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

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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 Chartas of July 10, 2003 / 3
II-1 / Summary of January 2001Management Audit Recommendations and Staff’s Follow-up Findings, Conclusions, and Recommendations / 7

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 –
Year 2000 / 54

VIII-8

/ Steps Required to Shut Off Residential Service and Timeline –
Year 2003 / 55

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 Savingsfor 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
XII-3
XII-4
XII-5
XIII-1
XIII-2
XIII-3
XIII-4 / Rate of Annual Wage Increases/Estimated Savings Realized
Safety Results
Comparison of Lost Time to Accidents per 100 Employees to Panel Companies
Fringe Benefit Costs
Number of Employees by EEO Category
2003 Job Group Utilization Analysis
New Hires Summary for 2001 through 2003
Total Utility Purchases for Minority, Women, and Disabled Person Businesses for the Years 1999 - 2002 / 106
109
109
113
116
119
121
124

1

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:

  • Proceed with its March 2001 Implementation Plan.
  • 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 fivesemiannual 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:

  • Corporate Planning
  • Staffing Levels
  • Support Services
  • Ongoing or Planned Efforts
  • Corporate Governance
  • Customer Service, Billing and Collection
  • Gas Distribution and Supply Management
  • Financial Management
  • Information Technology
  • Human Resource Management
  • Diversity and Equal Employment Opportunity
  • 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.

1

Philadelphia Gas Works

Organization Chart as of July 10, 2003

1

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.
  • The reduction in the Company’s workers’ compensation expenses and rate of accidents has resulted in annual savings of approximately $456,000.
  • The reduction of monthly disability payouts resulted in annual savings of approximately $80,000.
  • The provision of timely information and improvement initiatives to the Company’s stakeholders.
  • The implementation of a new organization structure and encourage managers to communicate policies on a departmental and Company-wide basis.
  • The establishment of an ethics hotline and an Ethics Officer to manage the program.
  • The acceleration of the Company’s cost iron main replacement program to reasonable levels.
  • 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.
  • The development and implementation of a formal information technology planning process.
  • Taken appropriate steps to reduce and control IT costs resulting in annual savings of $4.2 million.
  • The annual preparation and filing of an Affirmative Action Plan.
  • 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.
  • 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, whichthe consultant estimated would produce annual savings of $10 million within three to five years of implementation.

1

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
Bureau of Audit’s
Prior Recommendations / Originally
Targeted
Completion Date / MEI
Finding Number / Staff’s Follow-up Findings
And Conclusions
as of January 21, 2004 / Staff’s
Follow-up
Recommendation
III. CORPORATE PLANNING
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. / September 2001 / 1 / The Company has made significant improvements to its corporate planning process. / None.
IV.STAFFING LEVELS
Reduce the number of positions that have high or low spans of control. / March 2002 / 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. / Periodically analyze each position that has a span of control outside a 1:4 to 1:9 reporting range, and adjust job duties as appropriate based on the results of this review.
Develop and implement a labor relations strategy that will promote improved productivity and lower labor costs. / October 2001 / 3 / The Company has implemented a labor relations strategy to promote improved productivity and control labor costs. / None.
V.SUPPORT SERVICES
Take steps to reduce workers’ compensation claims costs. / January 2002 / 4 / The Company has been able to control its workers’ compensation expenses and effectively reduce the rate of accidents. / None.


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
Bureau of Audit’s
Prior Recommendations / Originally
Targeted
Completion Date / MEI
Finding Number / Staff’s Follow-up Findings
And Conclusions
as of January 21, 2004 / Staff’s
Follow-up
Recommendation
VI.ONGOING OR PLANNED EFFORTS
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 (PFMC) Board ofDirectors, the City Council, and the Mayor. / December 2001 / 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. / None.
VII. CORPORATE GOVERNANCE
Revise the governance structure of PGW to make it more accountable and to eliminate overlapping responsibilities. / Rejected / 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. / 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.
7 / The Company has not made a due diligent effort to meet those guidelines recommended by the Commission, the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB). / 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.

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
Bureau of Audit’s
Prior Recommendations / Originally
Targeted
Completion Date / MEI
Finding Number / Staff’s Follow-up Findings
And Conclusions
as of January 21, 2004 / Staff’s
Follow-up
Recommendation
VII. CORPORATE GOVERNANCE (continued)
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. / May 2002 / 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. / None.
Take steps to improve PGW’s interfaces with outside parties. / February 2002 / 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. / None.
Establish an ethics “hotline” reporting directly to PGW’s manager of internal audit or its chief legal counsel. / February 2002 / 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. / None.


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
Bureau of Audit’s
Prior Recommendations / Originally
Targeted
Completion Date / MEI
Finding Number / Staff’s Follow-up Findings
And Conclusions
as of January 21, 2004 / Staff’s
Follow-up
Recommendation
VIII. CUSTOMER SERVICE, BILLING AND COLLECTION
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. / Ongoing / 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. / 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.
Complete the installation of automated meter reading (AMR) devices on commercial/industrial accounts to improve the cost effectiveness of reading their meters. / FY 2005 / 12 / PGW has not completed the installation of AMR meters for its commercial/industrial accounts. / Complete the installation of AMR devices on commercial/industrial accounts to improve the cost effectiveness of reading their meters.
Take steps to improve delinquent payments and uncollectible accounts. / March 2002 / 13 / The Company has not significantly reduced the size of its uncollectible accounts (bad debt write-offs) and delinquent receivables have increased substantially. / Strengthen credit and collections policies and procedures, and implement changes as necessary to reduce the write-offs of uncollectible accounts.
Revise policies so that PGW can shut off customers after 32 days compared to its current 48-day termination. / September 2003 / 14 / PGW’s current shut-off procedures comply with Commission regulations. / None.


PHILADELPHIA GAS WORKS