E.B.R.O. 497-01 E.B.O. 179-14 E.B.O. 179-15 THE ONTARIO ENERGY BOARD IN THE MATTER OF the Ontario Energy Board Act, R.S.O. 1990, c. O.13; AND IN THE MATTER OF an Application by The Consumers' Gas Company Ltd. for an order or orders approving rates to be charged for the sale, distribution, transmission and storage of gas for its 1999 fiscal year; AND IN THE MATTER OF an Application by the Consumers' Gas Company Ltd. for all necessary approvals of trans- actions related to the transfer of certain customer information systems to an affiliate; AND IN THE MATTER OF an Application by The Consumers' Gas Company Ltd. for all necessary approvals of trans- actions related to the transfer of certain businesses and activities to one or more affiliates; AND IN THE MATTER OF an Application by The Consumers' Gas Company Ltd. for approval of an incentive mechanism in relation to the Operation and Maintenance Expense component of its cost of service, effective during the 2000 through 2002 fiscal years, and an incentive mechanism in relation to Demand Side Management. Hearing held at 2300 Yonge Street, 25th Floor, Hearing Room No. 1, Toronto, Ontario on Monday, November 16, 1998 commencing at 9:00 a.m. -------------------------- SECOND TECHNICAL CONFERENCE -------------------------- F A C I L I T A T O R : EDWARD SWEET, Board Technical Staff 2 A P P E A R A N C E S EDWARD SWEET ) Board Technical Staff NEIL McKAY ) KATHY LITT ) JERRY FARRELL ) Enbridge Consumers Gas JAMES GRANT ) Applicant JUDY ALLAN ) ROBERT WARREN Consumers Association of Canada (CAC) PETER C.P. THOMPSON, Q.C. Industrial Gas Users (not present) Association (IGUA) MICHAEL JANIGAN ) Ontario Coalition JOHN NORSWORTHY ) Against Poverty (OCAP) MURRAY KLIPPENSTEIN Pollution Probe IAN MONDROW HVAC Coalition DON ROGERS Union Energy MARK MATTSON ) Energy Probe MICHAEL HILSON ) DAVID POCH Green Energy Coalition (GEC) MICHAEL MORRISON Ontario Association of Physical Plant Administrators (OAPPA) BETH SYMES Alliance of Manufacturers and Exporters, Canada GLEN MacDONALD ) Ontario Hydro CAROLYN RUSSELL ) THOMAS BRETT Ontario Association of School Business Officials (OASBO); and CAESCO 3 ---Upon commencing at 9:00 a.m. MR. SWEET: Good morning. My name is Edward Sweet and I'm with Board Staff. I would like to welcome you to the Enbridge Consumers Gas Phase 2 second Technical Conference for EBO 179-14, EBO 179-15, and EBRO 497-01. For the record, the first Technical Conference for Phase 2 was held on August 13th, 1998 and was not transcribed. This Technical Conference is being transcribed and will form part of the record. It is being held as directed by Procedural Order No. 6 which was issued on Tuesday, November 10th, 1998. This Technical Conference was necessitated due to the lateness of filing of certain intervenor evidence which itself was delayed as a result of certain interrogatory responses which were not filed within the time limitation specified in the Board's Procedural Order No. 5. The purpose of this Technical Conference is to allow the company, intervenors and Board Staff, through a high level examination of all the intervenors' witnesses, to gain a more thorough understanding of their evidence in order to prepare themselves for both of the ensuing Settlement Conferences. The first Settlement Conference immediately follows this Technical Conference, and deals with issues related to EBO 179-14 and EBO 179-15, otherwise known as the company's unbundling application. Preliminary Matters 4 The second Settlement Conference commences next Monday, November 23rd, 1998, and deals with issues related to EBRO 497-01. That is the PBR and SSM portions of the company's application. Procedural Order No. 6 made allowances for this Technical Conference to run four hours until approximately 1:00 p.m. this afternoon. To accommodate this goal will require an amount of brevity on the part of all participants. With respect to the sequencing of witnesses, it has been proposed that they shall appear in the following order. Dr. Johannes Bauer for CAC, IGUA, OCAP and HVAC dealing with unbundling; Dr. Johannes Bauer dealing with PBR for CAC, IGUA and OCAP; Paul Chernik, SSM for DSM for Green Energy Coalition. He will be attending by phone; a Witness Panel brought by HVAC dealing with unbundling, specifically the rental assets; and Dr. Norsworthy on behalf of OCAP. It would be of benefit to those of us who have not yet had an opportunity to undertake a detailed review of the witnesses' evidence to have all of the witnesses give a short, say, three- to five-minute summation of their evidence. I would ask that the most salient points of the evidence be revealed and that any significant findings or differences between the company's evidence and the witnesses' own work be identified. I would like to suggest that the order of examination of the Witness Panels follow the order of Preliminary Matters 5 appearances with Board Staff going last. For the record, I now ask that all participants identify themselves to the court reporter. May I have appearances, please? I will start. Edward Sweet, Board Staff. MR. McKAY: Neil McKay, Board Staff. MS. LITT: Kathy Litt, Board Staff. MR. WARREN: Robert Warren for the Consumers Association of Canada. May I enter an appearance, please, for the eminent Peter Thompson for the Industry Gas Users Association who is otherwise occupied in Ottawa today. MR. JANIGAN: Michael Janigan for OCAP. MR. KLIPPENSTEIN: Murray Klippenstein for Pollution Probe. MR. FARRELL: Jerry Farrell for Enbridge Consumers Gas. MR. GRANT: Jim Grant, Enbridge Consumers Gas. MS. ALLAN: Judy Allan. Enbridge Consumers Gas. MR. MONDROW: Ian Mondrow, HVAC Coalition. MR. ROGERS: Don Rogers, Union Energy. MR. MATTSON: Mark Mattson, Energy Probe. MR. HILSON: Mike Hilson, Energy Probe. MR. POCH: David Poch, Green Energy Collision. DR. BAUER: Johannes Bauer, Michigan State University. MR. MORRISON: Michael Morrison, the Ontario Association of Physical Plant Administrators. MR. LUYMES: Martin Luymes, HVAC Coalition. Preliminary Matters 6 MS. SYMES: Beth Symes, the Alliance of Manufacturers and Exporters. MR. NORSWORTHY: John Norsworthy, Rensselaver Polytechnic Institute in Troy, New York, for OCAP. MR. MacDONALD: Glen MacDonald and Caroline Russell for Ontario Hydro. MS. ANDERSON: Linda Anderson, Union Gas. MR. SWEET: I see no other parties. Are there any other procedural matters which parties wish to raise at this time? MR. POCH: Yes. I'd just like to put on the record, we have just received Dr. Bauer's evidence, as I imagine is the case for many people, on Friday, Friday night. And our witness, in fact, doesn't even have a copy yet, so it's possible we will have some unanswered questions or questions which are of a technical nature and best not posed orally today. And I just wanted to understand if we are still at liberty to put in written interrogatories? MR. SWEET: The answer, David, is yes. Procedural Order No. 6, page 4, paragraph numbered 3: 'Any party who wishes information and material that is in addition to an intervenor or Board Staff evidence, including that given at the Technical Conference and that is relevant to the hearing, shall request the same by written interrogatories filed with the Board and Preliminary Matters 7 delivered to the intervenor on or before November 20th, 1998. 'Responses to the interrogatories shall be filed with the Board and delivered to Consumers Gas and the other intervenors on or before November 27th, 1998.' Just for the record, I believe Dr. Norsworthy's evidence has not been filed either. It should be filed, I understand, some time this morning. MR. JANIGAN: There will be discussion about that with the intervenors that will be filing that evidence and we will report back. MR. SWEET: Thank you. Are there any other procedural matters? ---(no verbal response) MR. SWEET: No? I suggest that we commence. Would CAC, IGUA, OCAP and HVAC like to call their first witness? MR. WARREN: Where do you want him to sit; over there? MR. SWEET: Yes. JOHANNES BAUER, Ph.D.; Called. MR. WARREN: How would you like us to proceed? Dr. Bauer is prepared to give a three-and-a-half minute summary of his evidence. MR. SWEET: That would be a good idea, just to bring us up to speed, highlighting the salient differences between your evidence and that filed by the company, and Dr. J. Bauer 8 (Summary) then we throw it open for questioning. Thank you. SUMMARY BY DR. BAUER: Well, good morning, everybody. As was said, I'm Johannes Bauer from Michigan State University. I was retained by the Consumers Association of Canada, the Industrial Gas Users Association, the Heating, Ventilation, the Air Conditioning Contractors' Coalition, and Ontario Coalition Against Poverty to comment on and analyze Consumers' proposal to separate some of its businesses and wind down the rental business. I should say that my evidence is based on the prefiled evidence of Consumers, as well as their answers to written interrogatories that were received by about November the 10th. That means that some of the more recent interrogatory answers could not be included in my evidence here. The main conclusions of my paper are the following: The proposed separation combined with the wind-down of the business does not hold consumers and ratepayers harmless. It may also have detrimental effects on the emergence of robust competition in the Ontario natural gas market and especially the appliances we pay on maintenance market. As I look at it, the model is not based on the clear-cut separation between competitive and monopolistic businesses as some structurally competitive businesses are divested or unbundled; whereas, others are not and are Dr. J. Bauer 9 (Summary) kept in the utility. The proposed model raises two sets of issues: one is the question of how ratepayers are impacted, and the other one is how competition will be impacted by the proposed model. And I think overall, because of this combination of unbundling and wind-down of the rental program, a more complicated regulatory system is required than would be necessary in alternative scenarios. It is difficult to assess alternative scenarios because the company did not provide any information on alternative approaches, such as a divestiture to an affiliate of the rental program or a divestiture to a third party and, therefore, I was not able to evaluate the implications for ratepayers and for competition of these alternatives, although there is reason to believe that some of the problems that are created by the current proposal would be avoided in such an alternative approach. Now, in more detail, my analysis, I think, deviates from Consumers in two aspects: one is in assessing the benefits and costs of the separation. And I came to the conclusion that despite the fact that there is no formal requirement in Consumers' undertakings that ratepayers need to be held harmless by Board decisions, if we apply this standard which is widely used in North America and in other utilities in Ontario, that -- as proposed consumers are not held harmless because there are benefits of this proposal resulting in a reduced revenue requirement for ratepayers, but there are also costs of Dr. J. Bauer 10 (Summary) the proposal. Utilities receive - pardon me - ratepayers receive less for what they pay after unbundling and they have to contract for other services, repair maintenance and these things that are unbundled, through alternative providers or in the proposal initially through Consumersfirst and these costs need to be factored into their analysis of costs and benefits. If you do that appropriately, there is a net harm at least based on the data provided to ratepayers. Now, in more detail, my recommendations based on this analysis are the following: First, I think it would be advisable for the Board to require the company to submit evidence on these alternative scenarios - divestiture to an affiliate of the rental program or divestiture to a third party. If, for some reason, this is not seen as the appropriate approach and despite my arguments it should be decided to go ahead with the separation at least in the basic parameters as proposed, then I have the following more narrow recommendations: First of all, the transition costs associated with the proposed separation should not be recovered from the ratepayers as proposed but borne by the shareholders or the new receiving entity. Second, the company should be allowed to share services during the limited transition period as Consumersfirst. I think this is an appropriate request if it is temporary in nature to take advantage of existing Dr. J. Bauer 11 (Summary) economies of scope between the existing business and the to be unbundled businesses. Thirdly, the company should be required to determine transfer prices for the shared services in compliance with widely recognized regulatory principles. I think that in general, the proposed model to eliminate the costs for shared services is a pragmatic approach and is feasible, but I think there needs to be transparency as to how the unit costs of services provided are being calculated to make sure that those regulatory principles for transfer pricing are being met. Fourth, alternatives now to a wind-down of the rental business should be evaluated in the implications for ratepayers and the development of the competitive marketplace in Ontario. There could be, for example, the option that the business is being continued and I think there wasn't enough evidence in the proposal to come up with a meaningful understanding of what this would mean for ratepayers and competition. If a wind-down on the other hand though is approved - again, you see, I have sort of some contingency recommendations depending on prior decisions by the Board or by the settlement process - if a wind-down is approved as the most appropriate option, I think that there is a legitimate claim by Consumers that the deferred tax burden -- I should say after all feasible mitigation measures are undertaken, should be recovered from the rental customers rather than ratepayers in general. Dr. J. Bauer 12 (Summary) Sixth, the company should assume responsibility for possible stranded costs resulting from the wind-down of the rental business. There is a presumption in the prefiled evidence that there is sort of a natural safeguard to mitigate the stranding of assets because Consumersfirst and Consumers are both part of the same holding company. I do not agree that this is the case. I think that because of the fact that the deferred tax issue is in part a result of the Board's decision earlier on to mandate flow-through tax accounting rather than accrual tax accounting; so that in other words, the Board bears some responsibility for the issue. On the other hand, one has to recognize that the company also, due to its decision wind down the business, increases the payment of taxes that results from the winding down of the business. There should be a split responsibility for taking care of the issue. The ratepayers take care of the deferred taxes. Shareholders, it seems to me, would be a fair solution to take care of the stranded issue if it should arise. The advantage of the solution is, that I think it would really be a very strong then safeguard against Consumersfirst prematurely stranding as in the conduct of its own business. Seven, I think it would be advantageous if Consumers were held to conduct an open bid or solicit open bids in the marketplace for the services and repair work required during the wind-down period, at least for the five years in which it plans currently to have an Dr. J. Bauer 13 (Summary) exclusive service contract with Consumersfirst. Relating to this rental, Consumers should be given the option to contract for service from third parties from the very beginning. Nine, if the service contract between the company and Consumersfirst is approved - again another contingency here - it should be subject to the standards of business practice and the interim code of conduct. And last but not least, the Board should carefully consider links between the separation and the PBR in the same proposal, which is really another part of this case, and attempt to create maximum synergies between the decisions in both matters. This summarizes, I guess, in more than three and a half minutes, my evidence. MR. SWEET: Okay. Let's start the questioning of the witness in order of appearances. I guess that would be -- Board Staff is going last. MR. KLIPPENSTEIN: Thanks. Dr. Bauer's comments have added a bit to the evidence and have been helpful, but I don't have any questions following up. MR. GRANT: Thank you, Edward. Thank you, Dr. Bauer, for your overview there. EXAMINATION BY MR. GRANT: Q. We have had a chance to look at your evidence on the unbundling component of the proceeding and we only have one question which is a just a clarification question, on page 3. That would be at Exhibit E, section 2.0, page 3. Dr. J. Bauer 14 ex (Grant) In the second paragraph, toward the bottom of that paragraph, you mention a section 7 and in my copy, I didn't see a section 7. Is there some missing evidence? I think it goes from 6.2 to 8, at least in my copy. I have section 6.2 starting at page 20 and then going over to page 21 -- A. No. It should be -- this was produced in two parts if the Board -- so it should be -- affiliate transactions should be appropriately 7. Q. Thank you. A. And then 7.1 and 7.2. Q. Thank you. MR. WARREN: We found our stealth evidence. MS. ALLAN: Sorry, affiliate or ancillary? THE WITNESS: Ancillary is 8. Yes, there are two sixes by mistake. The summary on page 3 is correct, but the numbering ... MR. FARRELL: It should be page 18. It should be 7 and then -- THE WITNESS: Yes, 7.1, right, correct. Can we submit a sheet with corrections? MR. GRANT: Yes, that's fine. And as I say, we've been through your evidence. At this point, we don't see a need to ask a great number of interrogatories. If there are any on this section of your evidence, there would be only a few. MR. SWEET: Jim, just in -- the whole purpose of this Technical Conference is to try and get those Dr. J. Bauer 15 ex (Grant) interrogatories in a verbal form. If you're thinking of some now, I would encourage you to use this opportunity to ask them. MR. GRANT: Yes. Right now, again, Edward, we've been through it and we didn't have any, but we want to go through it again and make sure that we haven't missed anything, so -- but my anticipation is, if we have any at all, it would only be a few. MR. SWEET: Okay. Mark Mattson? MR. MATTSON: Dr. Bauer, Mark Mattson, counsel to Energy Probe. Just a couple of questions. EXAMINATION BY MR. MATTSON: Q. In your evidence, if I could get some further clarity here. In your opinion, Dr. Bauer, how should the deferred tax liability be allocated among the ratepayers, rental customers and shareholders, if you have any opinion on that? A. The difficulty in this case is, that there's really a joint responsibility for the specific magnitude of the tax burden that we see emerge out of this case and it's in many ways difficult to compare the proposed scenario with alternative scenarios because very likely if the business were to be continued for example, the deferred tax payment would likely be lower, but it depends on a number of other issues pertaining to tax planning that I cannot evaluate based on the evidence. And I should also mention here that I'm not a genuine expert in Canadian tax legislation, so I would be the wrong person Dr. J. Bauer 16 ex (Mattson) to assess it in detail. But it is also a legitimate claim, though, that when Consumers apparently asked the Board for permission to go to a different accounting method that would be more appropriate to handle the deferred tax issue that the Board found in order to keep rates lower at a time when rates were increasing due to high inflation, that the flow-through accounting method was appropriate. So I think there's really a joint responsibility that we see between the Board representing, one could say, ratepayers and the company, which made the decision to wind down the business. For that reason, I think it would be appropriate to think of some shared responsibility for the deferred tax burden if the proposal to wind down the business were approved as proposed. Now, in my specific proposal, I think it would be appropriate for reasons that relate to the incentives created by the restructuring, that ratepayers take responsibility of the deferred tax burden under the provision that all mitigating efforts are being undertaken, but, on the other hand, that the responsibility of the shareholders comes in when we talk about the potential stranded assets. So that would be my specific way of splitting responsibility between shareholders and ratepayers. I also see in relation to this point my proposal to give ratepayers a choice immediately to select a third Dr. J. Bauer 17 ex (Mattson) party provider of maintenance services and repair services rather than being forced to use Consumersfirst. That increases probably slightly the risk of the straining of assets, especially if the services provided by Consumersfirst are less competitive than other services. But that's the reason why I put the shareholders into the position to assume the responsibility for these stranded costs. Now, I should say that this is not the only way how responsibility could be shared and the difficulty in defining such modes of sharing is always, it is a negotiation process. Economic theory gives us relatively little background, how we decide those things. And in very similar issues, the question of stranded costs, let's say, in the electric utility industry and we see a wide range of approaches to that. And in general, there's some sharing between shareholders and ratepayers. One method, an alternative could be to say, 'Well, we split the deferred tax burden also between shareholders and ratepayers.' And I think, though, based on my analysis of the case and the past history of these decisions, I think that this would probably be inappropriate, given the history of regulatory decisions in this case. However, I would like to point out that in the alternative scenarios, the payable deferred tax burden is likely to be lower than it is in the proposed write-down. Dr. J. Bauer 18 ex (Mattson) Coming to the issue of how these deferred taxes should be collected, I think it would be fair to collect those from rental customers. I think that would be desirable for two reasons. For one, it seems from the data that I analyzed that the over-earnings, as they're called, from these ancillary businesses actually were flown back to different ratepayers based on a prorated basis. That leads me to believe that payments for these deferred taxes should also be covered on a prorated basis by different ratepayer groups and not by ratepayers in general. Q. Thank you. I'll go back to that. Dr. Bauer, in terms of your recommendation that it may be advisable for the Board to ask Consumers to explore further restructuring options at this time, I guess the evidence currently doesn't go that far, as far as you would like to recommend. Could you give me any idea as to what further restructuring options you would like to see the Board ask the company to investigate and to file evidence on before this proceeding? A. Well, there are two important ones. One would be a divestiture of the rental business to an affiliate and the other one would be a divestiture of the rental business to a third party. Now, in interrogatories that were faxed to me Friday night and I luckily found Sunday in my office, Dr. J. Bauer 19 ex (Mattson) there is some very tentative information on these options, but it is not really what I would require, a full analysis of these different scenarios, and I think a detailed study of these options would be very helpful. Q. "A detailed study" meaning...? A. Meaning an evaluation of the market value of the businesses, which is something that is currently not available. A detailed study of the implications for competition because the two options of divestiture to an affiliate and divestiture to a third party, you know, in whole or in perhaps even more than one piece, differs significantly in their competitive impact. And I think without this information, it's very difficult to compare the proposed scenario with these alternatives. Q. Thank you. And just one more question. It is a follow-up from my first question. I didn't have it completely written down here. But water heater rental rates, in your opinion, is it such that water heater rental rates should have reflected a liability for deferred taxes all along and, if not, it's the company's problem? Is that something you would agree with? A. As far as I understand the regulatory approach in the past, I think that wouldn't have been feasible. Q. Wouldn't have been feasible? A. No. Dr. J. Bauer 20 ex (Mattson) Q. No. A. Right. But I mean, in my view, the accrual approach to tax accounting is, you know, is more appropriate than the flow-through approach. MR. MATTSON: Thank you. Those are all my questions. Thank you, Dr. Bauer. MR. POCH: Good morning, Dr. Bauer. David Poch on behalf of the Green Energy Coalition. EXAMINATION BY MR. POCH: Q. I have a few questions arising from your comments on ancillary issues, which starts at page 22 of this piece of evidence. First of all, you start by suggesting or discussing alternative approaches that the Government, if I understand you correctly, might take to DSM, and you mentioned California and New Hampshire as examples. Can you indicate for us, is my understanding correct that what the distinction you're drawing and, indeed, the distinction in those jurisdictions is that they have a different funding approach; not necessarily that the programs on the ground are any different? Is that -- have you looked into that and can you give us any information on that? A. Well, the answer is yes and no. I raised this issue as an ancillary issue, so I don't think it's really at the core of this case. But the reason why I raise it is that in the long run, I think we have to think about the way how DSM programs are being Dr. J. Bauer 21 ex (Poch) financed, and what level of DSM programs we think is desirable is, to a certain degree, an economic and, to a certain degree, a political decision as well. It sort of expresses the preference of a community for environmental protection. Okay? And I refer predominantly to the financing side here and what I raise as an issue that needs to be thought of in the longer run is the fact that if a more open marketplace is the vision of the future, then it seems appropriate also to have a financing model that is fair and equitable to all the players in the marketplace. And in some jurisdictions, the response to this insight has been to introduce a small levy for DSM measures. Now, we see it not only in the energy industries; we see it also in telecommunications where a similar problem of universal service funding exists. Q. All right. So I take it that what you're driving at is, you would like DSM to evolve in a way that doesn't skew the competitive market. Is that fair? A. Right, yes. Q. All right. So short of moving responsibility for DSM out of the utility right now, then in the near term, am I correct in understanding your position would be that DSM programs should be designed in a way such that they don't introduce, for example, favouritism to the affiliate? A. Right. They shouldn't introduce competitive distortions. And the utility would, in any case, be the Dr. J. Bauer 22 ex (Poch) largest contributor to DSM programs because it still would have a large share of the revenue of the total industry. Q. All right. And I take it when you wrote this evidence, you... Well, let me ask you. Were you aware of the recent Bill 35 Ontario Energy Board Act change which introduces a guiding principle to the Board in respect of energy efficiency in its regulation of the gas sector? Have you considered that factor? A. You mean the one that was passed about a week ago? Q. Yes. A. Well, I didn't -- I was aware of the passing of the bill, but I wasn't aware of the details. Q. All right. Moving on then. Just in terms of your current proposal, you go on to suggest that entrepreneurs may have some interest in promoting energy efficiency in an open market environment. Can I ask you if you have compared the level of water heater efficiency in Ontario to that obtained in other jurisdictions that have had a more competitive market structure? A. No, I have not. Q. You make a comment that only DSM measures that have a pure public good character would -- you would expect it would be only these that would not be sold in a more competitive market environment and, thus, would require public policy intervention. Have you studied this to see if this is, in fact, Dr. J. Bauer 23 ex (Poch) the case in more competitive jurisdictions? A. No. This is an argument that is based on economic reasoning and, you know, on insights that we have from many other situations that have the same structure. Q. All right. A. What I -- so, no, I haven't. I haven't studied this in empirical detail. Q. All right. And would you agree, though, that where measures have a mix of both private and public benefits, that you would not expect the private entrepreneurial market to obtain the optimal level, the societally optimal level? A. Right. I would say that very likely most DSM measures have both aspects. Q. Right. A. You know, a private good aspect of a DSM measure would be, let's say if insulating your windows leads to savings that are larger than the increased, the higher cost of purchasing a more efficient heater. So, you know, we see also a clear migration in the models that I discussed before, that there is a strong reliance on competitive service providers. Now, the financing symmetry would also require, of course, a funding symmetry on the receiving end. In other words, anybody who contributes to DSM measures would be eligible for receiving -- I know this is a much broader debate. That's why I didn't put it at the core of my evidence. Dr. J. Bauer 24 ex (Poch) Q. Yes, all right. Yes. I appreciate that. I just want to understand what the implications are for where you're saying the Board should go in the nearer term DSM, and perhaps as part of this decision in this case, since you have raised it. Now, would it also be the case that to the extent that a utility's avoided cost, marginal avoided costs are higher than higher than its rates or may be higher than its rates, that the private sector application of efficiency wouldn't be optimal in that it doesn't see those costs at the margin? A. That's correct. Q. All right. And would it also be the case or have you studied -- if we leave aside public benefits, it's possible that the market cannot overcome such problems as split incentives in the residential sector due to high transition costs, but that a utility facilitated approach could bring economies of scope and scale to bear that would enable it to address those situations? A. Yeah, that's correct. Q. All right. So just harkening back to your earlier comments, I take it in terms of your recommendations, you're not recommending that as part of this proceeding the Board deal with the question of DSM. It's just something to be kept in the background as part of the context for this design of separation; is that fair? A. That is correct. Dr. J. Bauer 25 ex (Rogers) MR. POCH: Thank you very much. MR. SWEET: Beth? MS. SYMES: I'm not next. MR. SWEET: Well, who? MR. MONDROW: We're one of the sponsoring parties, so we don't have any further questions. EXAMINATION BY MR. ROGERS: Q. I'm not and I have one question, Dr. Bauer. You've suggested a further study of the alternatives in this case. Do you have any idea or any help for us as to how long you think that should take if such a study was undertaken? A. Well, how long it should take? I have no idea how long it would take. It would probably be several months ... information. MR. ROGERS: All right. Thank you very much. MR. SWEET: Continuing through the list, Beth has no questions. No one else? I notice the arrival of Tom Brett for the record. Tom, would you like to state your appearance? MR. BRETT: Yes, thank you, Edward. I'm appearing on behalf of the Ontario Association of School Business Officials and CAESCO. MR. SWEET: Tom, do you have any questions of this panel? EXAMINATION BY MR. BRETT: Q. I have one just question of clarification for Dr. J. Bauer 26 ex (Brett) you, Dr. Bauer: I think it -- I read your evidence and I wasn't sure whether I found this in here explicitly or by implication, but is your view in looking at this question of the no-detriment test to ratepayers, that the starting point in assessing this should be how the ratepayers would fare in the event the transaction was not done and in the event as decided by the Board in 495 and 497 a regime of fully-allocated costing applied to the ancillary services; would that be the starting point for comparison? A. Well, the starting point would be the status quo, what we have in place currently given, you know, the Board's .... Q. Which is what I've suggested. A. Yeah. Q. Okay. It's not clear to me that, for example, the 18.4-million reduction in cost of service that the utility shows as a benefit is actually calculated using that base as a starting point. It looks to me like it may be calculated using marginal costing of ancillary programs at the starting point? A. One of my provisos, it did not -- I was not asked and I did not look into the specific numbers that were provided in the case. MR. BRETT: Okay. That's all I had, Edward. Thank you. MR. SWEET: Thank you, Tom. MR. McKAY: Good morning, Johannes. Board Staff has a few questions of clarification. Dr. J. Bauer 27 ex (McKay) EXAMINATION BY MR. McKAY: Q. In your opening section, you talk about the Consumersfirst five-year contract and the fact that it should go to an open bidding process. Is it your position that the Board should not proceed until that's done, until that bidding process is complete? A. Yes. It would certainly give more reliability to the data that we have received in the prefiled evidence. Q. Could you fill out that answer a little bit in terms of Consumers Gas' position that essentially they're the only provider of that service that can meet their criteria, full franchise coverage, 24-hour service, the reasons that they gave in terms of supporting their choice of going with Consumersfirst? A. Well, you know, I don't see any very strong reason by this unity throughout the entire franchise territories is such an important feature. Also, it seems that in the current situation, and I haven't had enough time to think in detail about some of the answers I received late and this answer was part of this, but it seems to be that currently, many other subcontractors are being used, so moving to a unified model would actually be a step away from a more open marketplace back to a more integrated solution. See, the reason why I think a bidding process would be advisable is the following: that this is really Dr. J. Bauer 28 ex (McKay) part of our learning process, how we approach regulation, and is also part of the PBR proposal, if I may say that, and that's the fact that we try to replace sort of procedural approaches with sort of substantive approaches. In other words, rather than saying 'Here is a good price for these services', we put a procedure into place that helps us discover the market price for these things. And in many, many cases in the recent five, six years of regulation, these discovery processes have turned out to be very revealing and have increased efficiency significantly. Q. On your section on restructuring trends in the natural gas industry, if I could summarize essentially, what you've said is, it's kind of too early to tell if restructuring is either a good or a bad thing in a competitive sense in terms of how it's going to work out. And then the conclusion you come to, though, is that the Board's decision should be made on a clear analysis of incremental impacts of any decision they make; in other words, the Board should be aware of what the impacts of their decision is going to be in the competitive market. A. Right. Q. But your conclusion seems to say that it's really too early to tell if deregulation is either a good or a bad thing. So what sort of position does that put the Board Dr. J. Bauer 29 ex (McKay) in right now if you can't determine whether or not deregulation is, in fact, assisting the competitive environment? A. Well, in my conclusions, I was a little bit more humble, I would say, and what I propose is really just practicing this incremental analysis. So my argument essentially would say, rather than arguing that in ten years or in five years at an unknown date we hope that the market for these ancillary services will be competitive, we look at the immediate impacts in the foreseeable future when we know what the likely implications of the proposals are, we come up with an evaluation. And in this case, for instance, we can look at the implications of granting an exclusive contract to Consumersfirst for five years. And it's clear, I think, that this creates market interbarriers and also may create a very favourable platform for Consumersfirst after the five-year contract expires. So in this incremental analysis, the conclusion of this really is affecting the emergence of competition negatively and it's very likely going to delay it. Q. Thank you. A. That's the type of approach that I suggest now. Q. You've got a table, Table 1 - it's called the utility restructuring scenarios - and I'm just wondering if you can give us a fairly high-level description of how that's put together and what it means for Consumers Gas? Dr. J. Bauer 30 ex (McKay) A. Does everybody have that? Okay. This is really simplifying the situations that may emerge in discussions related to diversification of restructuring. And there really are two issues, I think, that regulatory agencies and corporations that attempt to restructure should consider in the proposals: One is the question whether there are economies of scale and economies of scope especially between different types of operations, let's say in our case between core delivery services and ancillary services? If there are economies of scope that are very strong and integration of these businesses is advantageous, not only for the company which, you know, is able to produce both services, delivery and ancillary services, at the lower price but also for society as a whole because everybody can be served at a lower price. The other situation would be where there are weak economies of scope, but being in the delivery business does not also create a very substantial advantage of being in the ancillary services business. The second I mentioned that needs to be considered and that leads to four possible scenarios is the question of how high is the risk that an integrated approach where these businesses are conducted in one organization unit in one business will lead to an abuse, and the risks of abuse are well known. I mean, they've been discussed many times. Cross-subsidization of businesses is, which is, of course, a more urgent issue if Dr. J. Bauer 31 ex (McKay) the ancillary business side is expected to become more competitive. Profit shifting, risk shifting, all these things that were discussed in the diversification procedure that the Board had awhile ago. If the risk of abuse is high, then there is, I think, a case in favour of a more separate organizational structure and this will either be a full divestiture or a separation to an affiliate. If there is a lower risk of abuse, I think the regulatory conclusion is a little bit less clear and it doesn't have to be necessarily in separation. I think that's in a nutshell really what many regulatory agencies in North America and other parts of the world are recognizing these days in how they frame their policies. In our case, my conceptual analysis and analysis of the data provided does not support the idea that there are really extremely high economies of scope between those two businesses. There may be sort of temporary advantages of integration because these two businesses were engineered in a way that the joint cost of providing ancillary and delivery services are lower, but I don't think there are any structural reasons to believe that ancillary services has very strong economies of scope with delivery services. So in the immediate run after, in the immediate transition period, I think these could be run effectively as stand-alone businesses. So we are in these scenarios in the row of weak economies of scope. Dr. J. Bauer 32 ex (McKay) In terms of the risk of an abuse of integrated operations, let's say keeping the ancillary businesses in the utility or running them as a subsidiary of the utility, I think that the risk is essentially controllable. I think we know we have the devices to avoid an abuse of such an integration. The regulatory approach, I think, would be simpler and more transparent if it were conducted in a separate affiliate or, you know, fully divested. So from my -- that leads me to conclude that really, there is a slight advantage in this case of separation of these lines of business especially given the goal of developing a more competitive energy services market in Ontario. Q. Thank you. On the Consumers' separation model, you say here that the separation evidence does not present a well-defined "bright line" to distinguish which services should remain part of the core utility and which should be separated. At least my readout of the Consumers Gas evidence is that it's fairly clear in terms of what they want to roll out of the utility and, you know, what's being separated and essentially what their plans are for the rental wind-down. So I was just wondering what you meant by that? A. By using the term "bright line", I meant sort of a commonly accepted and meaningful standard and this could be the differentiation between structurally monopolistic businesses and competitive businesses. And Dr. J. Bauer 33 ex (McKay) if this is our bright line, then the proposal does not meet that criteria because some of the structurally competitive businesses remain in the organization. Q. You discussed the value of the assets on page 11 of your evidence. Is it your position that the assets should be valued at higher than book value, at higher than market value? A. The regulatory rule should be the higher of market value or book value in the case of a sale. Q. the alternative would be to sell the assets in terms of the rental, the rental business; to sell the rental business if you can't value it? A. Right. But that would determine a market value for those businesses. The procedure would be to determine the market value. Q. Under the proposed treatment of transition costs, you have got a statement here on page 13. It says in that first full paragraph that: 'Ratepayers may pay less for delivery services, but they also receive a smaller package of services.' Can you just elaborate on why you think the ratepayers are worse off in that situation? A. I have two. One of the reasons why the revenue requirements are lower is that part of the business is unbundled. Now, unless we assume that these services were Dr. J. Bauer 34 ex (McKay) useless or superfluous, Consumers have to contract for these services, you know, from an alternative source. And the model that you propose is that Consumersfirst fills in for the first five years. So the costs of this conflict need to be factored into the equation in the proposed model or, alternatively, now if Consumers would buy these services from third parties, the costs for contracting for these services would have to be factored in. And, you know, by moving services out, we reduce revenue requirements, but Consumers have to contract for these services. And if you go to the numbers as they were presented, you have a revenue reduction of 18.4-million that is forecast. You have, you know, the proposal to transition costs distributed over three years, which adds several million dollars to the equation. You have the cost for Consumersfirst at 17.7-million. If you net these all out, your bottom line is a loss for ratepayers. Q. Is that the reason for your conclusion here that says: 'One must not confuse the resulting reduction in the revenue requirement with savings or benefits'? A. Yes. Q. Okay. A. See, if we would -- let me just give you an Dr. J. Bauer 35 ex (McKay) example to highlight this point. If you would eliminate the distribution operations from the current utility, according to Consumers' argument, you would create a huge ratepayer benefit. Everybody sees that this is not the case. [Laughter] Q. Just a couple more questions on the deferred tax issue. I guess after reading your evidence, I sort of came to the conclusion that what you were saying was that Consumers' approach was acceptable in terms of the deferred tax burden, in terms of rolling it through? A. There are a number of provisos in my argument, and this is really, you know, we're past several contingencies if we deal with the tax issue as it is proposed here because, you know, the first proviso was to look at alternatives; the second was to look at mitigating issues that could be undertaken. But if the conclusion were to proceed and a deferred tax burden results, and I think I would hold in defence of Consumers' approach that in the EBRO decision the Board really emphasized the flow-through approach to taxes based on the expectation that future revenues will allow them to recover those taxes. You know, this is independent of my personal assessment that accrual tax accounting would be the more appropriate way to handle such issues. Dr. J. Bauer 36 ex (McKay) Now, you know, it raises a questions of prudence, what are prudent decisions. And there are really two standards of prudence that are applied sometimes. One is very stringent and says, you know, prudence means that you anticipate perfectly all future events. So if one would apply this standard of prudence, I think then shareholders should be responsible for these deferred tax payments because Consumers would have to undertake ultimately alternative measures to try to move to such an accrual method of tax accounting. The more... the less stringent approach to prudence, which is one that I favour, would be to say, 'Well, given the information at any point in time, was the decision prudent?' And if we apply that standard, I think, you know, then several years ago, it seemed like a likely scenario that the rental business would be continued like it was in the previous decades. But I also should emphasize that there's a corporate responsibility, as well, because it is a corporate decision to wind down the business. You know, the alternative would be to continue running the business. And looking at the data, actually, I'm sometimes surprised that given the high benefits that are being claimed for the rental business - you know, in excess of $250-million per year - that a wind-down seems to be such an appealing solution. Q. Thank you. Dr. J. Bauer 37 ex (McKay) And then finally, under your section 9, the wind-down of the rental program, on page 17 you talk about the fact that: 'The company should be required to assume full responsibility for potentially stranded costs.' A. (nodding head) Q. And your term, "stranded costs", you're referring simply to the rental units themselves or are you talking about the stranded costs for the other unbundling activities that were described in the evidence for the appliance and the other business units that -- A. Well, this refers specifically to the rental wind-down, but I mean the argument would apply to the relatively minor residual assets, as well. MR. McKAY: Thank you. MR. SWEET: Johannes, I have got two questions. EXAMINATION BY MR. SWEET: Q. If we turn to your recommendations on page 23, the second recommendation is that: 'The company should be allowed to share services during a limited transition period with Consumersfirst.' I was wondering if you could expand on that, concluding share services with whom and also address the length of time that you would envision for the limited transition period? A. Well, this refers to services shared between Dr. J. Bauer 38 ex (Sweet) Consumers, or the company, and Consumersfirst. From the evidence, I gathered there are sort of two types of services that the company envisions to share. One are services that are already offered. The other category are services that will be developed, where there will be investment undertaken to develop these services jointly for both companies. And I think it is justifiable to argue that because, in the past, these businesses were run as integrated operations, that some limited sharing should take place. Obviously, one can engineer databases and other support operations in ways that are more suited to run two businesses combined, two businesses separately. And it will take some time to unbundle these activities in a way that support then two separate businesses. And in this transition period, I think it is appropriate to share services. The time frame I think for sharing should be short. I think somewhere between two and three years would be appropriate. I mean, I think the three years that are being proposed is okay, although there is sort of a back door that is kind of left open, that these services may be negotiated according to the current proposal. I would suggest to limit the time period to three years only. Also, I think the company should be asked not to develop new services jointly, specifically for the purpose of sharing with Consumersfirst. Dr. J. Bauer 39 ex (Sweet) That's the answer. Q. Thank you. I am just trying to come to grips with No. 2, and my quick read of your evidence would seem to indicate that in the ideal world - correct me if I'm wrong - from your perspective, that the company should perhaps consider the alternative of spinning off the businesses to independent contractors or to put it out to tender? A. Right. Q. Do you not see a dichotomy there? On one side, you're saying that it would be advantageous to spin off the business completely, yet your second recommendation is that it's okay to go ahead and share these services. It's okay to go through a company transition period? A. No. The company -- I would allow the same thing if the company were divested, you know, the rental program were divested. It would make sense for a temporary period to share services. They would then be provided to an affiliate in one of the possible alternative scenarios or to a third party. Q. Okay. Thank you. With respect to your Recommendation No. 8: 'Rental customers should be given the option to contract for service work from third parties from the very beginning.' Would you envision that Consumers Gas would Dr. J. Bauer 40 ex (Sweet) establish some sort of a list of approved contractors who would be allowed to go out and do this work, and it would be the consumer who would choose when, say their water heater breaks down; they would look at the approved list of contractors and just select one, whomever they so choose, or are you suggesting that they open a phone book and choose on another basis? A. Well, I think... are you listening? Q. Yes, I am. [Laughter] A. No. The recommendation would be to... I have difficulty with the idea that a company has to promote its own competitors. I think fairness of competition would mean that, you know, that other competitors have to market their own services. Although, I think, for a temporary period, to make it clear what the new model is, you know, there's sort of a long -- there's significant inertia in many utility areas that we have seen in other examples. For instance, the migration to new -- at least, you know, in some instances, the migration to new gas commodity suppliers. It was very rapid in Ontario for historical reasons. In other areas, you know, when the commodity prices were low, the migration was relatively slow. And so therefore it seems justified for a temporary period to make consumers aware of the new options. So I think a phasing model where initially Dr. J. Bauer 41 ex (Sweet) Consumers provides consumers - you know, gas consumers now - with a list of alternative vendors would be justifiable. In the longer run, I would leave this to the marketplace. MR. SWEET: Okay. Thank you. I guess we should make allowance for re-direct or something of the equivalent, Bob? MR. WARREN: No. You can make allowance for it. I don't have any questions, though. MR. SWEET: Okay. Thank you very much. Thank you, Johannes. Now we will deal with Johannes on the second issue, and that is his PBR proposal. DR. BAUER: Okay. MR. POCH: Bears a striking resemblance to the earlier witness. [Laughter] MR. WARREN: Do you want to follow a similar drill? You want a brief summary of the -- MR. SWEET: Yes. I was thinking that the three to five minutes, we should allow less brevity for the more recent acquired evidence perhaps. So as we come to some evidence when we might not even have seen it yet, we would expect more information to be provided to us. And I would again reiterate, the purpose of this is to facilitate the understanding of that evidence of all participants, so that they are in a better position to enter into the Settlement Conference that will be held this afternoon. Thank you. Dr. J. Bauer 42 (Summary/PBR) SUMMARY BY DR. BAUER WITH RESPECT TO PBR: Okay. Well, I will try to be brief and summarize some of the highlights of my analysis of the PBR approach. In some ways, I think the proposal is more thought through than proposals that we have seen in the last five years that were presented to other regulatory agencies. And, for instance, I think it was clear that great pains had been undertaken to get the formulaic expression correct; you know, to come up with an approach that reflects clearly the economic relationships between the aggregates that we're modelling. But the weaknesses, as I see them, and the difficulties that I had in finding this a desirable plan are related to two aspects in particular. One is that the plan is extremely narrow in scope; and then, secondly, how the economic variables are specified or approximated that are being used to substantiate the formula that was proposed. And, you know, like cost of service regulation, PBR - and many people don't see this - actually tries to come up with a forward-looking forecast of key variables; in this case, a performance target that the company should meet. So usually we do not have precise empirical data, but we come up with an approximation. And there's a broad variety of ways to come up with these approximations, and I think in the current proposal, some of these Dr. J. Bauer 43 (Summary/PBR) approximations are done in a relatively weak fashion. So let me therefore summarize some of the highlights that I think I can derive from this proposal. First of all, I think it would be very desirable to move to a more comprehensive PBR plan. And, again, like in the other case, there are some sort of contingencies here. I think that it would be very desirable and advisable to think of a more comprehensive plan. PBR has moved in leaps and bounds and initial plans in the late '80s/early 1990s were very cautious in scope, at least in North America, and most of them were of the type that Consumers proposes here. Now, in the meantime, we have learned very quickly that such narrow PBR plans didn't measure up to the expectations that most people had. They didn't lead to the dramatic changes in operational efficiency and performance. And there are clear reasons for them. And what the PBR plan did emphasize is operations and maintenance leaves large parts of the company's operations out of the PBR scope and some efficiency increases that one would expect to happen that are tied to a realignment of the resources that the company uses, especially the amount of capital as opposed to the amount of labour and other inputs, will not take place under such a PBR model. And one of the biggest criticisms on this respect to cost of service regulation was that companies have an Dr. J. Bauer 44 (Summary/PBR) incentive to overinvest, you know, their famous gold-plating argument brought forward by (inaudible) and Johnson and that is not addressed at all in the current proposal. And from what we see in other jurisdictions, there is evidence that broader plans are more advantageous. So my feeling is that Ontario and Consumers could take advantage of our knowledge from other jurisdictions rather than stay with the proposed plan. It seems like a missed opportunity to be a little bit more state-of-the-art when I look at the current plan. Now, if we now assume for the sake of the analysis that we would go ahead, in other words the plan as proposed, the narrow targeted indexing plan for operations and maintenance expenses of the company - then I have some further comments that I would like to make. First of all, I think that the proposal doesn't clearly grasp what the goal of PBR is. If the goal of PBR is to define a performance target that reflects a market standard, that means that the company's performance should be indexed or should be tied to market developments and industry developments. The proposal as presented benchmarks the company's performance to its own past performance. Now, it does use external data such as the Ontario CPI to forecast performance into the test years, but it really intends to reflect the company's own past performance. That is a very, very cautious PBR approach one should say, you know, because you measure the company against its own historical performance. And if one Dr. J. Bauer 45 (Summary/PBR) subscribes to the idea that the cost of service regulation is inefficient for a variety of reasons, that it leads to what they call ex-inefficiencies, inefficiencies that we cannot pinpoint because they're spread through the company, then using the past performance as a yardstick is really not a good idea and it violates really one of the basic principles of PBR to rely on external standards that reflect a market. Now, let's again for the sake of the analysis assume now that we look at the company's own historical record. Then, there are ways to fix this deficiency that the own historical record doesn't reflect this market standard and this has been, you know, discussed in the literature. This is not something that I'm inventing here. And there are several ways this could be done. One would be to acknowledge such past ex-inefficiencies and use a, what is sometimes called, a consumer dividend factor to stretch the 'x' factor, the one the productivity also affects, the (inaudible) the formula. This is variably widely used to create true up-front benefits for consumers. Alternatively, if that is not seen as an appropriate way to handle this issue, what could be done is to establish an earnings sharing mechanism. If you wish, this is an insurance against failure of the plan in both ways. You know, a plan, because it's based on forecasting, forecasts of main variables can hurt the company. It can also hurt consumers. I think sharing Dr. J. Bauer 46 (Summary/PBR) plans typically are contingency plans of what would happen, you know, if the plan exceeds expectations significantly or if it falls short of expectations. Next point: In a more narrow analysis, Consumers has suggested to leave what are called 'Z' factors open to save -- an economizing on time spent defining such factors and has proposed that in the annual review, such factors would be submitted to the Board for approval. I think, again, this would increase some of the regulatory administrative burden of the proposal and alternatively, I suggest to really define a concise of list of such factors that would be treated as flow-throughs. I don't think the list needs to be long. The major variables that could be treated in such a fashion I think are well known. These would be tax changes or other anticipated changes affecting specifically the natural gas distribution industry. And then one should leave the opportunity open to have other factors recognized if the need should arise. Again, I think that having a concise list of such factors would be more comparable with the idea of incentive regulation; that is, setting a very clear frame for the company to increase efficiency. The next point I would like to address briefly is the issue of quality of service. Early PBR plans made the mistake that they did not have any safeguards for quality of service deteriorations and because incentive plans create an incentive to reduce your costs, there is a danger that this will come at the expense of service Dr. J. Bauer 47 (Summary/PBR) quality. Now, more recent PBR plans - in fact, the current plan does propose it as well, include safeguards for the quality of service. I think what the plan does not do though is to establish a penalty or any contingencies of what would happen besides reports to the Board in case the quality of service is not being met. And again, in the spirit of incentive regulation where we try to create sort of automatized, if you wish, incentives for management to do the right thing, it would be desirable to have a penalty if the quality of service is not being met, the penalty that is commensurate to the effort required to maintain the quality of service. Again, you have an automatic link in to management decisions through such a penalty. It is also clear that quality of service safeguards and safeguards against the deterioration of service quality are not intended to be an incentive to increase the service quality beyond the minimal level. Now, if such increases are desirable and desired by consumers, the company should be able to get a market reward for it anyway on the PBR. So quality of service safeguards in the more recent plan designs are typically asymmetric. They provide a penalty for failure to meet target but no bonus for exceeding the target. Let me briefly move to the other big plan, a component of the PBR plan; that's DSM. Let me start as a proviso or preamble: I mean, I'm very much in favour of DSM. I think it's a legitimate policy. I think it is Dr. J. Bauer 48 (Summary/PBR) important to recognize that DSM measures will need some public policy incentive to be undertaken. But having said this, I think in the current plan design, which is a very modest -- the proposed plan design which is a very modest form of PBR, I don't see a very strong need to come up with an additional incentive for DSM. It seems to me that the company has demonstrated in its practice that under the current conditions, it can conduct DSM programs. And, you know, these programs have been recognized as legitimate expenses as far as capital was affected and I assume that they would have to fall into the rate base and, therefore, one could assume that the company will be able to maintain the current level of DSM. Now, having said this, if the goal is to increase DSM activity, then I think, and especially in the longer run, if you envision a more comprehensive PBR plan in the future in the more competitive energy market, then I think there is a legitimate interest in having some more explicit DSM incentive involved and I think that the proposed SSM mechanism is, indeed, in the category of acceptable incentives into the area. A recent analyses of such programs have shown that shared savings mechanisms have many desirable features and indeed, among options that exist, very often are best suited to achieve increases in DSM spending. Now, I think, though, that the proposed design does not really meet the standards of how these incentives Dr. J. Bauer 49 (Summary/PBR) are currently structured. What I suggest is, if one -- if there is a strong political will to increase DSM spending or if there is a desire to move to a more comprehensive plan which makes the tension between DSM spending and efficiency increases more direct, more immediate than the current proposal, then an SSM mechanism should be established of the following sort: It should calibrate a desirable level of DSM spending and then create an incentive that has both rewards as well as penalties for variations from this target level. It is important if we recognize that it is the goal of a DSM incentive to incent management to increase spending and not to reward spending for doing it, then the importance is at the marginal incentive rate, and I think many of the more recent plan designs have been quite successful in establishing a relatively high marginal incentive rate but decoupling disincentive for increased DSM spending from the total incentive payment and I'd be glad to talk to the details of such a proposal. Also, I think it would be advisable to establish upper and lower caps on the total incentive payment. Now, last but not least, let me mention that I think it is desirable to define up front how the review of the plan will take place. And Consumers states at several points in the evidence that consumers will benefit at the end of the plan when the plan is being recalibrated or rebased and I think it will be desirable, though, to specify how this rebasing will take place because there Dr. J. Bauer 50 (Summary/PBR) are two philosophies out there in the regulatory arena. One is that rebasing means that we only rebase the parameters of the plans. We look at whether the inflation rate was a correct specification, whether the productivity offset factor was a correct factor. Others go further in this and argue that rebasing means something that is close to a traditional rate case, review the PBR plan in the bottom-up fashion based on detailed cost information. And I think not specifying which approach is the most appropriate one, desirable one would be a mistake early on. This concludes at least from my point my summary. MR. SWEET: Murray, any questions? MR. KLIPPENSTEIN: I don't think I have any questions right now. MR. SWEET: Jim? MS. ALLAN: Just a couple of clarifying questions, Dr. Bauer. EXAMINATION BY MS. ALLAN: Q. If I could turn you to page 10 of your evidence. If I could ask you to look at Footnote 21 and could you just expand on that footnote for us a bit please? A. Yeah. What I'm doing here is I differentiate between two types of issues. One is the starting point of the plan and the other issues are, how do we define the benchmark on a forward-looking basis? And you know, some people argue, and I disagree with them for the reasons Dr. J. Bauer 51 ex (Allan) that I'll be explaining just in a moment, that we should calibrate performance-based plans initially to a best practice standard in the industry and they say that using the historical data that the company provides to start the indexing process is a mistake. Now, the problem -- you know, these people then suggested that one should really engage in a benchmarking against other companies in the field but not use an industry average but the best practice because benchmarking means, you know, comparing yourself to the industry leader and not to an average, the average being a mediocre performance standard. I mean, I disagree with this reasoning for several reasons: One is that it opens up really a whole set of issues that are very difficult to answer, such as: Is industry best practice really a meaningful standard? Secondly, you know, it creates a lot of uncertainty which the historical performance of the industry when it comes to the level of rates has not because it then has been shown that given the rates that were charged historically or, you know, at time the PBR plan is installed, it will allow the company to break even so I think there's no dispute about these things. And for the fact that this is a dispute-free approach, I think when it comes to the starting point - in other words, to what is the base year revenue from which the plan indexing starts - I think using a historical data avoids many potential conflicts and debates where we often don't have Dr. J. Bauer 52 ex (Allan) the information to have a meaningful discussion. It's different when we look at the forward-looking benchmark because the basic rationale for all indexing formulas is really derived from a competitive market scenario and it's the idea that if we had a competitive market in an industry, changes in input price inflation would translate into changes in the market price, that if you had performance -- pardon me, productivity gains or productivity changes in this industry, these productivity changes would also translate into the market price. And, therefore, while, you know, we can as a compromise accept the existing rates or the existing revenues as a starting point for the PBR plan, when it comes to the indexing, this indexing should reflect a market standard. Now, I don't say, you know, that the current plan does not provide probably very slightly increased incentives compared to a pure cost of service model and the reason being is that under this approach, you know, any efficiency gains that are achieved during the plan, the company would be able to retain in the form of higher earnings. So what you essentially really do here is, you take the O&M part out of an annual regulatory review process and, you know, defer it, postpone this debate to the three-year end of the plan. As I said before, if we believe the basic premise of PBR, that is that cost of service regulation leads to Dr. J. Bauer 53 ex (Allan) certain ex-inefficiencies that we cannot pinpoint, then to use the own historical record of the company to forecast its future performance is really a bad thing to do and it's relying on the wrong standard. And I -- you know, sometimes if, for pragmatic reasons, this is chosen as an approach, then there are remedies, you know, how this could be fixed, you know, because the mistake that is being made very likely is that the company has given it, so to speak, a too generous performance target based on its own historical performance. Now, if we believe that in the past, cost of service regulation was absolutely efficient, then I think relying on this historical record would be fine. But it's the basic spirit of PBR that cost of service regulation is not efficient in that way for information asymmetries and other reasons; therefore, using the historical data to forecast the plan would not be a good thing. But the remedies that will be feasible if, despite better, one would decide to rely on the historical record would be to either, you know, use a stretch factor to increase the productivity offset to reflect these inefficiencies that we know exist but we cannot quantify them, or to introduce an earnings sharing mechanism. Q. If I could ask you to go to page 12. In the paragraph at the bottom of the page, there's a sentence that says: 'As calculated, the productivity offset reflects a lower boundary of the historical Dr. J. Bauer 54 ex (Allan) trend.' And I just wondered on what basis you had made that determination? A. Yes. I mean, that's based on exactly the same argument, that if -- you calculated this or Professor Fuss, I assume, calculated this figure using only historical data provided by the company. Now, if the argument that cost of service regulation is not the most efficient method of regulation, then the historical record therefore should represent the lower boundary, very likely this productivity figure would have to be higher. You know, looking at the overall industry development, we get additional arguments because the industry productivity trend in O&M apparently is higher than the figure determined for Consumers. So the difficulty we have, of course, is the difficulty of asymmetric information. We don't know exactly how much, given a fully effective regulatory regime, how much higher the productivity increase could have been. If we look at especially comprehensive PBR plans, though, we see that the productivity increase, most cases - there's a few exceptions - have exceeded the anticipation. MS. ALLAN: Thanks. That clarifies that for me. Those are my questions, Edward. MR. SWEET: Thank you, Judy. Mark? Dr. J. Bauer 55 ex (Mattson) MR. MATTSON: Thank you, Edward. EXAMINATION BY MR. MATTSON: Q. Dr. Bauer, just a couple of fairly general questions. From reading your evidence, I just wondered if you would confirm that if the Board accepted all of your recommendations with respect to PBR, is it your opinion then that that performance-based regulatory model would serve customers better than the current cost of service regulation that exists in Ontario? Is that a fair conclusion to draw from your evidence? A. I would say, I would agree with you if the Board especially accepted Recommendation 1. Q. That's that it should be broader as opposed to the narrower approach that the company has taken? A. Yes. The proposed narrow plan has, at best, very slight advantages over the status quo. Q. And if the Consumers application went forward as it is, would it be your conclusion that the proposal would not serve customers better in Ontario than the current cost of service regulation, or is that less clear? A. The difference is really marginal. I mean, it's very difficult to see the clear benefits from the current proposal. Also, on the other hand, I don't think the consumers would be worse off significantly. That conclusion also holds. MR. MATTSON: Thank you. Those are my questions, Dr. J. Bauer 56 ex (Poch) Edward. EXAMINATION BY MR. POCH: Q. Dr. Bauer, again a few questions on the -- A. Yes. Can I just say one thing to this? Q. Yes. A. Procedurally, can I say one more remark? MR. SWEET: Yes. Yes, certainly. Is this in response to Mark's questions? THE WITNESS: Yes, to Marc. Mr. Mattson's question. This now refers to the PBR plan, okay, and I'm not sure whether you also included the SSM plan. The SSM plan, in the current proposal, okay, actually is really... My conclusion in the current proposal is that the SSM plan will not lead to any additional DSM measures, but will cause a cost to consumers; that is, you know an equivalent benefit to the shareholders of the company. And so when you say "PBR plan", if you include that as the same plan, I think that the plan, as it stands currently, has disadvantages for consumers that's come predominantly from the treatment of SSM. But on the other hand, I want you to understand that I think that, you know, if a high level of DSM is desirable or, alternatively, if the Board would move to a broader comprehensive PBR plan, that a well thought through SSM proposal makes a lot of sense and will then have these desirable features, you know, to benefits the Dr. J. Bauer 57 ex (Poch) consumers and shareholders. MR. POCH: Q. Okay. Dr. Bauer, let me just pick up on that last point then, if I may. I'm trying to understand to what extent the ineffectiveness of the proposed SSM can be cured, in your opinion, in the context of the current narrower PBR? A. Mm-hmm. Q. I think we may agree on some of these. Let me just test them; that you would advocate greater effective incentive at the margin. Do I understand that correctly? A. In the context of the current model, though you have a very mild incentive in for, on the operations and maintenance side, no effect on the entire capital side of the business and, also, you know, a monopoly situation in the delivery segment of the business, and this is obviously the company sees its DSM measures will reside. I don't see a very strong reason to include an explicit SSM mechanism to begin with. It seems that, you know, historically the company was successful in conducting DSM measures in the current design. And I think, you know, that if one is worried that DSM measures will fall below the current level, one could essentially treat DSM in the context of the current very narrow proposal like the quality of service indicators. You know, one could say, well, let's agree that a certain level of DSM measures needs to be achieved, a certain level of net benefits needs to flow from these measures Dr. J. Bauer 58 ex (Poch) and have, you know, a symmetric or asymmetric - that's up to further thinking - mechanism to assure that this is the case. Now, if ones goes to a more comprehensive model, then the tension between DSM expenditures and the efficiency incentive of a PBR mechanism I think becomes more pressing. Q. All right. A. Likewise, if one wants to increase DSM over and above the current level. Q. Right, okay. I will come back to that, but let me just ask you about some specific wording here to make sure I understand. On page 18 of your evidence, you say: 'The O&M...plan revenues increase with customer growth. The O&M PBR plan revenues increase with customer growth,' excuse me, 'creating no incentive to increase energy per customers, however...,' And you're quoting from the company's evidence here: '...'decreases in use per customer are rewarded, provided they are efficiency-based and cost effective'; thus, the proposed O&M PBR formula already creates rewards for DSM efforts.' And I looked at the company's evidence you refer to, and it is referring to the... The reward it refers to is in the SSM, and I'm wondering if you're saying here that the O&M PBR absent the SSM creates rewards for DSM efforts? Dr. J. Bauer 59 ex (Poch) I'm wondering how that is so. A. Well, it does. I mean, as far as DSM efforts reduce, because they reduce volume of sales, you know, they may reduce O&M, it would be captured. What I'm saying here is really that one has to be careful that no double counting, you know, happens; that you don't reward, through the revenue cap mechanism, O&M -- or DSM measures that reduce O&M, and then you again have an additional reward, you know, through the SSM mechanism. Q. All right. A. You know, one would have to put real numbers on this to really see whether this is a problem. I don't say that it is necessarily a problem. I just wanted to point it out. Q. All right. And just so we have a broader picture then, it would also be true, would it not, that without the SSM, the company, if it simply reduced its DSM spending, would be... The mechanism would allow it to pocket that O&M budget, as it were? A. Yeah. But that's why I said in the current framework, one needs to treat, you know, as -- at a level, a minimum level of DSM like the quality of service. Q. All right. A. So, you know, it's the analogy -- the quality of service analogy I think is okay because you have the same problem, that reducing the spending would lead to higher earnings; therefore, we need to have minimum Dr. J. Bauer 60 ex (Poch) threshold. But the current -- coming back to an earlier question, you know, the current level of O&M expenses and the rate base of the company reflects a certain level of DSM activity and therefore, you know, it's justified to say that this level can be maintained in the current plan because we start from the historic revenue requirement. Q. All right. Indeed, your recommendation, Recommendation No. 6 about service quality index for DSM, I take it if you went that route, consistent with your other evidence, you would like to see some consequence if the quality indicator isn't met? A. Right, yes. Q. And would you also advocate that, in effect, the consequence be a graduated one; that we not have some sharp line that thou shalt not cross. Rather, that you would like to see an incentive structure? A. Yes, absolutely. Q. All right. In essence then, what we would be -- would that not be, in essence, simply embedding an SSM inside the PBR as opposed to treating it as a separate module? A. Well, not really because one would have to... I think the purpose of an incentive of that sort would be to maintain, you know, the current level of DSM activity. Q. Okay. A. So therefore, the marginal incentive would likely be much lower than in a proposal where you aim at Dr. J. Bauer 61 ex (Poch) expanding DSM activity. Q. All right. Now, I think I understand you better now. So the recommendation is assuming one, as a matter of policy, the Board wishes to set its target at preserving the current level of DSM activity? A. Right. Q. All right. In fact, you use the word "preserving". And I take it -- you observed earlier this morning, you said that they already do do DSM, and I observed they already do do OM&A, too. If we assume the Board wants to improve on the status quo, if it finds there are significant cost-effective savings available and it's appropriate for pursue them through DSM, do I take it that your position would be then that in that scenario, SSM is the preferred means to enhance? MR. WARREN: Sorry. David, can I just ask where, what's this clarification of the evidence as opposed to cross-examining him on his evidence, which is really not the purpose of the exercise today. MR. POCH: Well, yes. I -- MR. WARREN: What is the clarification of his evidence that you require? MR. POCH: Yes, yes. He has made a recommendation with a premise and I'm just trying to understand -- and the premise being that we just want to achieve the status quo. Dr. J. Bauer 62 ex (Poch) And in the body of -- MR. WARREN: Do you want to know what his premise is? Can you ask him what his premise is? MR. POCH: I have asked his premise and he has agreed with that. And now I'm suggesting, if we assume alternative premise, if it's his evidence that SSM is the preferred mechanism? MR. WARREN: That, I suggest, is cross-examination-- MR. POCH: Fine. MR. WARREN: --which you would conduct presumably when the hearing starts. MR. POCH: All right. Fine. I don't... MR. POCH: Q. In your evidence, you refer to... You suggest that the marginal incentive rate should increase as the net benefits rise. MR. WARREN: Do you have an evidence reference for him? MR. POCH: Yes. Q. This is at the bottom of page 18, the last full paragraph on page 18. You say: 'Hidden costs of DSM measures tend to increase more than proportionately with the net benefits. An increasing marginal incentive rate seems appropriate. A high marginal incentive rate could be combined with a fixed charge to the utility to decouple the marginal incentive rate from the total incentive payment.' Dr. J. Bauer 63 ex (Poch) And I am wondering, if the Board accepts that recommendation, is it appropriate to maintain symmetry, that you would have an increase in the penalty percentage at the bottom of the curve as well as the net benefits are easier to attain, relatively? A. Yes. The reason for this progressive nature is that the SSM is again based on the premise that there are hidden costs of pursuing DSM measures. And you know, it's fairly common that such efforts increase over-proportionally as one expands, you know, the level of DSM and that's why on the upside the DSM has a progressive marginal rate but on the downside as well. Q. All right. And is it fair to generalize your comment to say you would like to see increasing incentives to deal with, say, any aspect of DSM where if the Board finds that it is harder to achieve that aspect? I'm thinking here -- I'm thinking, just to put this in some context, I'm thinking here if we concluded, for example, that lost opportunity type DSM is much harder to achieve, is it appropriate in designing an SSM in keeping with that comment you've made to put a higher incentive on that type of activity assuming administrate ease? A. Well, I guess I don't have enough information right now to ... I'd rather focus on the prefiled evidence. Q. Sure. Now, you talk about decoupling the marginal incentive rate from the total incentive payment. Dr. J. Bauer 64 ex (Poch) Can you tell us what mechanism you're suggesting there? MR. WARREN: Is there an evidence reference? MR. POCH: Yes, the one -- I just read that reference. THE WITNESS: Now, let me just give an example: If you had total net benefits of, let's say, $50-million, okay, and the marginal incentive rate because you want to expand DSM activities were high, let's say 15 per cent, okay, which is fairly significant, then the resulting, you know, incentive payment would be fairly high. So what is commonly done in such incentive mechanisms to allow the establishment of a high marginal rate but keep, you know, the ratepayer impact manageable, is this decoupling measure and one could say, okay, we have a fixed payment of, let's say, $4-1/2-million-- Q. From the utility? A. --that is deducted, Q. I see, yes. A. Okay. So that the incentive payment corresponding, you know, to the this level of benefits would only be 500,000, but, you know, for any additional, the marginal rate would be the 15 per cent hypothesized here, but you deduct the fixed payment. It's really just a very -- it's a simple feature. Q. Yes, thank you for that. I think I understand now. If you go that route then, are you suggesting Dr. J. Bauer 65 ex (Poch) that there should be a zero expectancy value? Well, logically, there would be a zero expectancy value for the incentive at some level of activity. Are you making any recommendation as to what that cross-over point should then be? A. No, I don't make any specific recommendations on these issues and I think the -- you know, if -- again, this is a contingency recommendation of mine that comes, you know, further down in my set of recommendations. My first would be to move to a more comprehensive model or, if one stays with the proposed revenue indexing proposal to treat DSM equivalent to quality of service measures and only, you know, if all these contingencies are passed and we still want to have more DSM or go to a more comprehensive model, then I think we should think about the design of this mechanism. And I think it will need further thought with respect to this point where there's no reward, although there are arguments again that it should be close to the existing level of DSM benefits. One would have to think in more detail about the level of the marginal incentive, the specific structure, the caps and all these things, but I haven't made any recommendation, I suspect. Q. That's fine. You're saying your preference is the broader PBR first of all and I take it your preference there is for price caps. Do you have a recommendation for the Board if the Board were to give direction as a result of this Dr. J. Bauer 66 ex (Poch) proceeding to the company to go that route, how -- what approach to take if the Board also finds it wants to incent, to cause DSM to be pursued aggressively, how in that broader model you would ask -- have DSM addressed; is it an SSM or some other mechanism? A. Well, in the spectrum of alternatives, there will be sort of a plain, you know, penalty rewards game or some mark-up model and it's the same -- I think the preference would be for SSM. Q. Fine. You've also indicated a suggestion as an improvement for the proposal to put in place. In your summary this morning, you said caps for outline results, if I understood you correctly. Could I just understand what problem that is to address? A. Well, the problem that caps like to address is the following: That some of the benefits -- especially if one measures net benefits with inclusion of externalities, there may be quite significant discrepancies as to how different people evaluate those benefits and that to avoid, you know, extremely biased estimates in favour of the utility or in dis-favour of the utility, such caps are often seen as an appropriate means, you know, to avoid some of these informational asymmetries and the problems of quantifying the benefits. You know, in essence, it's really a safeguard to avoid that strategic gaming of the process that takes place. Q. All right. And just in that regard, Dr. J. Bauer 67 ex (Poch) elsewhere it's been suggested that as part of SSM, it's appropriate to have some kind of third party verification audit of results as a means of simplifying clearance of -- on account of avoiding argument about what was achieved. Do you have any comments on that? A. I think that follows almost naturally from the idea of PBR, to have some external valuation of reference point. Q. You made a comment a few moments ago about concern about disagreement about the measure on externalities. First of all, I take it if I've understood your evidence correctly, you would like to see any PBR for DSM focus on net benefits rather than costs or spending or gas savings? A. Yes. Q. All right. And if the Board has determined, as it has in Ontario, that it wishes to take account of societal costs and benefits, is it your -- do you have an opinion to offer us as to whether it is then appropriate to use a measure of that -- MR. WARREN: Sorry, David, really, this is more appropriate on cross-examination. I think we can all agree with that. This is not intended to elicit a greater clarification of what's in his prefiled evidence. I object to it. MR. POCH: Well, he refers to net benefits and I'm wondering in the context of Ontario if he means net Dr. J. Bauer 68 ex (Poch) benefits including externalities or not. THE WITNESS: I left it open deliberately and I didn't want to give a recommendation. Both are feasible standards. MR. POCH: Q. That's fine. I just wanted to understand if there was a recommendation. A. The incentive structure would look different depending on what measure you use. Q. I take it by that if you use the SCT rather than the TRC, you would use a lower percentage number to achieve the same marginal incentive. A. Yes. MR. POCH: Thank you. Those are my questions. EXAMINATION BY MS. SYMES: Q. Dr. Bauer, I must apologize in that I received your prefiled evidence this morning and so I certainly am unable to, (a), cross-examine you or (b), refer to you the references, so my questions are entirely trying to understand it and for information purposes. At the top of page 18 of your evidence, you have indicated -- A. Could you say the page again? Q. Page 18, Dr. Bauer. The last sentence: "It needs to be ascertained that no overlap exists between LRAM and the proposed O&M PBR formula." Could you, please, help me understand what we should be looking for in order to satisfy that sentence? Dr. J. Bauer 69 ex (Symes) A. Yeah. I had information on the LRAM and let me highlight the problem. If the LRAM is designed to strictly compensate the company for lost contributions to its fixed cost, then there is no problem. And from information I had on the LRAM, I couldn't absolutely verify that this is the case. If the LRAM is designed also to recapture some contribution to O&M, then there could be an overlap. Typically a LRAM mechanism focuses on the fixed costs of the company. There's no -- the capital costs of the company and, therefore, there may not be a problem, but that's what one needs to look for. Q. And in terms of that then, an LRAM mechanism as the Board modified in its last round that uses forecasts or estimates as opposed to actual performance, either in terms of the actual measure of participants or success rates, does that have any impact in the overlap; that is, in other words, if using the estimated or forecasted results as opposed to actual results, will that produce overlap between LRAM and O&M PBR? A. No, not if the LRAM is focused on the capital. Q. Sorry, but my question is: If the LRAM as the Board amended for Consumers does not rely on actual performance in terms of participants or efficiency, will that cause problems? A. I don't see any immediate problems. I mean, the problem is more how to deal with deviations between, Dr. J. Bauer 70 ex (Symes) you know, actuals and forecasted values. You know, it seems that the methods that are proposed in the PBR proposal, you know, I'm not sure whether those extend to the LRAM. From what I read about the LRAM, I think they do, that you have a truing-up process that should take care of any of those issues, unless, you know, the overlap that I pointed out before does exist which I cannot judge from my information. Q. What information do you need in -- or would we need in order to be able to determine whether there is an overlap? A. You would simply have to know whether the LRAM also compensates the company for cost components that would be classified as O&M which LRAMs that I know in more detail don't, so... again this, is sort of a flag of caution here, something to look out for. It's easy to deal with. Q. Now, you had indicated that your first preference for DSM is that it be part of the service indicators of the O&M PBR. Given your first preference, what would that look like, your ideal proposal? A. Could you say that again? I'm not sure that I...? Q. In terms of your modelling, I had understood you to say that your first preference in dealing with DSM is to have it as a service indicator as part of the O&M PBR formula. Dr. J. Bauer 71 ex (Symes) My question to you is: If you got your wish, what would that look like? A. I guess I wouldn't say it's my first preference. I think, you know, it's based on my -- not preference in the sense that it's a value judgment. I think it's based on my analysis of the PBR proposal and its implications on corporate behavior and how one could treat DSM in such a context and also based on the assumption that the goal is to maintain, you know, to preserve the existing level of DSM. And then I think one would simply have a condition in the plan that would say that the current level of DSM needs to be maintained and some reward/penalty mechanism or, if one wants to be very stringent, just a penalty mechanism for DSM levels that fall below the target level. You know, I think what is important to see is that PBR gives a number of options, okay, and, you know, there is no right/right design of PBR plans. I mean, there are correct combinations of planned features and then there are incorrect combinations of planned features, but there are several alternatives. You know, there's several tradeoffs that we can model. Q. If, though, there were some concerns expressed about the current level of DSM performance, would that change what you think should go into the mechanism? MR. WARREN: The same concern, Beth, it's cross-examination. Dr. J. Bauer 72 ex (Symes) MS. SYMES: Look, we were asked to ask these questions as an alternative to the interrogatory process. MR. WARREN: As a substitute for the interrogatory process. MS. SYMES: As a substitute. And given the fairly short time lines, I think these are perfectly reasonable questions to ask. MR. WARREN: I disagree. MS. SYMES: But does that mean he can't answer them; you're directing him not to answer them? MR. WARREN: You can ask questions regarding them. A substitute for the interrogatories is to elicit further clarification of what he's done, written in his prefiled evidence, but not to cross-examine him and you are cross-examining him. MS. SYMES: Well, with respect, I -- MR. WARREN: My witnesses, Beth, so that you understand my point, are at a considerable disadvantage to the witnesses from anybody else. We're in this position initially because of the late filing of the interrogatory responses and I don't want to disadvantage my witnesses by having them in a position of being cross-examined twice. That's not fair. I'm sure you'd agree with that. MS. SYMES: Let me try and ask it another way: Q. In your assumptions as to what should go into the either reward or penalty mechanism as part of the O&M PBR, are you starting from an assumption that the current level of DSM performance is appropriate? Dr. J. Bauer 73 ex (Symes) A. No. I'm giving you the options. I'm saying, if the Board finds the current level of DSM is appropriate, here is what you can do in the context of the PBR plan. And I think the best approach actually would be to have an asymmetrical, like in the quality of service case, an asymmetric safeguard against reductions in the quality -- in the DSM efforts. And again, there's flexibility in how specifically we do it. In some cases, and other jurisdictions have done it, you know, the penalty kicks in if the level falls below 95 per cent or 90 per cent of the current level. I think that's a decision that needs to be made by the Board. So it is not based on the assumption that the current level of DSM is the best. Q. But sorry, I understand then based on that assumption. Do you have any recommendations if there are a finding or a concern that the level of performance is -- the current level of performance is not adequate; would you change your answer and how? A. Again, I didn't have -- it's a question I cannot assess and it was not part of, you know, my mandate in this case, but if your question is what -- let's assume that the DSM level should be increased - I answered this question in my evidence by saying - and it's the same approach would be something that one should look into. Q. Now, going to -- if, in fact, Consumers is obviously seeking SSM in addition to the O&M PBR, in terms of the mechanism proposed, in your discussions with David Dr. J. Bauer 74 ex (Symes) Poch, you talked about a bright line and you said you didn't want a sharp line. Are there mechanisms which deal with a continuous function, for example, the difference between achieved and forecasted and rewarding or penalizing on a continuous function; are there advantages of that, any disadvantages? A. I don't see any disadvantages. I mean, the advantages of such an approach is that it sets a clear incentive structure. The current proposal, there are many -- you have a very strong discontinuity in there, so the marginal incentive, if you go one dollar above the 20-million, you know, is essentially -- well, it's an infinite marginal incentive at this point and that's something that is very undesirable from the features of an incentive plan. Q. Dr. Bauer, just so to make sure I understood your answer, is that problem solved - that is the discontinuity - if the mechanism is, in fact, the difference between actual and forecasted? Would that work -- or is it sufficient? A. It will depend on the details, but it can be designed in a way that this problem is avoided, yes. Q. And in terms of that, if there is to be an SSM, does it make any difference in terms of conceptually, if actual performance indicators are used as opposed to estimated or forecasted? A. In general, I think it's desirable to have some truing-up process that uses actual values rather than Dr. J. Bauer 75 ex (Symes) forecasted ones. Q. And in terms of your answer to the external audit questions that David Poch had, I would like to ask you slightly different, is before an SSM is begun, in other jurisdictions has there been some form of external audit to assure I guess the parties, the regulator that the information on which they are beginning is, in fact, valid? A. I think so, but I would have to verify that. I cannot answer this on the spot. MS. SYMES: Thanks very much. Those are my questions. MR. ROGERS: No. I have no questions. Thanks. MR. BRETT: No questions. Thanks. EXAMINATION BY MS. LITT: Q. Dr. Bauer, could you turn to page 3 of the evidence, please? A. Mm-hmm. Q. There's a statement that: 'Targeted PBR plans have generated a mixed record.' I was wondering if you could refer to specific instances? A. Yes. I can also refer you to a good summary that is quoted in my evidence. But the State of New York has for a while used such targeted plans for different utilities; for Niagara Mohawk for a while, for NYSEC. And Brooklyn Union for a while has operated under such a model. Dr. J. Bauer 76 ex (Litt) And "mixed record" means that it has not shown, you know, a clear pattern of efficiency increases. And actually, several of those more targeted plans were abandoned and replaced by broader ones. And now I should mention one caveat, though. Some of those targeted plans were not as broad as the current proposal. Some of them were even narrower. They would highlight, you know, even smaller parts or incent even smaller segments of the operations of a utility. But some were of a different nature and, for instance, they were not developed indexing plans like the ones currently proposed, but they were benchmarking plans. So the literature commonly clusters targeted plans as opposed to broad, more comprehensive plans. So there's a set of different plans in that area. Now, in Canada, there are cases and, for instance, West Kootenay Power has a cost indexing plan that's in some ways similar to what is proposed here. And BC Gas had one that's actually very similar to what is proposed here. In the first case, there are talks to, as far as I know from anecdotal evidence that I am aware of, to broaden the plan. In the second case, it was broadened recently. Q. With respect to achieving service quality index targets, there's a reward/penalty mechanism available to be applied. What other mechanisms exist or is the Dr. J. Bauer 77 ex (Litt) reward/penalty the most commonly used mechanism? A. Well, there are very few mechanisms that are comparable with the PBR, to sort of internalize, you know, certain performance goals into the company's thinking without external control. Within the category of reward/penalty mechanisms, there are two types. I mean, some jurisdictions have rewards and penalties, but it is... It seems that this was a... Again, where plan designs that fall into the first generation of PBR plans when we didn't, and maybe did for one-and-a-half generation of PBR plans. And we saw some of the flaws of plans that don't have quality of service targets, but didn't yet see clear enough that this is really a safeguard against the deterioration of the quality of service and therefore doesn't have to provide any rewards. So the latest set of quality of service safeguards essentially for seasonal only penalties for failing to achieve the quality of service, there are other probably methods that one could imagine such as, you know, an individual treatment of quality of service violations. You know, for instance, one could take the company's proposal and say, well, whenever you don't measure up to the quality of service, we will define some measure on a case-by-case basis. But I think this is really contradicting the basic idea of PBR, which is really to sort of incorporate incentives into the management's decision-making Dr. J. Bauer 78 ex (Litt) behaviour. And a mechanism as proposed in my evidence essentially gives the company a contingency plan. It's very transparent ahead of time what would happen should the quality of service fail to measure up to the target. Q. On page 16 under the discussion of Z-factors, there's a statement that: 'Z-factors are not to be abused as a back door to seek relief against management error.' What planned features are available to guard against that? A. Well, I think the best safeguard is to, for one, have a list... Well, let me back up a little bit. I think the strongest safeguard would be to have no Z-factors in a plan, and there are plans that don't have any such adjustments. Now that, of course, influences the risk structure of the plan, you know. One could legitimately say if the company accepts a plan that doesn't have any such Z-factor adjustments, then its opportunities to achieve reward should also be higher, and that's really what one sees in those plans. But then a second solution less dramatic, I would say, less radical than the one just mentioned would be to have a narrowly defined list of Z-factors that clearly identify issues that are, or variables that are outside of the control of management. That would be tax changes that affect the natural gas distribution industry, per se. You know, it's a question of whether, let's say, Dr. J. Bauer 79 ex (Litt) general tax changes should be part of such a Z-factor because they would be reflected in the indexing components of the plan, such as the inflation variable, the productivity variable, especially if one would go to industry-wide measures. Q. On page 17 in the first partial paragraph, there's reference to a minimum impact on the return on equity. Can you provide any quantitative estimate of a minimum impact? A. That's... You know, the plans that exist in practice are very diverse, and it's like 1,000 flowers are blooming, but... So the specific threshold varies from case to case. In some cases, it is quantified as, let's say, 50 basis points impact on return equity or I'm aware of plans, I think, where it's 25 basis points. In some cases, you have a fixed dollar amount; let's say $500,000 (U.S.) in that case. And I think, you know, the existing solution where you have, I think the amount is $100,000 (Canadian), that would be feasible to define that. You know, I think one has to understand the following; that that's again one of the tradeoffs in PBR plans. You know, if you define these Z-factors, you know, with very low thresholds and very inclusive, then the idea of PBR is essentially undermined because, you know, unexpected features or factors that affect the company are really filtered out and the company is shielded from these things, which it is not in a market environment. Dr. J. Bauer 80 ex (Sweet) MS. LITT: Thank you. MR. SWEET: I just have one question. EXAMINATION BY MR. SWEET: Q. If I may turn you to page 9 at the top, you have got a paragraph. I guess what it says is, it basically indicates that there are advantages to PBR - and this is carrying over from page 8, and, in fact, you quote the company, indicating that they provide more flexible market response if kept simple and less costly, create stronger incentives for prudent risk-taking, et cetera. My read of this paragraph and maybe of the company's -- your impression of the company's overall PBR proposal is that the company doesn't end up with that level of flexibility to respond to the market to change its prices. Is that a correct assessment of that paragraph? A. Yes, yes. I mean, I was actually puzzled by that because it seems that the company didn't really take advantage of some of the flexibility that was even provided within the, you know, the O&M proposal as it exists. Now, I also highlight that there are other issues that one gets into if you think about more pricing flexibility. But what I wanted to highlight here is that some of the claims, some of the advantages of the proposal, it's very difficult to imagine how they're being realized unless there's some pricing flexibility within the constraints of the plan. Dr. J. Bauer 81 ex (Sweet) Q. One last question then, just to follow up on that. In your estimation, is the ratepayer further ahead with the introduction of this limited PBR or status quo or behind? A. Compared to the status quo, I think it's a very marginal change. I mean, it's difficult to understand, you know, whether the learning that is necessary in learning how to interpret, you know, behaviour under this incentive plan, the cost of learning are not outweighing the slight benefits that one would assume this plan can bring. I think, you know, one would also have to see clearer how, at the end of the three-year period, the rebasing of the plan takes place. And unless there are clear provisions that assure at this point sort of efficiency gains will be shared more explicitly with ratepayers, it's difficult to see the advantages over the status quo. I think, you know, my argument is essentially, though, that ratepayers could be, and shareholders, very likely be better off in a more comprehensive plan. So if that were the yardstick against which we want to measure, then the current plan, compared to this other possible path, does not fare as well as it could. MS. ALLAN: Edward, could I just follow up a little bit? Dr. J. Bauer 82 fur ex (Allan) EXAMINATION BY MS. ALLAN: Q. Johannes, are you assuming that the comprehensive would be brought in, in the same time as the O&M plan or are you assuming that there would be a delay? A. Well, my understanding is that the comprehensive would include the O&M, so there would be a substitute for the current proposal. Q. So you're assuming that it could be brought in, in the same timeframe? A. Yeah. We would start or you would start with a more comprehensive PBR model, rather than having this very gradual transition. Q. So if there would be a need, for whatever reason, to take some time to develop a comprehensive plan, so that it was, say, a year later, what's the efficiency consideration? MR. WARREN: Sorry. I'm going to object to that question, Judy. MS. ALLAN: Okay. MR. WARREN: You started cross-examining him. MS. ALLAN: Well, I wanted to understand the assumptions in his answer; that was all. MR. WARREN: Which you got. MS. ALLAN: Okay. MR. SWEET: Thank you. Are there any other -- I guess that's it. There's no more questions on this witness. Thank you very much, Johannes. Dr. J. Bauer 83 Bob, any...? No. MR. WARREN: No, thanks. ---(Witness withdraws) MR. SWEET: Well, I suggest we take a 20-minute break now and reconvene at 11:45. The witness at that time will be GEC's witness, Paul Chernick. So 11:45, reconvene. Thank you. ---Recessed at 11:22 a.m. ---On resuming at 11:49 a.m. MR. SWEET: Thank you and welcome back to the second half of the Technical Conference. Are there any procedural matters parties wish to raise? Jim, do you have something to tell us? MR. GRANT: Yes, I've got one. I just wanted to let everybody know we have now filed all of the interrogatories. We filed two letters today. This is all over on the windowsill. The first letter contains answers to 17 interrogatories and the second letter contains answers to the remaining three and that completes all of the interrogatory responses. Mow, the other thing I'll mention is that we have copies over on the windowsill again of a letter which I sent to Paul Pudge on the 12th of November concerning the Revenue Canada changes in assessing practice and this letter and the information in it are germane to the issues in EBO 179-14 and 15. MR. SWEET: Thank you very much, Jim. 84 Our next witness is GEC's witness on the phone and his name is Paul Chernick. ---[via telephone] MR. POCH: Paul, you're able to hear the proceedings? THE WITNESS: Yeah, I can hear fine. MR. SWEET: Paul, I'm not sure if -- this is Edward Sweet of Board staff talking. I'm not aware of whether or not David indicated to you, but we've asked all of the witnesses to provide -- to undertake a detailed review of their evidence and to give a short, say, three- to five-minute summation of the evidence and to highlight the most salient points of the evidence and indicate any significant findings or differences between the company's evidence and your own, okay? THE WITNESS: Okay. MR. SWEET: Do you have any questions? THE WITNESS: No. I think I understand that direction. MR. SWEET: Thank you very much for joining us this morning. David? PAUL CHERNICK; Called. EXAMINATION BY MR. POCH: Q. If you'd like to go ahead with that then. A. Sure. Actually, I think this will surprise people who know me. I think I can keep this under the three minutes. In general, I agree with the company P. Chernick 85 ex (Poch) regarding the need for a shared savings mechanism and I disagree with the company about certain aspects of the design. On page 6 of my testimony, there are three bullet points that lay that out: The asymmetry, the fact that there are bonuses without penalties, the discontinuity that the company proposes at the threshold of 20-million in net benefits where suddenly the reward would jump dramatically from zero to 1.6-million as the last dollar came in to get them over the $20-million threshold and finally, the use of the basically the TRC test, the societal test without externalities for measuring benefits rather than the societal test with a reasonable level of externalities. And I propose an alternative formula that doesn't have these problems, that changes the measure of net benefits to include externalities, gets rid of the jump at the threshold and includes a penalty and I give a couple of examples on pages 8 and 9 of my testimony. And I make the point that there isn't any one right way, one perfect formula that will produce the right results and others are inherently incorrect. That's partly a matter of a judgment call on the part of the Board and there are other considerations that need to be taken into account, but the general form I've laid out here can be slid up and down into terms of -- where it crosses a zero point, the fulcrum or the threshold or pivot point you might call it and also in terms of the slope. P. Chernick 86 ex (Poch) And the last section of my testimony discusses the importance of measuring benefits and being very clear about how benefits are to be measured first of all and secondly, measuring them in an appropriate way. The company is proposing a per participant measure for -- all except the custom programs and is a little vague about how the custom programs would be evaluated for the purpose of the SSM and I point out that for many programs, other measures other than number of participants, such as the number of square feet of windows, the size of the boilers replaced and that sort of thing would give you a better measure of the benefits and would be just about as easy to implement and would get better incentives for the company in terms of directing them in the right direction. And of course, to the extent that actual costs can be determined certainly for the utility and for the participants where that's possible, those should be used. And the mechanism for determining and verifying the costs and savings for the custom measures is very important and should be laid out as early as possible. All these things should be laid out as early as possible to avoid uncertainties, disagreements, unnecessary disputes and confusion later on in the process. And I point out that much of what I say about measurement of benefits for -- and costs for that matter -- for the SSM, the benefit side of it anyway also applies to the LRAM. And to the extent that there are better ways of estimating lost revenues and to use a participant P. Chernick 87 ex (Poch) number, those should be used. And again, we need to know how lost revenues will be estimated for custom measures. And again, to the extent that can be done before the final claim is made, that would be helpful. And the last section of my testimony on DSM-related PBR issues points out the consistency essentially between the proposed PBR and the SSM in pursuit of DSM - excuse me, I'm fighting a bit of a cold here - and then I summarize my recommendations. I think that's probably enough of an interruption. Most people will have -- do want me to go on? Q. Thank you, Paul. We'll see if there are any questions. MR. SWEET: Murray? MR. KLIPPENSTEIN: I have no questions for Pollution Probe. MR. SWEET: Jim? MR. GRANT: No questions. MR. SWEET: Beth Symes? EXAMINATION BY MS. SYMES: Q. Mr. Chernick, in terms of the SSM and your comments concerning it, in your view, would the discontinuity which you have identified as a problem with its current proposal be solved by simply incenting or penalizing based on the function that is achieved minus forecasted? A. So that the company would get some constant share of achieved minus forecasted net benefits? P. Chernick 88 ex (Symes) Q. Yes. A. Yes, that would certainly be one way of doing it. That would set the pivot point then -- unless you added a constant to it, that would set the pivot point at the forecast. Q. And if you were to try to build into this an incentive whereby each year the performance improves, what would you recommend as what you've just told as the constant; how would you calculate that? A. Well, that's a good question. You really would want to tie that to what's a reasonable target. You could to do it somewhat arbitrarily by saying we're going to start with a pivot point at 80 per cent of the forecast and next year it will be 100 per cent of this year's forecast and a year after that it will be 120 per cent, but I would like -- I would prefer to start with sort of a bottom-up review of the programs and what they really could be doing and lay out an aggressive target for them to meet by, say, the third year with recognition that in the first couple of years, they can't really be expected to have the programs fully mature and, therefore, have a lower pivot point in those years. Q. Are you aware that this is the fifth year of the DSM for Consumers Gas? A. I'm sorry, I didn't hear that question. Q. Are you aware that this is the fifth year of DSM performance for Consumers Gas? A. That sounds about right. P. Chernick 89 ex (Symes) Q. In terms of looking at the inputs and the measures that should go into an SSM, can you tell us based on your experience across the United States whether audits of existing performance are a necessary and/or sufficient measure to give the regulator confidence in the numbers it's about to embark on? A. Well, I'm not quite sure what you mean by an audit. I could answer that in a couple of different ways if you'd like. Q. Well, what I meant was an external audit by a third party independent to verify -- essentially to verify the numbers. A. To verify the level of achieved savings? Q. Yes. A. Oh, yes. Yes, I would consider that part of a comprehensive monitoring and evaluation plan which I discuss in my testimony. You have to have a very careful independent eye taking a look at how the savings are estimated, how the something costs are estimated, how the life of the measures is estimated so that you can really believe the numbers that you're getting back. Q. And Dr. Bauer commented that given the PBR mechanism proposed by Consumers which is an O&M measure, that his recommendation was that DSM be dealt with in that O&M PBR measure in terms of quality of service and that Consumers be penalized if its DSM performance fell below the current performance. Can you comment on that; do you agree, disagree P. Chernick 90 ex (Symes) and why and why not? A. Well, I haven't reviewed Dr. Bauer's evidence, so I'm going basically on what you just said, The way you described it. I would agree that falling below a reasonable threshold should result in some kind of penalty, but I don't see why you wouldn't also want to have some kind of reward or bonus for going above that level and getting greater savings. So I guess I don't disagree with the idea of a penalty, but I don't see why a positive incentive wouldn't be valuable as well. As a matter of fact, I'm sure it would be. The idea that you had put -- set the pivot point at current performance, I guess that would sort of lock into place whatever the company has been doing to find that as acceptable and give them no incentive to do better and I believe that the testimony of Mr. Neme in the first phase of this case indicated that there is room to do better. MS. SYMES: Those are my questions. Thank you. MR. POCH: I have no -- nothing for Mr. Chernick, so -- I'm sorry, Board staff has some questions. MR. SWEET: Tom Brett. MR. BRETT: I have no questions. MS. LITT: Mr. Chernick, my name is Kathy Litt. I'm a member of the OEB technical staff. I have two questions for you. EXAMINATION BY MS. LITT: Q. On page 5 of the evidence, the second bullet P. Chernick 91 ex (Litt) point, there's a statement that the net benefit level not be excessive. Can you give any guidance as to -- or quantification of what would be considered excessive? A. Well, what I meant there was more than is reasonably required. Obviously, you can give the company an incentive for, I guess, just getting their bills out every month, but that would be -- that seems to be beyond necessary. That level of performance and a considerably higher level of performance is built into the normal return on equity and you want to start the incentive at a point that reflects greater than normal or greater than standard performance and reflects performance beyond what you would expect just for that return on equity. Obviously consumer groups can consider almost any unnecessary cost to be excessive. I didn't mean to indicate that, you know, $50,000 is okay but 500,000 wasn't. Q. Going on to page 10 of the evidence, at the bottom of that page where the review proposal is explored, could a third party audit completely replace a review and a consultation process? A. Well, you may then have an issue in which there's a dispute between the company, the third party auditor and other parties to the proceeding. It may be valuable to have a third party producing a report to the Board, but that party should be working with and ideally should have some confidence from the company and the other P. Chernick 92 ex (Litt) parties so that what goes to the Board reflects values which even if the company and the parties don't necessarily all agree with in detail are overall reasonable and that don't require any further litigation. So I see a third party as complementing the consultation rather than replacing it or the consultation complementing the third party review. But in any case, it's necessary to set up this -- a monitoring and evaluation plan so that the third party auditor will have the right information to audit. If at the end of a program you bring in a third party and at the end of a program year you bring in a third party to do an evaluation or review the company's numbers and they start to ask questions about, well, how was -- how were the savings from this custom measure estimated and the company doesn't have an answer because they didn't require contractors to provide certain information, that's going to be frustrating for everyone. MS. LITT: Thank you. MR. SWEET: David? MR. POCH: Nothing. MR. SWEET: That's it. Thank you very much, Mr. Chernick. We will hang up now. THE WITNESS: Okay. Thank you. Bye. ---[Telephone call terminated] MR. SWEET: The next Panel we will deal with is the HVAC Panel. Ian, would you like to bring them R. Grochmal, M. Luymes 93 forward? MR. MONDROW: Thank you, Edward. They're coming forward. ROGER GROCHMAL, MARTIN LUYMES; Called. MR. MONDROW: We have two witnesses covered by the Witness Statement that has been filed and circulated. The gentleman sitting closest to the dais is Roger Grochmal. He is the President and owner of Atlas Air, an HVAC contractor, and the person sitting next to him is Martin Luymes, L-u-y-m-e-s. "Grochmal" is G-r-o-c-h-m-a-l for the reporters. Martin is HVAC Coalition's case manager and is responsible in large measure for the statistical aspects of the Witness Statement that has been filed and circulated, and can speak to those. And I understand the preference is for the witnesses to give a brief overview of the evidence-- MR. SWEET: Yes. MR. MONDROW: --and Mr. Grochmal will do that. MR. SWEET: Thank you. MR. GROCHMAL: Thank you. SUMMARY BY MR. GROCHMAL: Our evidence really deals with a very singular subject, and that is the skill and the will of the HVAC industry at large to provide maintenance and repair services with respect to rental water heaters and furnaces. The prefiled evidence of Consumers I think leaves R. Grochmal, M. Luymes 94 (Summary- Grochmal) the impression that the HVAC industry somehow does not have the resources to service the assets in question. Our evidence indicates the opposite. According to our industry figures, we have some 4,800 contractors that are registered businesses, licensed under the Energy Act, and they employ some 12,000 licensed gas fitters in the Province of Ontario. These are big companies, small companies, and they're pretty evenly distributed among the entire province. The present proposal as outlined by Consumers would strand a lot of long-time authorized contractors, and their employees have been doing a lot of this work for a considerable period of time. One of the big concerns that the gas company seems to have is that there is a willingness of the gas contractors to do a lot of this work. Quite frankly, as it exists today, there are several hundred contractors that are actively participating as partners with Consumers to provide much of the service now and I would feel very strongly that they would continue to do so. One of the big risks that is pointed out in the evidence is that there's a problem with potential premature retirement of water heaters in the marketplace. We don't believe that that is the case. Contractors are pretty committed to high levels of customer service and really don't go about replacing good operating equipment with new. The only exception that does occur is when we are upgrading to higher efficiency R. Grochmal, M. Luymes 95 (Summary- Grochmal) equipment, much of what has been talked about here today. If, however, additional comfort were deemed necessary in this matter, contractors would be willing to submit to reasonable contractual arrangements as we've indicated; things such as spot audits and penalties for prematurely replacing an asset. We do have some competitive concerns about the nature of this transaction. Our customers have some difficulty distinguishing between Consumers Gas and Consumersfirst. With the reidentification of the company and its affiliates under Enbridge, we believe it will be even more difficult for consumers to make a distinction and, for us, this presents a pretty significant barrier. And I think hopefully, in a few minutes, that summarizes the nature of our evidence. MR. MONDROW: Edward, I should just indicate before people have questions that Roger Grochmal is also President of HVAC Coalition. MR. SWEET: Thank you, Ian. Bob Warren, do you have any questions? MR. WARREN: No, thank you. MR. SWEET: Michael Janigan? MR. JANIGAN: No questions. MR. KLIPPENSTEIN: No questions from Pollution Probe. MR. GRANT: We have had some limited opportunity to review this. We probably will have a couple of written interrogatories once we are able to think a little bit R. Grochmal, M. Luymes 96 ex (Brett) more about this. I don't have any questions today of a clarifying nature. MR. SWEET: David Poch? MR. POCH: No questions. MS. SYMES: No questions. MR. BRETT: Yes. I just have one clarifying question. EXAMINATION BY MR. BRETT: Q. I gather the way it works today is that some of Consumers' own staff gas fitters do some of their repair work on the existing water heater base, but that your members also do a lot of repair work on the existing water heater base, and I guess the same would be true for the existing base of furnaces and other gas appliances. Would you be able to elaborate, at all, on what you think the proportions might be currently? MR. LUYMES: A. According to Consumers' own evidence, I think the breakdown is 60 per cent independent contractors/40 per cent utility personnel. I would be prepared to be corrected on that. EXAMINATION BY MR. McKAY: Q. Neil McKay. I'm with Board Staff. I've just got a couple of questions. Consumers Gas authorizes certain dealers. Is that correct? MR. GROCHMAL: A. That's correct. Q. And it's only the authorized dealers that can perform the service work. Is that correct? R. Grochmal, M. Luymes 97 ex (McKay) A. That's correct. Q. And what percentage of the dealers are authorized by Consumers Gas? A. The numbers changed. The last records we had, Martin, I think that there were some 500 authorized contractors throughout Ontario. They are -- through this process of restructuring, that number is changing. I don't know what the exact number are because I have yet to see a list from Consumers as to the exact numbers and quantity and who those people are. MR. LUYMES: A. Not all of those contractors are authorized to do water heater servicing. There are some that are; some that aren't. Q. So your chart that has the number of contractors on it; that's a total list of contractors? That's not necessarily authorized dealers. Is that correct? MR. GROCHMAL: A. (Nodding head) MR. LUYMES: A. Right. Q. Okay. And do I take it that it's your position that if Consumersfirst gets exclusivity on the contract for the service work for rental repairs, that that will displace some of the work that is currently being done by your contractors? MR. GROCHMAL: A. That's correct. Q. Have you figured out how much? A. It will be -- it will be difficult to do so because we are not privy to the operating plans of R. Grochmal, M. Luymes 98 ex (McKay) Consumersfirst. They have indicated that they intend to use some mix of -- again, as they have present, of doing some work themselves with their own staff and in doing some work with some companies that they have acquired and some work that they're going to do with independent contractors. So it depends on how that mix evolves will depend on how much is displaced, and we don't really have any idea at this time. Q. But you would expect that if Consumersfirst has the exclusive contract, they would do all of that work? A. That's correct. Q. Okay. And just one final question. You have got a couple of charts. There's a pie chart here in terms of the areas you cover in Ontario. I notice that Metro Toronto has 14 per cent. I just thought that was incredibly low. Is there some reason for that? I would have thought that, you know, Greater Toronto would have the -- MR. LUYMES: A. Well, that's not Greater Toronto. That's just -- this is based on a surrogate measure, the only thing that we had in the database that we were using, which was area code. Q. Right. A. So this is based on the 416 area code only. If you add the 905, unfortunately that also includes parts of Southwestern Ontario. R. Grochmal, M. Luymes 99 ex (McKay) Q. Okay. A. But you would have to combine those two to some extent to get the Greater Toronto Area number. Q. All right. And, again, these aren't authorized dealers-- A. No. Q. --these are all dealers; right? A. They're all. MR. McKAY: Okay. Thank you very much. MR. SWEET: Are there any other questions? Ian? EXAMINATION BY MR. MONDROW: Q. I just thought maybe I would ask Mr. Grochmal to clarify, and maybe I misheard. But for the sake of the record, when Neil was asking him about what will happen post-separation with respect to contractor involvement, first I thought I heard Mr. Grochmal say that Consumersfirst had indicated an intention to use a mix of in-house and contractor personnel. And later on, his comments might have implied that Consumersfirst would do it all in-house. So it may be appropriate if he just clarifies that response, if that's all right. MR. GROCHMAL: A. It would be a mix, from what I understand. MR. MONDROW: That's it. Thank you, Edward. MR. SWEET: Thank you, Ian. Thank you. ---(Witness Panel withdraws) MR. SWEET: We are onto our last Panel of the Procedural Matters 100 morning and that would be OCAP's Panel consisting of Dr. Norsworthy. MR. JANIGAN: Yes. Dr. Norsworthy is also a joint witness of CAC and IGUA. MR. SWEET: Of CAC and IGUA? MR. JANIGAN: With respect to Dr. Norsworthy's evidence, although Dr. Norsworthy has completed the conceptual framework of his evidence, he has not completed his measurements essentially to derive an "X" factor, either a measurement of total factor productivity or a replication of Dr. Fuss's MFP. And he has identified about seven or eight specific data requests which he is currently transcribing in a form which can be delivered to the company today. And the company then can take it under advisement whether it's capable of responding to that and whether or not there are any proprietary issues that must be addressed and a framework within which they may be addressed. If he obtains that information, he can finish or complete the evidence and derive the appropriate measurements fairly expeditiously. MR. SWEET: Jim, you will take a wait-and-see and see what they ask? MR. GRANT: Yes. Obviously, I have to take a look at what they are asking. MR. SWEET: Given the most positive of scenarios, Michael - the company is able to respond, say, in a day's time - when will your evidence be ready? Procedural Matters 101 MR. JANIGAN: Well, as soon as possible. I would like to... Before I give a commitment on that, it's always beneficial to sort of see the evidence first. But, I mean, we're cognizant of the time deadlines and the fact that the time deadline for intervenor evidence set by the Board Order was Thursday of last week. We're certainly attempting to produce it as soon as possible. I think, rather than give an ambitious day, I would sooner have the benefit of Dr. Norsworthy seeing the response and coming up with that estimate. MR. SWEET: Do you have a ballpark? MR. JANIGAN: Why don't we ask him when Dr. Norsworthy returns. MS. ALLAN: Michael -- MR. SWEET: Judy? MS. ALLAN: Just, Edward made a guess of a day in there and I guess when I start hearing TFP data and MFP data that, you know... Can you give us a better idea of what exactly you are looking for? MR. JANIGAN: Yes. He has a list of seven specific requests that he has found from the data in the interrogatories, that he has been unable to run his particular models without this data. And it's a combination of data concerning the inputs and outputs and a variety of other matters. And as I said, we can put that before the company today so you can be in a position to respond quickly. Concluding Remarks 102 (Sweet) MS. ALLAN: Thank you. MR. JANIGAN: A number of the different points involves consistency problems with the existing data. It's a matter of cleaning up some matters that are already in, either in evidence or in the interrogatory responses. CONCLUDING REMARKS BY MR. SWEET: I believe that concludes our Technical Conference. I would like to thank all the participants, the Panels, the witnesses and the intervenors and the company who participated. The Board's Procedural Order No. 6 indicated that it expected this conference to run approximately four hours and I see we're just under the wire by a bit. Item No. 5 in Procedural Order No. 6... Actually, Item No. 4 said that the... Item No. 3? One of the items in the Procedural Order said that, if I remember correctly, we would commence the settlement conference at two o'clock. I suggest that it might still be a wise idea to start at two o'clock. It will give parties a chance to digest the information that they have now received. And the only thing I would bring to your attention is at two o'clock, we will be meeting in the other hearing room, Hearing Room No. 2. So when you are finished, please take all your personal belongings and effects with you. Thank you very much. ---Whereupon, the Technical Conference was concluded at 12:25 p.m. 103 I N D E X o f P R O C E E D I N G S Page No. Preliminary Matters . . . . . . . . . . . . . . 3-7 Appearances . . . . . . . . . . . . . . 4-5 On behalf of CAC; IGUA; OCAP and HVAC: JOHANNES BAUER, Ph.D. 7 Summary 8-13 Examination by Mr. Klippenstein 13 Examination by Mr. Mattson 15 Examination by Mr. Poch 20 Examination by Mr. Rogers 25 Examination by Mr. Brett 25 Examination by Mr. McKay 27 Examination by Mr. Sweet 37 On the PBR proposal: Summary 42-50 Examination by Ms. Allan 50 Examination by Mr. Mattson 55 Examination by Mr. Poch 56 Examination by Ms. Symes 68 Examination by Ms. Litt 75 Examination by Mr. Sweet 80 Further Examination by Ms. Allan 82 ---Recessed On behalf of Green Energy Coalition: PAUL CHERNICK 84 [via telephone] Examination by Mr. Poch 84 Examination by Ms. Symes 87 Examination by Ms. Litt 90 On behalf of HVAC Coalition: ROGER GROCHMAL, MARTIN LUYMES; Called. 93 Summary by Mr. Grochmal 93-95 Examination by Mr. Brett 96 Examination by Mr. McKay 96 Examination by Mr. Mondrow 99 Concluding remarks by Mr. Sweet 102 JB/BV [ Copyright 1985]