Summary

The Mayor of Philadelphia recently announced the hiring of two investment bankers to start the solicitation process for selling the city’s gas division. As a unique feature of this transaction, the gas division is regulated by the Pennsylvania Public Utility Commission. The Commission will play a major role in determining the final terms of the transaction and potential buyers should be prepared to meet the Commission’s requirements.

Transaction

On April 25, 2013, the city of Philadelphia announced that it had engaged JP Morgan and Loop Capital to seek a buyer for Philadelphia Gas Works (“PGW”), the largest municipally-owned gas utility in the United States. PGW serves 500,000 customer accounts, representing a population of 1.2 million people, and has been valued, under various scenarios, at amounts approaching $2 Billion. City officials are planning to receive offers for the gas system this summer in response to solicitations that will be managed by the investment bankers.

While most municipal systems are not subject to rate and service regulation by a statewide commission, PGW is unique. PGW is regulated by the Pennsylvania Public Utility Commission (the “Commission”), which imposes its own separate requirements on transactions involving a change of control of a public utility. Accordingly, this transaction will raise many regulatory issues in addition to the customary issues and approvals associated with an M&A transaction. The Commission will play a major role in determining the key terms of the transaction, and potential buyers should be educated and prepared to meet the Commission’s requirements.

Legal/Regulatory Requirements

In Pennsylvania, the legal prerequisite to a transfer of control of a public utility is that the utility obtain a certificate of convenience (“Certificate”) from the Commission. Under the Pennsylvania Public Utility Code (the “Code”), a public utility cannot transfer possession or use of any tangible or intangible property to another party without authority. To receive authority, the utility must file an application with the Commission and meet the burden established by the Pennsylvania Supreme Court, showing that the transaction is necessary or proper for the service, accommodation, convenience or safety of the public. Those seeking approval for a transfer application must demonstrate, by a preponderance of the evidence, that the change of control will affirmatively benefit the public interest in some substantial way. This standard is applied by weighing the benefits and detriments of the transaction to all affected parties, so the applicant must present a case to the Commission that is substantial and compelling.

To ensure that applications for a change in control are in the public interest, the Commission may impose conditions on its approval of the transaction. The Code permits the Commission to impose such conditions as it may deem to be just and reasonable. In past transactions, the Commission has attached various conditions to its approval, including rate moratoriums, consumer education programs, staffing commitments, customer service commitments and investments in green energy. Every transaction is different, so potential buyers should understand and be prepared for the various scenarios under which the new owner of PGW may have ongoing obligations.

Although the Public Utility Code does not impose a timeframe on the proceedings, it usually takes about nine (9) months to receive approval. Typically, the approval process includes: (1) filing the application; (2) discovery; (3) hearings (both evidentiary and non-evidentiary) before an administrative law judge (“ALJ”); (4) issuance of the ALJ’s decision; (5) exceptions to the decision, if any, and (6) the final Commission order.

Strategic Preparation and Planning

Regulatory approval is the biggest hurdle Acquisitions in the non-regulated sectors are mainly assessed in terms of investor value, with little to no reference to the public interest. However, for acquisitions of regulated utilities in Pennsylvania, the public interest test requires an applicant to meet its burden with particularity. This type of evidence requires specialized skills and reliable insight into the application approval process. Parties interested in purchasing PGW will need to begin assembling their teams and planning their strategies for winning the bid and obtaining the required regulatory approval.

Saul Ewing’s Energy and Utilities Practice includes the former Chairman of the Pennsylvania Public Utility Commission, as well as other attorneys with extensive experience in transactional and regulatory matters involving regulated utilities. Feel free to contact any of the authors for more information about the PGW sale or other issues affecting your energy or utility business.