a program is cost-effective. The Utility Code also requires subsequent external evaluations of the universal service and energy conservation programs to occur at no more than six-year intervals. As mentioned previously, PGW has indicated that it plans to conduct this evaluation within three years of the initial process evaluation.
The cost of the CRP discount is absorbed into the utility’s base rates and is spread among the non-CRP customers. PGW’s CRP discount costs averaged $20.0 million for the last seven-year period (1997 to 2003), as shown in Exhibit VIII-10. Note that in years when natural gas prices are high (i.e. 2001 and 2003), the CRP discount rises substantially because the customer’s CRP payments are based on income levels and, thus, increases in natural gas price fluctuations do not affect customer contributions but do increase the costs of the program.
Exhibit VIII-10
Philadelphia Gas Works
Customer Responsibility Program Costs to Customers
1997 – 2003
| | |
|Fiscal Year |CRP Discount |
| | $ million |
| | |
|1997 | 17.7 |
|1998 | 12.0 |
|1999 | 9.3* |
|2000 | 14.4 |
|2001 | 37.6 |
|2002 | 16.1 |
|2003 | 33.0 |
|Total |140.0 |
| | |
|Average | 20.0 |
| | |
|* Updated from BWG Report |
| | |
Source: Data Request CS-32.
PGW expects reduced collection costs for CRP customers because they are receiving a discount as long as they make timely payments. The next PUC mandated external evaluation should determine more clearly if CRP customer collection costs are reduced and if the CRP is cost-effective overall. Based on our review, it appears that PGW has satisfactorily complied with the timetable to transition from Philadelphia Gas Commission rules and regulations regarding CRP to the PUC rules and regulations.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Appeal to the City administration to tighten eligibility rules for PGW’s social programs and/or transfer the cost of the social programs from PGW to the City general fund.
Prior Situation – PGW was being used as a vehicle for implementation of social programs by the City of Philadelphia. In fiscal year 1999, PGW had three social programs with an aggregate annual cost of $27.2 million (updated amount for 1999 is $25.0 million as a result of revising the CRP costs from $11.5 million in the BWG report to $9.3 million). These three programs included:
• A Senior Citizen Discount (SCD) Program that offers a 20% discount to customers over 65 years old ($13.5 million),
• A Customer Responsibility Program (CRP) that offers discounts to low income customers ($9.3 million), and
• A Conservation Works Program (CWP) that is designed to reduce energy usage ($2.2 million).
The costs of these programs were spread across the volume of natural gas used in the calculation of PGW’s gas cost rate (GCR) volumetric charges. BWG believed that the costs of these programs were more appropriately City of Philadelphia expenses rather than PGW GCR costs. The Consultant further stated that as gas competition progresses, PGW would be at a competitive disadvantage because of these programs.
Follow-up Finding and Conclusion No. 19 – PGW has been unsuccessful in transferring the cost of its social programs to the City, but has modified them since the management audit to conform to the Public Utility Code and PUC regulations.
In accordance with the Consultant’s recommendation, PGW sent a letter to the City administration asking for City funding for the social programs. City officials did not formally respond to this request but conveyed that they did not have sufficient funds to support PGW’s senior citizen and low-income discount programs. In fact, during 2003, the Philadelphia City Council passed two ordinances directing that the SCD program be continued. However, since the management audit was performed, PGW’s social programs have been restructured or modified to comply with the Pennsylvania Public Utility Code and PUC regulations.
On July 1, 2002, PGW filed its gas competition restructuring plan, which was effectively its first general rate request before the PUC. On March 21, 2003, at M-00021612, the PUC issued its order concluding this case which, in part, resulted in PGW issuing a tariff effective September 1, 2003 that still included the 20% SCD for existing customers. However, this new tariff closed enrollment into the SCD program to new applicants effective September 1, 2003 and thereafter. It is noteworthy that the SCD is not a component of the Company’s universal service program (as detailed later) and is not a program offered by any other regulated Pennsylvania utility.
Although PGW proposed and the PUC approved a tariff to prospectively eliminate the SCD through the phase-out described above, the City of Philadelphia, the actual owner of PGW, desired to keep the discount for qualified customers. Therefore, despite the potential detriment to PGW in the evolving competitive gas market as noted in BWG’s report, PGW filed a Petition for Rescission and Amendment of its restructuring plan in July 2003 which sought to modify the SCD for participants enrolling in it on or after September 1, 2003. In October 2003, the PUC sent this petition to enroll new applicants into a means-tested SCD for hearing before an Administrative Law Judge (ALJ). On December 1, 2003, the Consumer Education and Protective Association filed a petition to allow PGW to immediately enroll, on an interim basis, additional seniors into a means-tested SCD program. In mid-December 2003, pending a final decision by the PUC, PGW was permitted to put a means-tested SCD into its tariff on an interim basis.
PGW’s universal service programs in addition to the SCD are designed to help low-income, payment-troubled, and special needs customers pay their utility bill or lower the amount of natural gas they use. The universal service program includes the following programs:
• Customer Responsibility Program (CRP) – A program that provides an alternative to traditional collection methods for low-income, payment troubled customers at or below 150% of the federal poverty level (fpl). Customers enrolled in CRP agree to make monthly payments to PGW based on household size and gross income.
• Conservation Works Program (CWP) – A free energy conservation assistance program designed to provide cost effective weatherization treatments to qualifying CRP residential gas heating customers. The goals of the CWP program are to reduce gas usage, lower gas bills, and improve payment practices.
• Customer Assistance Referral and Evaluation Program (CARES) – A program that provides help to customers with special needs. CARES is designed for customers who are experiencing family emergencies, divorce, unemployment, or medical emergencies. The goal is to support and provide direction to help customers pay their bill.
• Low Income Home Energy Assistance Program (LIHEAP) – A federal program that provides financial assistance to qualified customers to pay home energy bills.
The cost of the SCD, CRP, CWP, and CARES is included in PGW’s base rates and charged to all of its customers. The funds for LIHEAP come from the federal government and therefore are not included in the PGW’s rates.
PUC regulations at 52 Pa. Code §62.4 require PGW to provide the universal service programs for its low-income and special needs customers. The PUC accepted the CWP and CARES proposals as included in PGW’s restructuring plan, but directed the Company to redesign its CRP to comply with PUC regulations at 52 Pa. Code §69.265 effective as of September 1, 2003. A summary of the CRP changes are shown on Exhibit VIII-11. The universal service programs cost PGW $41.4 million in 2003.
PGW estimates that the changes to the SCD program should result in an annual savings of approximately $850,000 over the next 16 years. In contrast, the SCD provided to approximately 86,300 customers cost $20.2 million in fiscal year 2003 or 2.5% of annual operating revenue. The indirect costs of administering the program are not known and not included in the $20.2 million. Potential savings from discontinuing or phasing out the SCD entirely include the $20.2 program costs plus the indirect costs of administering the program, less the cost of senior citizens who would qualify and receive a CRP discount or CWP, LIHEAP or other funds.
Staff’s Follow-up Recommendation – Continue efforts to eliminate the SCD from the cost of service provided to ratepayers.
Exhibit VIII – 11
Philadelphia Gas Works
Customer Responsibility Program Design
Summary of September 2003 Revisions
| | | |
|Program Component |Old Design |New Design as of 9/1/2003 |
| | | |
|Eligibility |150% of fpl, but only those at or below 135% of fpl |150% of fpl |
| |received discount. | |
| | | |
|CRP Payment Plans |7.35% of household income for those under 135% of fpl. |0 - 50% of fpl = 8% of household income |
| |Budget + 2% of arrears for customers between 135-150% of|51 - 100% of fpl = 9% of household income |
| |fpl. |101 - 150% of fpl = 10% of household income|
| | | |
|Minimum Payment |$30 |$18 |
| | | |
|Arrearage Forgiveness |After 5 years of successful participation. |1/36 preprogram arrears forgiven each month |
| | |payment is made. |
| | | |
|Monthly Co-payment for Arrearage |None |$3 |
|Forgiveness | | |
| | | |
|LIHEAP Penalty |If customer does not apply for LIHEAP, PGW charges the |LIHEAP penalty eliminated. |
| |amount of an average LIHEAP grant to the customer’s | |
| |account. | |
| | | |
|Excess Usage Charge |Charge assessed for usage above average. |Excess usage charge eliminated. |
| | | |
Source: Data Request CS-24.
fpl = Federal poverty level.
IX. GAS DISTRIBUTION AND SUPPLY MANAGEMENT
Prior Recommendation – Accelerate the cast iron main replacement program to 27 miles per year.
Prior Situation – The Company’s commitment to its cast iron main replacement program waned in the 1995 to 1999 time period. Prior to this period, from 1990 to 1994, PGW replaced an average of approximately 22 miles of cast iron main per year. However, during the 1995 to 1999 time period, PGW replaced an average of nine miles of cast iron main per year This actual replacement rate ranged from approximately 0.4% to 0.7% of its cast iron mains annually. BWG concluded that this replacement rate was inadequate and detrimental to gas safety. As a result, the Consultant recommended that PGW replace 1.5% of its cast iron mains or 27 miles annually for the next six years as a catch-up provision and to get the Company back on schedule.
Follow-up Finding and Conclusion No. 20 – The Company has accelerated its cast iron main replacement program to reasonable levels.
Due to its financial crisis, PGW felt that the BWG recommended replacement rate of 27 miles annually for the next six years was unrealistic. Concurrent with the BWG management audit, PGW commissioned an external consultant in 2000 to conduct a cast iron main replacement risk profile study and replacement prioritization model. The study was most recently updated in 2002. The model predicts the risks associated with different cast iron main replacement levels thus allowing the Company to make maximum use of replacement funding by targeting city blocks of cast iron main most likely to break. As part of its 2000 study and reiterated in its 2002 update, the external consultant recommended a replacement rate of 1% or approximately 18 miles annually. The Company, however, has replaced its cast iron mains beyond this recommended level over the past several years (see Exhibit IX-1) and the Company plans to target 18 miles of cast iron main for replacement on an annual basis until at least 2009.
The BWG report cited a 1% annual replacement rate as the gas industry’s acceptable standard. For 2001, 2002, and 2003, PGW exceeded this rate and, by adhering to its projected 18-mile annual replacement program, will continue to exceed the standard by an increasing rate every year.
By aggressively replacing problematic cast iron mains over the past several years, PGW has reduced the number of cast iron main segments experiencing four or more breaks annually by approximately 21% since 2000. Additionally, the number of cast iron main leaks annualized over the past three years (1,861) has remained below its 10-year system average of 2,000 leaks.
Exhibit IX-1
Philadelphia Gas Works
Historical Cast Iron Main Replacements
1990 – June 2003
| |
| |
Source: GDO-4
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Accelerate the replacement or cathodic protection programs for coated-but-not-cathodically protected steel main, and continue to replace bare steel services.
Prior Situation – In 1991, PGW initiated a program to apply cathodic protection to existing coated steel pipe installed before August 1, 1971. From 1991 to 2000, the Company replaced or applied cathodic protection to 32 miles of steel main or at an annual average replacement rate of 3.2 miles. As of 2000, 534 miles of coated but unprotected steel main remained in the system. While the amount of coated but not cathodically-protected steel main decreased, the leak rate increased from an average of 37 per year for the period 1991 to 1995 to an average of 78 per year for the period 1996 to 2000. As part of the BWG management audit review, it was recommended that PGW target approximately 11 miles of coated but unprotected steel main for replacement annually which equates to about 49 years for complete replacement.
Bare steel services were at least 30 years old with the rate of leakage becoming more of a concern due to corrosion. PGW had no specific program to perform leak surveys devoted solely to bare steel services. The close proximity of bare steel services to buildings also raised safety concerns. From 1995 to 2000, PGW replaced approximately 57,000 bare steel services or at an average replacement rate of 9,500 annually. BWG recommended an average annual replacement rate of approximately 7,900 bare services to complete replacement in approximately 23 years.
Follow-up Finding and Conclusion No. 21 – PGW has adequately replaced bare steel services, but has not achieved targeted replacement levels for coated-but-not-cathodically protected steel main.
Since 2000, PGW has replaced bare steel services at an annual average rate of approximately 7,900 (see Exhibit IX-2) or at a rate that would complete replacement within 23 years. However, as shown in Exhibit IX-3, coated unprotected steel main have only been replaced at an annual average rate of 5.6 miles (or approximately half of the 11 miles recommended by BWG) or a rate whereby replacement would take 93 years. Although greater funding was committed in 2001 and 2002 than in previous years, the Company significantly reduced its 2003 commitment in part due to an additional funding commitment to its cast iron main replacement program (see Finding and Conclusion No. 20).
Exhibit IX-2
Philadelphia Gas Works
Bare Steel Service Replacements
1995 – 2003
| |Year | |
| |2001 | |8,2| |197| |4.1|
| | | |00 | |.7 | |% |
|1 annualized based on six months data | | | |
Source: Data Request GDO-7.
Exhibit IX-3
Philadelphia Gas Works
Coated-but-not-Cathodically Protected Steel Main Replacements
1995 – 2003
| |Year | |
| |200| |2 | |534|
| |0 | | | | |
Source: GDO-6
Without committing the necessary resources to replace or apply cathodic protection to its coated but unprotected steel mains, the Company risks experiencing increased leakage rates which would result in additional costs to repair the leaks as well as increased safety concerns.
Staff’s Follow-up Recommendation – Increase cathodic protection or replacement efforts for coated but unprotected steel mains to more reasonable levels and, at a minimum, maintain current bare steel service replacement levels.
Prior Recommendation – Evaluate engineering staffing levels and trends to determine the most cost-effective way to obtain engineering services.
Prior Situation – Since 1990, the proliferation of engineering needs had caused a dilution of PGW’s engineering talent in critical areas. The number of engineers in gas supply/processing had declined from eleven to six; in distribution from eight to four; and in engineering from twelve to six, with additional engineers redeployed into non-critical engineering areas.
BWG recommended that PGW examine the need for engineers in each of its departments and in the executive ranks now and over the next ten years, and then adjust its work force to accommodate the changing needs. While some routine engineering work could have been effectively out-sourced, the basic engineering talent required to analyze situations, develop plans, set standards, and solve problems should have resided within PGW in experienced well-qualified engineers.
Follow-up Finding and Conclusion No. 22 – PGW has adequately addressed its engineering staffing levels and has begun using engineering firms to augment its staff for specialized needs and to meet peak workload conditions.
Recognizing its shortage of engineers, the Company aggressively hired engineers in 2002. By June of 2002, the Company had hired 19 engineers which, due to turnover and additional retirements, resulted in a net increase of 11 engineers from 2000 staffing levels. The total engineering complement shown in Exhibit IX-4 for the Distribution, Field Services, Chemical Services, Engineering Services, Marketing, and Gas Processing Departments was 36 as of June 2003. That level represents an increase of 44% from the overall engineering staffing level in 2000. Additionally, three engineers now hold senior executive positions as opposed to one engineer at the time of BWG’s management audit.
Exhibit IX-4
Philadelphia Gas Works
Engineering Staffing Levels
1999 and 2003
| | | | | | | |
| | | | | | |Percentage of |
| | | | | | |Change |
| |2000 |2001 |2002 |2003 |2004¹ |’00 - ’04 |
| |($ millions) |($ millions) |($ millions) |($ millions) |($ millions) |% |
|Net Construction Expenditures |$48.1 |$57.4 |$57.5 |$60.9 |$69.8 |45.11 |
| | | | | | | |
|Capital Construction Funding |$69.3 |$55.4 |$53.8 |$61.0 |$69.8 |0.72 |
| | | | | | | |
|Internally Generated Funds |$0.0 |$0.0 |$0.0 |$0.0 |$0.0 |0 |
| | | | | | | |
|Proceeds from External Financings |$0.0 |$109.5 |$1.0 |$115.1 |$0.0 |0 |
| | | | | | | |
| | | | | | | |
|Debt to Equity Ratio |4.00 |4.10 |4.12 |4.09 |3.96 |-1.0 |
| | | | | | | |
|Debt Service Coverage 1975 Bonds |1.72 |2.13 |1.98 |3.26 |3.96 |130.23 |
| | | | | | | |
|Debt Service Coverage New Bonds |1.59 |1.70 |1.56 |2.38 |2.41 |51.57 |
| | | | | | | |
|¹Per Data Request FM-11 (Budgeted amount as approved by the PGC on 12/2/03). |
| |
Source: PGW’s Annual Financial Statements.
PGW’s financial situation was not positive as expected. In fact, it actually caused additional financial strain. This occurred because the colder winters resulted in not only higher sales and gas purchases, but also escalated demand causing the wholesale cost of gas and thus the gas cost billed to customers to rise significantly. The combination of higher usage and higher billing rates resulted in significantly higher customer bills, causing an increase in accounts receivable (see Exhibit X-2) and bad debts. This in turn adversely impacted the Company’s cash flow. However, as discussed in detail in Chapter VIII - Customer Service, Billing and Collection, PGW’s management team has taken steps in an attempt to control this situation.
As shown on Exhibit X-1, PGW is still not generating enough funds internally to finance its day-to-day operational needs. Instead, PGW is relying upon loans from the City, long-term financing, lines of credit, and base rate increases. Thus, while the financial improvements reflected in PGW’s balance sheet and income statement numbers (see Exhibit X-3) are a positive sign, the Audit Staff believes that management must continue to identify opportunities that will improve the Company’s overall financial status.
Exhibit X-2
Philadelphia Gas Works
Comparison of Selective Balance Sheet Categories
Fiscal Years 2000 - 2004
| | | | | | | |
| | | | | | |Percentage of |
| | | | | | |Change |
| |2000 |2001 |2002 |2003 |2004¹ |’00 – ’04 |
| |($ million) |($ million) |($ million) |($ million) |($ million) |% |
| | | | | | | |
|Total Equity |1,238.7 |1,343.7 |1,282.5 |1,405.0 |1,383.0 |11.65 |
| | | | | | | |
|Net Utility Plant |869.5 |883.7 |904.9 |928.4 |965.1 |10.99 |
| | | | | | | |
|Net Accounts Receivable |56.3 |96.1 |66.6 |92.9 |85.4 |51.69 |
| | | | | | | |
|Long Term Debt |856.5 |933.4 |891.4 |999.0 |955.3 |11.54 |
| | | | | | | |
|¹Per Data Request FM-11 (Budgeted amount as approved by the PGC on 12/2/03). |
Source: PGW’s Annual Financial Statements.
Exhibit X-3
Philadelphia Gas Works
Comparison of Selective Income Statement Categories
Fiscal Years 2000 - 2004
| | | | | | | |
| | | | | | |Percentage of |
| | | | | | |Change |
| |2000 |2001 |2002 |2003 |2004¹ |’00 - ’04 |
| |($ millions) |($ millions) |($ millions) |($ millions) |($ millions) |% |
| | | | | | | |
|Operating Revenues |555.9 |50.0 |593.5 |797.2 |815.5 |46.70 |
| | | | | | | |
|Operating Expenses |508.7 |684.7 |547.2 |721.4 |710.3 |39.63 |
| | | | | | | |
|Operating Income |47.2 |65.3 |46.3 |75.8 |105.2 |122.88 |
| | | | | | | |
|Interest and Other Income |9.4 |12.3 |15.4 |3.8 |3.2 |-65.96 |
| | | | | | | |
|Interest Expense |59.0 |58.4 |58.7 |56.7 |58.6 |-0.68 |
| | | | | | | |
|Net Increase (Decrease) in Retained |(20.4) |(6.8) |(15.0) |4.8 |31.9 |256.37 |
|Earnings | | | | | | |
| | | | | | | |
|¹Per Data Request FM-11 (Budgeted amount as approved by the PGC on 12/2/03). |
| |
Source: PGW’s Annual Financial Statements.
Staff’s Follow-up Recommendation – Continue efforts to improve the Company’s financial situation, particularly as those efforts relate to generating additional cash flow.
Prior Recommendation – Establish a functioning audit committee on the PFMC Board of Directors, and restore a viable internal audit function either internally or by outsourcing it.
Prior Situation – BWG found that the Philadelphia Financial Management Corporation (PFMC) Board of Directors did not have a functioning Audit Committee, and that the committee had not met with PGW’s outside auditors for several years. While the PFMC Management Agreement stated that the Board was obligated to apply high standards and due diligence in the management of PGW, the Board was not applying such standards consistently to its Audit Committee. BWG found that the Audit Committee had met only sporadically over several years. While the new City Mayor reconstituted the PFMC Board in early 2000, the Audit Committee was only reestablished in August 2000. BWG found that the Audit Committee had only one member and had not yet conducted any official committee meetings.
BWG also found that PGW had not implemented many of the recommendations made by the Company’s external auditors; however, the Company indicated that internal control improvements were well underway and promised significant progress would occur during fiscal year 2001.
Furthermore, BWG found that PGW had virtually eliminated its internal audit function. At the time of the BWG audit, PGW’s Internal Audit (IA) Department employees had been transferred to temporary assignments. Furthermore, upon returning from the temporary assignments, one of the four auditors resigned and another transferred into another Department. As a result, there was a significant gap between audits planned and audits actually performed. This resulted in BWG recommending that the Company either restore IA staffing levels or outsource the entire internal audit function.
Follow-Up Finding and Conclusion No. 28 – The PFMC Board has reconstituted the Audit Committee; updated the Audit Committee Charter to reflect the current organization of the Company, and the committee members’ roles and responsibilities; and outsourced most of PGW’s internal audit functions.
The PFMC Board met on December 9, 2003 and updated the Audit Committee’s (AC) Charter to reflect PGW’s current organizational structure. After reviewing the published AC Charter, we noted that the updated AC Charter establishes the Senior Vice President of Finance, rather than the Director of Internal Audits, as the Company’s direct contact person with the Audit Committee. However, we believe this may be a step in the wrong direction. In order to ensure that IA is functioning as an independent appraisal function of the Company, the Manager of Internal Audits should report functionally to the PFMC’s Audit Committee and administratively to a non-financial senior Company executive. Typically, this direct-line-reporting fosters a higher degree of internal auditor independence, and provides and enables the level of internal control required by the Sarbanes-Oxley Act of 2002.
Since July 2001, one Audit Manager and one administrative assistant have staffed PGW’s Internal Audit (IA) Department. Due to the Company’s past difficulties of hiring and retaining professional internal auditors, the PFMC Board decided to hire a “Big Five” audit firm to perform the Company’s basic internal auditing functions. The initial one-year $480,000 contract was effective for February 1, 2003 through January 31, 2004. This “Big Five” audit firm provides independence as it had never previously served as PGW’s external financial auditor. The cost of this contract is included in the IA operating budget. The IA Department’s budget has increased 68% over the last three fiscal years, from $394,000 in fiscal year 2000/2001 to $663,000 in fiscal year 2003/2004.
The PUC Audit Staff reviewed the outsourced internal audits completed to date, as well as the monitoring and follow-up review process performed by the IA Manager. The current audit schedule shows that a total of 10 internal audits would be completed by December 31, 2003. Some of the more significant audits completed and/or underway are discussed in Follow-up Finding and Conclusion No. 32.
In summary, it is important that the PFMC Board has an up-to-date Charter for all of its committees, including the Audit Committee. These Charters should include language that describe the committees’ roles and responsibilities, references those corporate governance issues that are appropriate and specific to the situation (see Chapter VII – Corporate Governance for more details), and show the current membership roster. Further, it would be prudent for PGW to expeditiously implement the recommendations made by the outsourced internal auditors, as well as those of the Company’s Internal Audit Manager.
Staff’s Follow-up Recommendation – Periodically review and update all PFMC committee charters, and expeditiously implement internal audit recommendations. Revise the Audit Committee Charter to establish the Director of Internal Audits as the Company’s direct contact with the Audit Committee.
Prior Recommendation – Require the external auditing firm to adhere to SEC guidelines that require the rotation off the assignment if the partner-in-charge has served in that capacity for seven or more years.
Prior Situation – At the time of the BWG audit, the Securities and Exchange Commission (SEC) required public accounting firms to rotate an audit partner from a current client’s assignment after serving as partner-in-charge for seven consecutive years. Although PGW is a municipal utility and did not technically fall under SEC jurisdiction, public accounting firms typically would follow this rotation rule and other SEC requirements. BWG found that the external auditor’s partner-in-charge for the PGW audit had served in that capacity for more than ten consecutive years, and that this accounting firm had no policy regarding rotation of its partners.
Follow-up Finding and Conclusion No. 29 – The Company’s current external accounting firm has a policy to rotate its partner-in-charge from the assignment after serving five consecutive years; however, the PFMC Audit Committee and PGW have not enacted this requirement.
Initially, the Company and the City expressed concern about the lack of potential accounting firms that would bid on performing a financial audit of PGW’s records. However, we found that the City Controller’s Office received two professional bids on June 20, 2003, and neither accounting firm had any previous association with PGW. After the City Controller’s Office performed a bid analysis, the lower-cost bidder was selected to perform a one-year audit of PGW’s financial records for Fiscal Year 2002/2003.
According to PGW officials, the newly-hired outside accounting firm strictly follows the SEC policy regarding rotation of partners from an assignment after serving that client for seven consecutive years. However, we found no evidence that the Company or the PFMC Audit Committee had an internal policy ensuring that its outside accounting firm complies with these provisions. We believe that it is in the best interest of the Company to comply with SEC guidelines and the Sarbanes-Oxley Act of 2002 requirements.
Staff’s Follow-up Recommendation – Establish a written policy that assures the rotation of the accounting firm’s partner-in-charge relative to the PGW audit assignment after serving seven consecutive years, similar to the policies and procedures required for SEC registrants and by the Sarbanes-Oxley Act.
Prior Recommendation – Establish a finance committee on the PFMC Board of Directors with specific responsibilities to monitor PGW’s capital and operating budget processes and budget variances.
Prior Situation – In the past, PGW’s management had inappropriately shifted capital dollars from approved projects to fund overruns in other projects without obtaining approval from the PGC and Philadelphia City Council. For example, PGW redirected an estimated $20 million to cover costs for BCCS which was budgeted to cost $9.7 million. As a result, City Council did not approve PGW’s capital budget for Fiscal Year 2000 until almost nine months after the fiscal year began. This situation could have been avoided if the PFMC Board had established a finance committee to provide oversight.
BWG also found PGW prioritized its projects during the capital budgeting process with the Company managers emphasizing approvals for the highest priority projects first. Among the available priority rankings, only expenditures relating to safety, reliability and forced pipeline relocations were likely to be approved. Revenue producing and discretionary projects to improve efficiency were usually not approved. BWG felt that establishment of a finance committee would have helped provide the appropriate guidance.
Follow-up Finding and Conclusion No. 30 – A PFMC Finance Committee was created by Board Resolution; however, a Charter spelling out specific roles and responsibilities has not been prepared.
Although the PFMC Board issued a resolution dated March 30, 2001 that established a separate three-member Finance Committee, a Charter was never developed. The March 2001 resolution states in part that:
• The Finance Committee membership will consist of one executive employee from PGW and two PFMC Board members.
• By creating a Finance Committee, PGW’s financial issues will be dealt with more efficiently.
The PFMC Board’s intent in creating a Finance Committee was to track and monitor PGW’s capital and operating budgets, scrutinize its budget variances, and evaluate its earnings and cash flow projections. However, the Audit Staff found little evidence that this review process was actually occurring. The Company provided us with minutes from two recently-held Finance Committee meetings (July 7, 2003 and November 10, 2003), but we found no evidence that these minutes or the minutes of other Finance Committee meetings were ever inserted into the official PFMC Board Minute Book.
The Company does summarize its daily cash receipts data and send it by electronic mail to all Board members, various members of the Company’s management team, the City Controller’s Office, and other interested parties. The cash receipts document is prepared by the Company’s Finance Department, and is submitted by the Senior Vice President of Finance. The Finance Department also prepares monthly financial statements that include cash and earnings projections. These documents are provided to each Board member approximately one week before the Board’s 2nd Tuesday of each month meeting.
At the close of our field work, the Company informed the Audit Staff that a Finance Committee Charter was under development. This Finance Committee Charter should include specific responsibilities to monitor PGW’s capital and operating budgets, variances, and earnings and cash flow projections. Furthermore, the Finance Committee meeting minutes should be prepared in a timely manner and filed in the PFMC Board Minutes Book.
Staff’s Follow-up Recommendation – Complete the development of a PFMC Finance Committee Charter with specific responsibilities to track and monitor PGW’s capital and operating budget, variances, and earnings and cash flow projections; and, prepare and file the appropriate minutes of the Finance Committee with the PFMC Board Minutes Book.
Prior Recommendation – Assign responsibility to the treasurer’s department for establishing and enforcing cash management policies including accounts receivable collection policies and procedures.
Prior Situation – BWG concluded that while PGW’s Treasury Department was adequately staffed, the CFO had not delegated responsibility for cash management to the Treasurer. Typically, a Treasurer’s functional job duties include:
• Performing evaluations on the causes of delays in cash inflows and deposits, as well as making recommendation(s) and implementing corrective action to change current cash management policies and procedures designed to reduce or eliminate processing delays.
• Preparing annual, monthly and daily forecasts of cash receipts and disbursements based upon several years of historical data; comparing actual to estimated results; and preparing formal budget variance reports.
• Ensuring that cash received at district offices and “buy-pay” locations are deposited correctly, and that reviews are periodically conducted by the company’s internal audit staff.
At PGW, the Treasurer recognized that the lack of adequate policies and procedures related to customer deposits and service termination for nonpayment was contributing to significant delays in cash receipts and write-offs. However, the Treasurer did not have the authority to influence or alter such policy changes.
Follow-up Finding and Conclusion No. 31 – The Treasurer’s current job duties include responsibility for cash management.
Since BWG conducted its review in 2000, the Company’s organizational structure has changed significantly (see Chapter VII – Corporate Governance). While no major reporting relationship change occurred within the Treasurer’s office or section (i.e., Treasurer still reports to the Controller who in turn reports to the Senior Vice President of Finance), the Treasurer’s roles and responsibilities have changed. For example, we found that the Senior Vice President of Finance and the Treasurer now jointly establish policies regarding service revenues, project revenues, earnings on fixed balances and debt management strategies; jointly review departmental spending levels on a monthly basis; and, jointly meet with the Vice President of Customer Service and the Director of Collections on a weekly basis regarding collection policy matters. Furthermore, the more significant job duties of the current Treasurer include:
1. Recommending plans for the issuance, maintenance and payment of corporate revenue bonds, commercial paper and lease financing management, as well as securing new capital for PGW.
2. Maintaining a business working relationship with banking and investment advisors and negotiating the best prices for services.
3. Performing oversight of the cash management system that transfers funds electronically overnight for corporate and investment purposes; processing elements of PGW’s petty cash fund; and making tax payments to the local, state, and federal levels in conformity with tax law.
4. Performing oversight of the payroll function to ensure that all current employees and retirees are accurately paid in a timely fashion.
5. Performing oversight of the accounts payable system and helping coordinate issuing checks, wire transfers, and payment of outstanding bills.
Furthermore, the Treasurer now has authority to influence or alter policy changes related to customer deposits and service termination for nonpayment, which contribute to significant delays in cash receipts and write-offs for PGW (see Chapter VIII, Customer Service, Billings and Collections). However, we found that the Treasurer’s job description has not been updated since April 1997, and thus does not reflect the position’s current responsibilities. It should be noted that, near the end of our field work, the Audit Staff was informed that a Company-wide effort was underway to update job descriptions for all Company professionals, including employees of the Finance Department.
Staff’s Follow-up Recommendation – Update the job description for PGW’s Treasurer to reflect current job duties and responsibilities.
Prior Recommendation – Update accounting procedures manuals and implement procedures for the inventory and tracking of capital assets.
Prior Situation – BWG concluded that while PGW’s Controller Department had developed adequate policies, practices, and procedures manuals for its MAPS (an inventory, purchasing and order entry module) and FAMIS (Financial Asset management Information System - an accounts payable, cash management, general ledger, and fixed assets module) systems, other procedural manuals had not been updated for ten or more years. In addition, BWG found that PGW did not have a formal verification process to ensure the accuracy of its assets in the Company’s accounting records. At that time, there was no regulatory requirement or Company policy requiring inventories; however, sound business practices dictated that taking a physical inventory of certain assets, such as motor vehicles, work equipment, computers, and furniture, be performed on a periodic basis. The Consultant also stated the other Company assets associated with the provision of service to customers should be inventoried using physical inventory or sampling techniques, depending on the asset.
Follow-Up Finding and Conclusion No. 32 – PGW has not updated its accounting procedures manual, nor has it implemented a schedule for taking inventory or tracking its capital assets.
Our review revealed that although PGW has made some improvements to its accounting procedures for tracking inventory and capital assets since the time of the BWG’s audit, important aspects still need to be addressed. More specifically, the Audit Staff found that:
• The Company has updated almost all of its policies, practices and procedures for its Accounts Payable function. However, a few PGW Accounts Payable procedures are not up-to-date. For example, cash disbursement procedures were last updated in 1992 and payment of contractor invoices for main and service installation procedures were last updated in 1979.
• The Company was unable to demonstrate that they had completed the documentation process associated with accounting journal entries. The Company has updated approximately 75% of the documentation.
• The Company has completed the purchase of a report writing software package to provide full financial reporting assistance beginning Fiscal Year 2003. Reportedly, this software will enable the Company to publish monthly budget variance reports. However, at the time of our audit, the Company has not begun distributing formal monthly budget variance reports that include the appropriate departmental justifications.
• The Company has not finalized procedures relative to taking inventory and the tracking of capital assets. Although the Company capitalizes assets with a dollar value over $400, PGW’s management was still reviewing this policy with its external financial auditors and reportedly planned to increase the dollar limit to approximately $2,000 effective September 1, 2004.
The Audit Staff reviewed the Controller’s procedural manuals and found that those sampled by BWG had not been updated (see Exhibit X-4). We sampled eight accounting procedures from the Controller’s procedural manual and found that seven of these procedures were last updated in the late 1970s and 1980s, and that the eighth procedure was last updated in October 1992. Good business practice dictates that PGW have up-to-date accounting procedure manuals. Moreover, management should expeditiously implement procedures for the inventory and tracking of capital assets. Without periodic verification that the assets of record actually exist and are used or useful to the organization, there is a potential for unrecognized depletions and inaccurate financial reporting. Without controls to identify unexpected or unplanned changes in Company assets, it is possible that inappropriate employee use or even theft could go undetected.
Exhibit X-4
Philadelphia Gas Works
Latest Revisions Made to the Controller’s Procedural Manual
As of October 2003
| | | |
| |Procedure |Latest |
|Title of the Procedure |Number |Revision Date |
| | | |
|Annual physical inventory of Naphtha, LPG, and LNG |29 |8/23/83 |
| | | |
|Cash disbursements |744.01 |6/10/92 |
| | | |
|Customer deposits-partial payments |766 |3/18/86 |
| | | |
|Customer payments-by-phone |643 |9/11/78 |
| | | |
|Handling of messenger service receipts and priority mail |576 |8/6/75 |
| | | |
|Payment of contractor invoices for main and service installation |659 |8/17/79 |
| | | |
|Payroll time reporting |7375 |5/29/84 |
| | | |
|Pension calculation |770 |9/18/86 |
| | | |
|Tool control |570 |6/9/75 |
| | | |
|Transmittal of cash for storeroom CODs and over-the-counter sales |715.01 |10/24/91 |
Source: Data Request FM-6.
While there are no regulatory requirements or published schedule requiring inventory counts, physical inventory counts of certain key assets, such as motor vehicles, work equipment, computers, and furniture, should be performed on a regularly scheduled basis. Other assets associated with the provision of service to customers should be
inventoried by taking a physical inventory or using sampling techniques depending on the asset.
Generally, the Audit Staff found that PGW has been slow in implementing this BWG financial recommendation because of its perceived marginal impact on the overall organization. Instead, management claims that it has focused on other more significant areas, such as Customer Service, Gas Distribution, and Information Technology. As a result, PGW does not yet have a formal verification process for all of its key assets to ensure accuracy of its accounting records.
Staff’s Follow-up Recommendation – Update the Company’s accounting procedure manual, and expeditiously implement a procedure to track and verify its capital assets on a regular scheduled basis.
Prior Recommendation – Take steps to implement all appropriate recommendations from the forensic audit currently being performed by an external accounting firm.
Prior Situation – During 1999 and early 2000 there were a number of widely reported scandals that later led to criminal prosecution of a few former PGW executives. Shortly thereafter, a new PGW senior executive management team was installed. Then, in September 2000, the City’s Director of Finance (who also serves as a member of the PFMC Board and its Audit Committee) entered into a preliminary agreement with a “Big Five” accounting firm to perform a retrospective forensic audit of PGW. The proposed audit was to include:
• A review of the facts and circumstances surrounding the acquisition and implementation of PGW’s Billing, Credit and Collection System (also see Chapter VIII - Customer Service, Billing and Collection).
• An investigation of activities performed by some former PGW senior management employees. The purpose of the investigation was to detect potential fraud, waste, mismanagement, misconduct, earnings manipulation, misappropriation of corporate assets, conflicts of interest, inappropriate segregation of duties, transactional fraud, and violation of fiduciary duties.
• An analysis of PGW’s policies, practices, procedures and protocols related to both voluntary and involuntary employee separation, and to assess the risk to the Company due to downsizing.
Follow-Up Finding and Conclusion No. 33 – The Company claims to have taken the appropriate steps to resolve the findings identified in the draft forensic audit.
PGW informed the Audit Staff that the anticipated forensic audit was completed but the report was only issued in draft form. According to PGW officials, a final forensic audit report was never issued because the proposed solutions presented by the forensic auditors did not meet the expectations of the City Finance Director, whose office commissioned and paid for the audit. Nevertheless, as a professional courtesy, PGW was given a copy of the draft forensic audit report and had an opportunity to respond to its findings and recommendations. PGW officials stated that they could not share the contents of the draft forensic audit with the Audit Staff since it had never been finalized and released by the City.
Nonetheless, we were able to determine that PFMC’s Audit Committee has taken some steps, based in part on the draft forensic audit report’s finding and conclusions, to initiate change within PGW. First, most of the Internal Audit (IA) Department’s job duties and responsibilities were outsourced to a public accounting firm (see Follow-up Finding and Conclusion No. 27) and, as a result, the Department was downsized to one auditor, who facilitates the outsourced IA firm’s audit work. Second, the outsourced IA firm began focusing on a number of high-risk assignments, which are all scheduled for completion by the Fall of 2004. The Audit Staff reviewed the roster of IA assignments. These include:
Completed Audits:
• Billing Collections and Customer Service (BCCS) Application – report issued May 12, 2003.
• Credit & Collections Process and Uncollectables & Write-offs Process – report issued August 22, 2003.
• Senior Citizen Discounts Process – report issued December 2003
In Progress Audits (reports projected to be issued by early 2004):
• Gas Procurement Process
• Metering
• Materials Management Controls
• Billing and Adjustments
• Information Technology Security
Planned Audits (reports projected to be issued by late Fall 2004):
• Employee Delinquencies
• Accounts Receivable Process
• Liens and Judgments Process
• Time and Labor Distribution Process
• Benefits Administration Controls Process
PGW indicated that when the current roster of outsourced internal audit assignments is completed, final disposition of the forensic audit findings would be considered complete. A copy of each completed audit is being submitted to the PFMC Audit Committee.
Staff’s Follow-Up Recommendation – Complete the disposition of the forensic audit findings. Provide a summary to the PUC’s Bureau of Audits of the problem areas identified by the forensic audit and how PGW addressed the recommendations for improvement.
XI. INFORMATION TECHNOLOGY
Prior Recommendation – Develop and implement a formal information technology (IT) planning process.
Prior Situation – PGW did not have a clearly defined IT strategy. The IT plan was out-of-date and reflective of neither current problems and issues nor of the needs of the current management team. PGW did not have a formal process for preparing an IT strategic plan. The Consultant recommended that the IT plan be prepared in conjunction with PGW’s overall strategic planning and budgeting process.
Follow-up Finding and Conclusion No. 34 – PGW now has a formal IT Department planning process and an up-to-date IT strategic plan.
PGW is formally documenting its long-term IT priorities and major activities, along with a work plan, target dates for completion, and identification of responsible parties, in a formal strategic planning document. The Company has developed and documented a corporate-wide, strategic planning process for IT, as well as other departments, in response to the management audit recommendation. The IT Strategic Plan appears to provide appropriate guidance, direction, and accountability for the IT Department and its corporate management.
The fiscal year 2004 IT Strategic Plan, a sub-part of the corporate-wide Strategic Plan, was the second developed since the strategic planning process began. IT’s 2004 Strategic Plan involved the following supporting documents:
• Architectural Plan (Five-year Infrastructure Upgrade Proposal)
o IT is in the process of upgrading its internal architecture
• Blueprint for Operations Excellence which describes the following IT topics:
o Functions
o Control processes
o Organizational structure
o Budget Implications
o Cost Controls
• 2003 Capital Budget
• Responsibility Matrix
• Budget Notes
The IT Department’s strategic planning procedure is part of the corporate-wide strategic planning process. The corporation identifies its goals in March of each year. The IT Department then performs the developmental processes to complete its strategic plan. Among these processes are:
• Issuing a questionnaire to departments covering the basic technology needs including computer hardware, telecommunications equipment, and computer software;
• Holding a conference with each department to understand its technology needs;
• Reviewing the corporate goals and determining the appropriate IT goals necessary to support those corporate goals;
• Preparing the IT strategic plan and submitting it to corporate for review and approval;
• Assigning the approved components of the strategic plan to the appropriate employees; and
• Developing target dates for completing the tasks.
Once completed, each department prepares a quarterly status report on the implementation of the strategic plan.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Emphasize outsourcing as a means for developing and implementing new IT applications to the extent possible.
Prior Situation – The involvement of key users in the initiation and development of major IT systems had been inconsistent. Some systems were adversely affected as a consequence of insufficient involvement by the users. Most significantly, the disastrous implementation of the BCCS (Billing, Collection and Customer Service) application in July 1999, which resulted in significant cost overruns, loss of integrity of customer records, and poor customer service, was primarily due to insufficient planning and preparation for the massive change in technology that was taking place. While there were advantages to implementing the new BCCS model, PGW undertook this massive change without devoting sufficient attention to the fact that it was making an implicit decision to change all of its IT systems from a mainframe to a client-server environment. Further, the Company failed to fully assess the time the change would take, the disruption it would cause, and drastically underestimating the full cost that would be incurred.
Follow-up Finding and Conclusion No. 35 – PGW now outsources most of its projects; however, the IT Department does not currently have a comprehensive sourcing strategy.
PGW now outsources most IT application development projects and the administration of the developed applications due to a lack of expertise. The lack of expertise is caused, in part, by the Philadelphia city residency requirement making it more difficult to attract IT professionals and, in part, by the lack of financial resources. The outsourced IT projects include PGW’s new Payroll and new Human Resources Information System (HRIS). However, the Company plans to develop the new Mobile dispatch application in-house. In addition to outsourcing, PGW created a project management office (PMO) within the Customer Affairs Department to manage and maintain the Customer Information System (CIS). IT now chiefly maintains programs not outsourced or maintained by the PMO.
A consultant recently benchmarked PGW’s IT functions with other companies in the industry. According to the report draft, (the final report was not yet available as of the end of our fieldwork) PGW’s overall costs were lower than the panel of peer group companies, but were higher in the area of the Help Desk, Mainframe Data Center, and purchased software. Exhibit XI-1 shows a comparison of PGW’s IT costs to the peer group panel by function, and Exhibit XI-2 shows a comparison of PGW’s IT costs to the peer group panel by component.
Exhibit XI-1
Philadelphia Gas Works
IT Functions Costs
2002
| | | | | | | |
| |IT Functions | |PGW | |Peer Group | |
| | | |$(000) | |$(000) | |
| | | | | | | |
| |Application Development | |5,778 | |6,017 | |
| |Application Support | |1,708 | |2,141 | |
| |Distribution Computing | |1,363 | |1,883 | |
| |IT Help Desk | |622 | |273 | |
| |Wide Area Data Network | |363 | |396 | |
| |Mainframe Data Center | |1,003 | |535 | |
| |Midrange NT | |241 | |538 | |
| |Midrange Unix | | 2,006 | | 2,487 | |
| | | | | | | |
| | Totals | |13,084 | |14,270 | |
| | | | | | | |
Source: Gartner Consulting Group IT Benchmark Study (draft).
Exhibit XI-2
Philadelphia Gas Works
IT Components Costs
2002
| | | | | | | |
| |IT Components | |PGW | |Peer Group | |
| | | |$(000) | |$(000) | |
| | | | | | | |
| |Occupancy | |672 | | 360 | |
| |Outsourcing | |375 | | 1,612 | |
| |Disaster Recovery | |218 | | 62 | |
| |Transmission | |168 | | 152 | |
| |Personnel | |4,234 | | 7,649 | |
| |Software | |6,243 | | 1,526 | |
| |Hardware | | 1,174 | | 2,909 | |
| | | | | | | |
| | Totals | |13,084 | | 14,270 | |
| | | | | | | |
Source: Gartner Consulting Group IT Benchmark Study (draft).
In the draft benchmarking report, the consultant recommended that PGW determine which business functions should be out-sourced, assess whether the existing management model is suitable for a multi-supplier environment, and then develop an overall sourcing strategy and implementation plan. IT should have a sourcing strategy to ensure that it selects appropriate, cost-effective vendors. PGW often relies on a consultant to select the vendors and negotiate the contracts. Further, the Company outsources based on resource availability instead of comparing the cost of its services with those in the market.
Outsourcing projects have improved the timing and quality of products and services, but the lack of a sourcing strategy means the Company may be unnecessarily paying higher prices and/or receiving lower quality work. For example, PGW’s IT Help Desk costs per call are $57, while the peer group profile of 14 business entities’ costs per call were only $25, or 56% less. According to the study, PGW’s call center handled 11,300 calls in 2002; therefore, the Company might be able to outsource this function considerably cheaper than the present costs. If the Company could outsource at $25 per call, they could potentially save $361,600 per year. The potential savings from outsourcing the Mainframe Data Center are approximately $600,000 annually. At the time our fieldwork was ending, PGW’s IT Department was preparing a request for proposal (RFP) to run the mainframe applications on another company’s mainframe. Furthermore, Exhibit XI-2 shows that PGW spent $6,243,000 on software in 2002, but the peer group only spent an average of $1,526,000. While the consultant showed the difference in total expense, they did not determine potential savings by developing less software in house and using more software provided by a vendor.
Staff’s Follow-up Recommendation – Develop a comprehensive IT application strategy that defines the process for evaluating which projects to outsource or to perform in house, selecting vendors, and project oversight.
Prior Recommendation – Continue efforts to select and implement a new Human Resource Information System (HRIS).
Prior Situation – PGW had a mainframe-based payroll system that was almost thirty years old. The system was inflexible and provided only a portion of the information needed by human resource management. PGW had licensed and paid $420,000 in maintenance fees through 1999 for a Cyborg HRIS software package that it had never installed.
Follow-up Finding and Conclusion No. 36 – PGW has outsourced its current human resources database; however, its human resource history is still on the Company’s mainframe database.
PGW has outsourced its human resources data processing activities to ADP. The changeover from the old human resource/payroll mainframe application to the ADP HRIS system was completed in 2003. HRIS is an integrated component of the payroll system. Payroll production and many other types of human resource information are currently outsourced, including:
• General employee information,
• Recruiting and requisition processes,
• Salary administration,
• Training and employee development,
• Position control and salary planning,
• Health and safety,
• Disciplinary actions,
• Regulatory compliance,
• Employee self-service, and
• Organizational charting.
The vendor, not IT, troubleshoots HRIS system problems. PGW anticipates that most modifications to this application will be implemented by the use of fields, tables, and data. Human Resource Department personnel update the fields with employee data. Access to different segments of the system is controlled with access security. However, a company’s human resources computer system should also be periodically updated to reflect the latest technological applications in order to improve services, functionality, and to update the security of employee information. One way to accomplish this task is to use an outside vendor because it gives the company the ability to stay current with the latest technology. In addition, PGW’s changeover to an outside vendor was expected to result in operational cost savings.
As indicated in Exhibit XI-3 below, PGW estimates that the ADP HRIS system would cost $835,000 to implement and maintain in 2003, and $280,000 annually to maintain in subsequent years. While PGW’s projections showed that there would be no savings by implementing the ADP HRIS system in 2003 or 2004, significant savings should occur in subsequent years once all the former Human Resource mainframe applications are outsourced to the ADP HRIS system. As shown on Exhibit XI-3, PGW estimates that starting in 2005, the savings will exceed $300,000 a year.
Exhibit XI-3
Philadelphia Gas Works
Estimated Fiscal Year Project Costs and Cost Savings
For ADP Payroll/HIRS System
2003-2007
| | | | | | |
| |$ in millions |$ in millions |$ in millions |$ in millions |$ in millions |
| | | | | | |
|Rate of Annual Wage Increases | | | |
| Non-Union |0.0% |0.0% |0.0% |2.0% ¹ | |
| Union |3.0% |0.0% |0.0% |2.0% ¹ | |
| | | | | | |
|Actual CPI |3.4% |2.8% |1.6% |2.5% |2.6% |
| | | | | | |
|Total Payroll as of Prior Year’s Fiscal | $94.3 | $99.2 | $99.6 | $92.3 | $385.3 |
|Year End | | | | | |
| | | | | | |
|Estimated Savings From Lower Rate Wage Increases | | | |
| Non-Union | $1.1 | $1.0 | $0.6 | $0.5 | $3.2 |
| Union | $0.8 | $2.4 | $1.6 | $1.4 | $6.2 |
| Total | $1.9 | $3.4 | $2.2 | $1.9 | $9.4 |
| | | | | | |
| Estimated Savings Realized for the Year| $1.9 | $5.3 | $7.5 | $9.4 | $24.0 |
|vs. 1999 Levels | | | | | |
| | | | | | |
|¹ Represents the impact of 2% increase occurring mid-way through the year. | |
Source: Data Request HR-3, Collective Bargaining Agreement, Auditor Analysis.
base to which future annual increases are applied. Therefore, the actual compensation savings in 2001 are not only the $3.4 million savings from a lower wage increase for that year, but also the $1.9 million savings achieved in 2000 that continue into 2001, for a total of $5.3 million. This continues with the $5.3 million from 2001 also being experienced in 2002, resulting in a combined savings of $7.4, and the 2002 savings being experienced in 2003 for an annual impact of $9.3 million. Moreover, it should be noted that this $9.4 million savings realized during 2003 will occur annually into the future and even continue to grow, as long as the Company continues to maintain wage increases that are below the previous average rate of 0.6% more than CPI.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Take steps to insure that the Code of Ethics and conflict of interest policy are understood by all employees, and obtain proof that each employee has a copy of the policies.
Prior Situation – PGW had issued an Ethics and Conflict of Interest Policy and Compliance Program (Policy Number 003-01) on August 6, 1999. Recognizing the importance of each employee understanding the Company’s Code of Ethics, the policy was distributed to all departments which were in turn responsible for disseminating policies to employees. However, there was no documentation indicating that employees had seen and agreed to the terms of the policy nor was there specific training provided to promote ethics in the work force.
Follow-up Finding and Conclusion No. 41 – PGW’s 2002 Ethics Policy was distributed to non-union personnel at ethics training sessions; however, there continues to be no documentation indicating which employees received Ethics Policy training nor confirmation that they have seen the policy and agreed to its terms.
A resolution was approved by the Philadelphia Facilities Management Corporation (PFMC) Board of Directors on March 15, 2002, authorizing the revision of PGW’s Ethics Policy and provision of ethics training to employees. PGW amended its Ethics Policy to incorporate provisions of the State Ethics Law and strengthen provisions of its 1999 Policy based on a December 2001 Pennsylvania Supreme Court decision that PGW employees are subject to the State Ethics Act. The revised policy was distributed to non-union employees at ethics training sessions that took place in March/April 2002 and April 2003. There were no sign-in sheets or other documentation indicating who received the training or who received the revised Ethics Policy, and whether they agree to the terms of the policy.
Collective bargaining unit employees did not receive a copy of the 2002 Ethics Policy or its predecessor. It is management’s position that application of the Ethics Policy to bargaining unit employees must be negotiated before it is made a condition of employment. As previously indicated, the current Collective Bargaining Agreement is scheduled to expire May 15, 2004. Therefore the requirement that employees conform to the Company’s Ethics Policy should be included in union negotiations.
Staff’s Follow-up Recommendation – Negotiate a provision in the next collective bargaining agreement whereby it is stated that the Company’s Ethics Policy applies to employees as a condition of employment. Provide ethics training and a copy of the Ethics Policy to all employees, requiring them to evidence receipt and agreement with the terms of the Policy.
Prior Recommendation – Enhance union-management safety training efforts and develop specific annual goals for achieving improved safety levels.
Prior Situation – The consultant found that while PGW had a good safety training program in place, its lost time to accident (LTA) rate per one hundred employees was high compared to other gas utilities. Safety-related goals identified in the September 1999 Five Year Plan included reducing lost work day cases by 20%; reducing preventable motor vehicle accidents by 20%; and enhancing public safety through oversight of safety activities.
Follow-up Finding and Conclusion No. 42 – PGW has improved safety levels substantially as a result of a comprehensive safety training program that includes specific safety goals.
At PGW the Manager’s Safety Committee, consisting of the Safety Director and Department managers, oversees safety training and sets safety goals. PGW conducts numerous safety training courses including basic first aid, cardio pulmonary resuscitation (CPR), fire response, safe equipment operation, personal protective equipment, work area protection, back injury prevention, new and remedial drivers training, and operator qualification training. This training is conducted on an ongoing basis.
The specific safety goals established for 2003 were 43 lost time accidents and 56 preventable motor vehicle accidents. As shown in Exhibit XII-3, PGW’s safety record reflects significant improvement in all safety tracking categories from 2000 to 2002 (the
last year complete annual data was available). Most notable were the 42% reduction in LTAs and the 26% decrease in preventable motor vehicle accidents during the period. In the two categories where specific goals were established for 2003, year-to-date totals are well within the range for meeting both goals.
In addition, PGW’s LTAs per 100 employees have improved both internally (see Exhibit XII-3) and in comparison to other gas utilities (see Exhibit XII-4). Specifically, the Company’s LTAs per 100 employees declined 37% from 3.36 in 2000 to 2.10 in 2002. The 2003 year-to-date rate through August was a favorable 1.51 LTAs per 100. Also, PGW’s LTAs per 100 employees were higher than the average of four other similar-sized gas utilities for 2000 and 2001 but lower than the 2002 average.
Staff’s Follow-up Recommendation – None.
Exhibit XII-3
Philadelphia Gas Works
Safety Results
Years 2000, 2001, 2002, and January – August 2003
| |
| |
|EEO Job Categories |
|EEO Job Categories |
|EEO Job Categories |
|EEO|2000 |200|2002 |200|Percent of |Net|
|Job| |1 | |3 |2003 Total |Cha|
|Cat| | | | |Company |nge|
|ego| | | | | | |
|rie| | | | | | |
|s | | | | | | |
| |
| |
| |
| | | | | | | | | | |Officials & Managers |2 |1 |3 |0 |5 |5 |6 |8 | |Professionals |2 |4 |6 |5 |7 |12 |11 |18 | |Technicians |0 |1 |1 |0 |2 |2 |3 |3 | |Sales Workers |0 |0 |0 |0 |0 |0 |0 |0 | |Office & Clerical |3 |13 |16 |8 |22 |30 |35 |46 | |Skilled Workers |2 |2 |4 |0 |0 |0 |2 |4 | |Operatives |16 |27 |43 |0 |0 |0 |27 |43 | |Laborers | |0 |0 |0 |0 |0 |0 |0 |0 | |Service Workers | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |Totals | |25 |48 |73 |13 |36 |49 |84 |122 | | | | | | | | | | | | |
employee performance appraisal process. PGW’s management employees (down through the Professional level) are now rated on their performance relative to diversity. Senior management job descriptions include responsibilities for achieving diversity goals. In addition, management employees are routinely receiving training on how to achieve AA goals.
The Human Resources Department informs management and other individuals responsible for hiring when job groups are under-utilized. Management is expected to make an effort to bring utilization up when positions are under-utilized. The Director of EEO Compliance, through the Employee Utilization Committee, meets periodically with appropriate management personnel to review the progress made and to develop alternatives if required. The annual AAP addresses management accountability and is reviewed annually with appropriate management personnel.
As a result of the additional management diversity training and accountability, PGW’s management is more informed about the Company’s diversity program and efforts to improve utilization of minorities and females are more likely to succeed.
Staff’s Follow-up Recommendation – None.
Prior Recommendation – Develop and implement a meaningful minority business enterprise, women business enterprise, and persons with disabilities owned business enterprise (MWDBE) program for making purchases outside the normal procurement process.
Prior Situation – PGW did not have an effective MWDBE program for purchases made outside the normal procurement process (known at PGW as “signature purchase”). As appropriate, vendors were instructed to contact PGW department representatives directly if the services were something outside the normal procurement process, for example, accounting or legal services. There was no follow-up to ensure that potential MWDBE vendors had been given full consideration for promoting their services. Since these “signature purchases” were not clearly defined the opportunities for using MWDBE vendors was limited.
Follow-up Finding and Conclusion No. 48 – PGW has not developed a program to address purchases made outside of the normal purchasing process and has not established goals and strategies to improve diversity purchases.
PGW has not established a MWDBE purchases program for “signature purchases”. Further, within the Procurement Department (where a diversity program exists for normal purchases) documentation, goals, and strategies are lacking. However, PGW has continued to track its MWDBE purchases. Exhibit XIII-4 indicates that although total MWDBE purchases increased approximately 31% from $2.9 million in 1999 to $3.8 million in 2002, MWDBE purchases as a percentage of total purchases decreased from 12.8% in 1999 to 5.9% for 2002. This occurred because total purchases increased from $22.6 million in 1999 to $64.4 million in 2002, or by 185% during the period.
PGW and the City believe that they are legally prevented from requiring that a certain percentage of vendor business be based on ethnic, gender or other non-business related factors. Therefore, in 1990, PGW and the City stopped utilizing percentage requirements for diversity purchases. While we agree that PGW should not require a quota for MWDBE purchases in accordance with the Commission’s Policy Statement regarding Diversity at Major Jurisdictional Utility Companies (at 52 Pa. Code §69.801 – 69.809), it should periodically examine its performance, set formal goals for improvement, determine how it’s going to achieve these goals, and document the results. Without goals, strategies, and documented results, PGW will have a difficult time achieving and measuring improvement in its diversity purchases.
Staff’s Follow-up Recommendation – Set goals and develop strategies to increase purchases from MWDBE vendors, and document the results.
Philadelphia Gas Works
Total Utility Purchases for Minority,
Women, and Disabled Person Businesses
For the Years 1999 – 2002
| | | | | | | | | | | | | | | | |MBE | |WBE | |DBE | |TOTAL MWDBE | | | |Total |Annual |% of Total | |Annual |% of Total | |Annual |% of Total | |Annual |% of Total | | |Years |Purchases |Purchases |Purchases | |Purchases |Purchases | |Purchases |Purchases | |Purchases |Purchases | | | | | | | | | | | | | | | | | |1999 |$22,600,000 |$1,100,000 |4.9% | |$1,800,000 |8.0% | |$0 |0.0% | |$2,900,000 |12.8% | | | | | | | | | | | | | | | | | |2000 |$34,093,554 |$1,408,173 |4.1% | |$2,483,513 |7.3% | |$0 |0.0% | |$3,891,686 |11.4% | | | | | | | | | | | | | | | | | |2001 |$61,170,290 |$1,891,290 |3.1% | |$1,079,828 |1.8% | |$1,357 | ................
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