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Wall Street consultants who recommended PGW privatization hired to manage PGW privatization
City hires Wall Street consultants at Lazard, the firm paid to conduct a study that recommended privatizing Philadelphia Gas Works, to manage the privatization of PGW.
Wall Street consultants who recommended PGW privatization hired to manage PGW privatization
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Philadelphia has hired Wall Street consultants at Lazard, the firm paid to conduct a study that recommended privatizing Philadelphia Gas Works (PGW), to manage the privatization of PGW.
The city plans an initial payment of $2 million in fees to Lazard and a slew of other contractors, including investment bank M.R. Beal. The contract also hands work to the locally well-connected Ballard Sphar law firm and Ceisler Media public relations outfit, among others.
City Paper first discovered that Lazard planned to bid to manage the sale, and would be allowed to do so, in March. The contract could be perceived as reflecting one of a few potential conflicts of interest on Lazard's part.
In July 2010, Nutter quietly paid the firm $200,000 to study privatizing PGW. Lazard's proposal, among other possibilities, included selling PGW to an infrastructure fund; Lazard happens to have a strategic relationship with such a fund, the Lazard Global Listed Infrastructure Portfolio. Finally, two of the six potential buyers Lazard interviewed for the PGW study were Lazard clients.
The city says Lazard could complete such a sale in 18 to 24 months. The Reuters article on the story carried a more unequivocal headline: “Philadelphia to sell gas utility in 2 years.”
But City Council must approve such a sale, and there is no guarantee that they will do so.
Consumer advocates contend that privatization could hurt ratepayers and the 109,000 poor and elderly that rely on subsidized gas heat, and put 1,138 union workers at risk. Mayor Michael Nutter, citing the report by Lazard, says a sale could free the city from major financial liabilities, including costly pensions.
In March, Gas Workers Local 686, Councilwoman Maria Quiñones-Sánchez, City Controller Alan Butkovitz and Community Legal Services attorney and ratepayer advocate Phil Bertocci all criticized Nutter's privatization proposal.
"For someone to be able to capture a profit, they're going to have to do it through rate increases and slashing employees," Butkovitz told CP at the time.
The Lazard study found that gas utilities like PGW, when merged with private companies, are able to realize efficiencies through economies of scale. But a 1999 study by Public Financial Management found that to sell at a profit, PGW would have to inflict "significant" layoffs and "essentially eliminate" social programs.
PGW has effected a profound turnaround since the late 1990s, when mismanagement and heavy debt forced the city to issue a $45 million loan in 2000. PGW has not only repaid that debt, but cut personnel by nearly 40 percent since 1988 and boosted collections to more than 98 percent. PGW is still stuck with $1.142 billion in long-term debt but is no longer paying it off with new debt. The company has resumed delivering its $18 million franchise payment to the city.
Related story: Utility Players A consultant (and potential bidder) has advised the city to sell off PGW. It could be a perilous gamble (March 2012).
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