THE ONTARIO ENERGY BOARD Ontario Hydro Services Company Inc. (SERVCO) Interim Transmission and Interim Distribution Applications Hearing held at 2300 Yonge Street, 25th Floor, Hearing Room No. 1, Toronto, Ontario on Tuesday, December 15, 1998, commencing at 9:00 a.m. --------------------- INFORMATION SESSION DAY TWO --------------------- F A C I L I T A T O R : DAVID HARDY Board Technical Staff 174 M A J O R P A R T I C I P A N T S DAVID HARDY ) Board Technical Staff RANDY PUGH ) CHRIS MACKIE ) KIRSTEN WALLI ) NEIL McKAY ) BRIAN HEWSON ) in conjunction with: BILL HOPKINS ) Reed Consulting MICHAEL HARRIS ) SUSAN SIMMONS ) MICHAEL GILLESPIE ) Ontario Hydro FRED LONG ) Services Company Inc. WILLIAM HARPER ) [SERVCO] DAVID CURTIS ) MARCEL REGHELINI ) 175 ---Upon commencing at 9:00 a.m. MR. HARDY: Good morning. We will try to begin on time. My name is Dave Hardy. I have been asked to facilitate the Ontario Energy Board educational conferences. To those of you who were here yesterday, welcome back. I do see some new faces. Could I just get a show of hands of people who weren't here yesterday who are new today? (Indicating) Okay, that's fine. That gives me an idea. I'm going to go through today's agenda in a moment, but I want to start by informing those of you who have joined us about some of the items that were discussed yesterday and the purpose of today. Essentially, yesterday we went through the rate application related to transmission. We're going to hear a little bit more about that as a summary this morning. For those of you who were sitting here and part of this yesterday, you will have to bear with us for a bit of time this morning so that we can make sure that we help people who weren't here get up to speed on some of the overview context. As most of you are aware, the recent changes to the Electricity Act and the Ontario Energy Board Act have resulted in the new Ontario Hydro Services Company having to obtain approval for transmission and distribution rates Opening Remarks 176 (Facilitator) from the Ontario Energy Board. A week ago, Ontario Hydro Services Company (SERVCO) filed an application with the Ontario Energy Board for interim rates and interim distribution rates. Yesterday we heard about the transmission application applications. Now there are copies, I believe, of the filings available either from SERVCO or from the Board web page. They will be referred to from time to time over the day. I know most of us have not had a lot of time to review the application and, because of this, the purpose of today and of yesterday is to go through the application to help us understand it, to bring us up to speed essentially on the content and some of the various aspects of the applications. As I said, this is an educational session. The specific purpose of today and yesterday, as well, is to help us understand the rate order applications; to provide us with an overview of the content of the distribution application today; and learn about the different areas of the application; to allow us to ask questions of clarification; to allow us to ask questions of SERVCO; also to identify any issues that we think, on a preliminary basis, SERVCO should be aware of; and, also, to flag any information that we believe is outstanding in the applications. This is preliminary information in advance of a line-by-line review of the application which will be Opening Remarks 177 (Facilitator) coming up in January, so it's an overview of the application. Again, we're also not preparing a formal issues list today, but certainly if there are issues, we will be flagging them for a formal preparation of issues later. Again, today's session is going to focus on the distribution session, but if there are questions on transmission, certainly I will allow those as well. Now, as I mentioned, we're going to hear a repeat of some of the information yesterday. As we talk today, I suggest that this is an informal session. It's not a formal Board hearing. There are also no questions that are too simple or trivial to be asked. There are no questions that are irrelevant. And if you have a question on your mind, it's a good likelihood that somebody else has a question on their mind, as well, so feel free to ask it. We have one constraint in that we're trying to hold a kind of meeting and educational session in a boardroom which means that you are going to have to come up to the microphones to be heard. So please just come up and then return to your seats, and do try to feel comfortable doing that. Now, the session is being transcribed. The transcription will be available very shortly after today. I am also going to be taking some flip chart notes. The flip chart notes are for my purposes to help me get a sense of where some of the conversation is going and also Opening Remarks 178 (Facilitator) to help me prepare some informal comments to the Board Staff after the meeting. Now, Ontario Hydro Services Company is going to be explaining their application throughout the day, and let me just go through the agenda informally. Just before I do, we do have Board Staff here and in a minute I'm going to ask Neil McKay to introduce the Staff and say a few words. We also have consultants from Reed Consulting Group here and Neil will introduce the consultants as well. My role here is -- I don't have a stake in the outcome of these discussions. I am concerned, however, with process and fairness. My role is to try to keep the agenda on track, to make sure that you are getting the most out of this meeting, to watch for process and fairness issues and to maximize the listening aspect. So occasionally I'll try to be a hands-off sort of role, but occasionally I'll jump in just to make sure there's clarification on a question or a response. I'll also be asking you what questions do you have about what SERVCO is about to present, what information do you need to better understand the application, and then also are there issues on a preliminary basis that the Board needs to understand. Now, Before I ask Neil to say a few words, I just want to do an agenda check. We're almost through the nine o'clock part. Opening Remarks 179 (Facilitator) Neil will be talking very preliminarily about these educational conferences. I'm going to ask the SERVCO folks here to provide a very brief overview of the context of the rate order applications. Again, it's a bit of a reiteration of what we heard yesterday, but it will help people who are new just to get up to speed on the overall context here. Then we have the meat of the presentation which Marcel will be providing, essentially going through the distribution rate order application, the business strategy, the regulatory framework, revenue requirements, rate base and capital programs, OM&A programs and losses, rates, remote committee service, and monopoly service supply. Are there any other agendas that you feel need to be added right now? MR. RODGER: Dave, when did you want to take questions on the transmission side; just any final clean-up questions? MR. HARDY: Yes. If there are thoughts that came up yesterday that need to also be addressed today, or some of the new folks who may have read it but are only attending the distribution session today, I think it's appropriate to take those questions as well. MR. RODGER: At the outset, before we get into the distribution? MR. HARDY: No, as part of the -- I want to get into the agenda and if those questions happen to come up Opening Remarks 180 (Facilitator) in relation to distribution questions, we'll take them then. MR. RODGER: Can I get one transmission question perhaps before we start? It just was a bit confusing from my notes last night and... MR. HARDY: What I'm going to do, I'm going to put that on the agenda then. MR. RODGER: All right. MR. HARDY: Okay. Let me just do that. Okay. Is it -- why don't we start off here with the transmission question. Okay. Are there any other agenda items that need to be added? ---(No verbal response) MR. HARDY: If there are any other agenda items through the day, please let me know and we'll add it. Again, this is an informal session. At this point, I would like to ask Neil McKay to give us just a couple of remarks on the hearings or the education conference, I should say. MR. McKAY: Good morning. My name is Neil McKay. I'm with Board Staff. Dave has pretty well covered off the general aspects of what this meeting is about, but we're hosting this meeting and some technical conferences in January to provide you with a better understanding of what the application is about and the supporting material that has been filed by SERVCO. Opening Remarks 181 (N. McKay) It will help us to define what is important to you and to gather your views on the adequacy of the information, and we want to solicit your comments on the filing today as it relates to distribution. The new Act, Section 129 of the Act provides us for issuing an interim rate order without a hearing, and the interim rate order is subject to the Minister's approval, and we will be providing essentially a report to the Minister and a recommendation in relation to that interim rate order. To help us review the application, we have got Reed Consulting. And maybe, I won't introduce them all, but if you could just raise your hands. It's a group of consultants that we have who are reviewing both the transco rate order and the distribution rate order, and they will be helping us formulate some opinions as to what the adequacy of the information is and also helping us to put together the report to the Board. We have got Kirsten Walli here from Board Staff and Chris Mackie, if you could just... (Indicating) These people are also working on the application. I think most of you know Randy Pugh, and certainly Brian Hewson is also working on it. So there's a lot of Staff who are associated with this application. So if you need any help, you can contact any of us. MR. POCH: Do you have any information about Opening Remarks 182 (N. McKay) when...? (Inaudible) I know that nobody on the Board has a life anymore, but some of the rest of us do. MR. McKAY: Well, it's scheduled to start on the 7th, I think, but I believe that is to provide -- the first couple of days are to provide a very sort of high level overview in terms of the structure of the applications. I think the distribution aspect, for those people who are interested in that, will likely be taking place the following week which is -- I don't have the schedule here, but I think it's the 20th. MR. HARPER: I think, without sort of misspeaking myself, I believe the current thoughts were that distribution would be addressed the third week of January. MR. McKAY: And transmission which week? MR. HARPER: That would be the second week of January. It starts the 11th. MR. McKAY: But the sessions themselves were scheduled to start on the 7th. MR. HARPER: The 7th, yes. MR. McKAY: And that would be sort of a preliminary overview of the applications and essentially what SERVCO is about. MR. HARPER: Well, I think it's also trying to address the fact that -- it has probably been evident as we're talking that there are certain issues that are common to both transmission and distribution. And rather Opening Remarks 183 (N. McKay) than trying to go through those twice in each of the two weeks, I thought if we could sort of group those together and cover them off once at the start, would be a useful way to handle it. MR. McKAY: But everybody is busy, David. MR. POCH: Yeah. Well, there's tentatively another PBR scheduled for the 11th. MR. McKAY: I know. There are conflicts with the schedule, with other cases. MR. HARDY: Okay. Thank you, Neil. Why don't we begin then with the transmission question. And, sorry, Mark, what was the question? MR. RODGER: Thanks, David. Mark Rodger, counsel for Toronto Hydro. Just going through my notes last night, and I don't think this was asked directly, but it's under the nature of who exactly will pay the transmission tariffs. And I'm thinking of the specific situation where, for example, an independent power producer has already paid for connection costs for the generation facility, paid to Ontario Hydro. Will they now have to start paying transmission charges under these applications, or are they exempt from this application by virtue of the fact that they have already paid the entire connection cost in the past? MR. GILLESPIE: Can we get back to you with that, Mark? I think Gary Schneider here is with us today and Questions 184 can speak to some of the transmission issues, but I think this one is one that probably we'd want to get, you know, a specific and more elaborate answer. MR. RODGER: Thank you. MR. GILLESPIE: Is that okay? MR. RODGER: That's fine. I'll follow up. MR. HARDY: Okay. I wonder if -- I think -- who is going to be presenting? It would be -- just as an overview of the context? MR. GILLESPIE: I'll be presenting the -- most of the overall context piece and Bill Harper will be joining me, so... MR. HARDY: And I assume you'll introduce your folks as well. Will you do that? MR. GILLESPIE: Yes, thank you. PRESENTATION BY MR. GILLESPIE: Good morning. I'm Michael Gillespie from the Regulatory Affairs at Ontario Hydro Services Company and I'm going to take you through a little bit of the overall context piece in which these rate applications fit. And helping me provide this kind of background information to the applications will be Bill Harper from my area and we'll talk a little bit about a number of things. First of all, the general direction provided by government in its White Paper and legislation and the restructuring of the industry. Bill will talk a little OHSC Presentation 185 (M. Gillespie) bit about the financial restructuring that results in some implications for, or in the actual foundation, the financial architecture for SERVCO and the rate freeze policy which is currently in effect until the end of the year 2000. And I'll talk a little bit more about the actual nature of the Ontario Hydro Services Company. The government restructuring had a number of objectives, the government restructuring as set out the policy direction of the White Paper. My comment is, that while a lot of these look like they would be targeted specifically at the competitive parts of the industry, and certainly the overall creation of competition was to create a new dynamic that would create a growing and more responsive and more efficient industry, that will apply both to the regulated as well as unregulated businesses. Of key import here for the wires company's transmission and distribution is efficiency. Explicitly mentioned in the paper was more efficient distribution and fair rules which apply not only for competing entities in the new industry, but also fair rules in terms of a level playing field for regulated businesses as well. The actual implementation of the White Paper takes the form of the Energy Competition Act passed in -- receiving royal assent October 30th, two parts of that act, an Electricity Act and an Ontario Energy Board Act. Market rules fall -- are generally being developed by the Market Design Committee over the past year and they have been issuing quarterly reports, the OHSC Presentation 186 (M. Gillespie) fourth quarter report due at the end of the year. And there are a number of other activities that have a context -- implications potentially for the rate orders, the development -- the finalization of licences. The Market Design Committee work, as I mentioned, on other government policies such as treatment of rural rate assistance and the treatment of taxes have yet to be worked out. So there still are some other ongoing projects that will have some implications or may have to be integrated with these rate orders. The restructuring of Ontario Hydro actually resulted in five different entities: First of all, the financed Ontario Hydro finance part, which was really just a shell to look after the debt held by the former Ontario Hydro. In a sense, this Ontario Hydro finances becomes, I guess, the continuation of Ontario Hydro. There is then an independent market operator to deal with both operating a market for the competitive aspects of the industry and to direct the transmission operations of -- to ensure reliability and system integration. There will be a separate electrical safety authority which has in the past been part of Ontario Hydro, had a regulatory role that Ontario Hydro had in the safety area. And the two commercial companies are the generating company and the services company for respectively generating power and selling bulk power, and OHSC Presentation 187 (M. Gillespie) the service company which I'll talk about in a little bit more detail later, of course the wires and related downstream services. The Ontario Hydro Services Company is established under the Ontario Business Corporations Act as a commercial entity. That is a new -- certainly very much a new element. There are some elements in these legislative framework that are actually carries over from the old structure and a number of them that are new. The distributor's obligation to provide supply for customers that do not choose to go with another supplier is, in a sense, a continuation of the old obligation held by Ontario Hydro as an integrated company. The obligation to actually discharge -- the actual discharge of that function in Ontario Hydro's case is to be carried out by a separate affiliate, not by the distribution company itself, and that will have some implications for how the services company is structured. The introduction of licences for operation is a new development. Of course, there's going to be an operating agreement with the independent market operator. Formerly, all of the operations of the transmission system were held in that part of the old Ontario Hydro. There are explicit references and implementations of rural and remote rate assistance in the Act which will have to be administered by the wires company. Important is that the wires company also be self-sustaining and borrow in its own right and pay taxes for the first time, OHSC Presentation 188 (W. Harper) proxy taxes. I'm going to call on Bill Harper to take you through a little bit on the financial architecture and the current rate freeze. PRESENTATION BY MR. HARPER: For those of you who were here yesterday, if what I say differs from what Fred said yesterday, take Fred's words, not my words, so... Michael just went through and outlined sort of the legislation, the fact that resulted in basically five entities being successors to Ontario Hydro and effectively two of those being set up as commercial entities, the generation business and Ontario Hydro Services Company. And so that as well as sort of doing the entity restructuring, the government basically was involved in doing some financial restructuring of the industry. And what's set out here are effectively what are the principles that were followed in doing that financial restructuring. And the first was to try and achieve that financial restructuring without increasing electricity rates. The second was to retain the maximum value in the electricity sector until the stranded debt that Michael referenced could be dealt with. The third was that any residual stranded debt should be recovered from the electricity sector itself, as opposed to taxpayers. OHSC Presentation 189 (W. Harper) And that, finally - which is the point I think Michael had at the very end of his last slide - was the new company should be put on a sound financial footing with an investment rate, capital structures and credit ratings effectively so that they could operate on their own as opposed to what happens now, where basically they're backed by a provincial government guarantee for their debt. Some of the considerations that the government went through in looking at the financial restructuring were basically looking at the sort of business forecasts for those two new entities, the generation company and the transmission company; reviewing generally what the criteria was used by various credit rating agencies in terms of trying to sort of test the credit worthiness of companies, and to basically trying to come up with a target credit rating that would allow both of those companies the type of access to capital that they would actually require in the future if they're going to basically retire the existing debt they have and also make whatever new capital investments were required in the future. Combined with that was basically, obviously, a look at sort of what was the current outlook for both from a financial and commercial and economic forecasts, and looking at sort of what were the types of ratings for comparable companies. All of that was sort of fed together to come up OHSC Presentation 190 (W. Harper) with what was a view of what would be the amount of supportable capital that each f these companies could maintain. On the slide here it references the discount cashflow analysis and, effectively, that was done more for the generation company than for the services company. Really what's summarized here is the results of that valuation process and basically the capital and financial structure that the government has established for the Ontario Hydro Services Company. And, effectively, what I've summarized here is not the company overall, but the regulated part of the company; that's the transmission and distribution business that we're dealing with in these rate orders. And, effectively, the first point is that in valuing the companies the regulated assets are treated at book value. The capital structure of the regulated business is to be 40 per cent equity/60 per cent debt. The target credit rating for the entity is a single A. And when you take the existing debt of Ontario Hydro - and basically part of the restructuring will be a transferring of that debt to the successor companies - the resulting initial cost of debt for the services company is 7.8 per cent on average if you look at the portfolio of debt that it's going to be holding, and that the target cost of equity for the regulated business after tax will be 10 per cent. Overall, combining both transmission and OHSC Presentation 191 (W. Harper) distribution together, you have a total debt of roughly $5.2-billion at the start of the process. One of the issues that has to be addressed is: Currently the government has a policy of a rate freeze at the wholesale level through to the end of the year 2000. Particularly during the transition period, before we get into open access, how is the revenue collected under that rate freeze going to be basically administered and basically handed off to the various successor companies of Ontario Hydro? And, effectively, this is what this slide here tries to lay out. We have the Ontario Hydro Services Company which, effectively, bills close to a million small retail customers in the province. They will be collecting that money and, effectively, on the basis of the revenue requirement that's approved by the Board as a result of this process, that will establish how much revenue the distribution business will receive, with the balance being handed over to the revenue pool which, current plans are, will be administered by the generation company. The municipal utilities and directs are themselves currently billed by the generation company. Those monies will be collected into the revenue pool and, on the basis of the revenue requirement approved by the Board here, the transmission business in OHSC will be allocated dollars. The IMO will be allocated dollars based on what's their budget. OHSC Presentation 192 (W. Harper) Dollars will go to the Ontario Power Generation Company based on an established and predetermined price as to what they should be receiving for their power. And, effectively, what you have then is a residual in the revenue pool which will go the Ontario Hydro Finance Corporation to help retire the debt. Also going to help retire the debt will be any taxes and dividends that are payable by the distribution business, the transmission business or the Ontario Power Generation Company. With that background, there is then a question from OHSC's perspective as to: How should we be pricing the power that we're selling during what is, effectively, this transition period up to open access which is going to occur sometime in the year 2000? Now, as I said, there are really two main drivers that were influencing our decision around this. One was the White Paper direction on the wholesale rate freeze that I mentioned earlier. As you may recall, that rate freeze was first introduced in 1995 and, effectively, as part of the White Paper the government indicated that they saw that rate freeze continuing to the end of the year 2000, effectively, to help with the transition from the old monopoly approach to pricing to the competitive market which was going to be introduced sometime in the year 2000. The second point is the fact is, until open OHSC Presentation 193 (W. Harper) access comes there's really no need to unbundle the rates. Basically within each service territory the distributor there, whether it be a municipal utility, a private distributor or Ontario Hydro Services, the distribution business will effectively continue to have a monopoly supply for those customers and, therefore, a bundled rate continues to be applicable or can be used for charging those customers. As a result of that, what our plans are and what we've included in the rate applications here at the retail level is that there will be no unbundled rates prior to open access for our distribution business, and we will continue to distribute power basically in accordance with the existing retail rates which, in our view, is sort of a continuation and extension of the freeze at the wholesale level down to a freeze on rates at the retail level. Having said that, effectively what this distribution application asks for that you have in front of you here is an approval of a revenue requirement for the year 1999, and approval of a revenue requirement for the year 2000. Basically the application is good up until the year 2000 or the introduction of open access, whichever comes first. Clearly, since there are no unbundled tariffs for distribution, we'll have to come back with unbundled tariffs for distribution prior to open access. It also asks for approval from the Board to OHSC Presentation 194 (W. Harper) continue to distribute power to those retail customers in accordance with our existing bundled rates, and it also flags for the Board the remote rate protection that's basically inherent in the current rates that we charge remote communities. This remote rate protection is one of the regulations that is still to come from the government, but for purposes of preparing this rate order, we've effectively assumed that they would maintain the current rates for remote communities in effect during the period of 1999 to 2000. On the transmission side - and this is effectively what we dealt with yesterday - we're asking for an approval of both the revenue requirement and rates for 1999 and for the year 2000. We're asking for the approval of a performance-based regulatory or PBR scheme for determining the revenue requirement in the year 2000 and, subsequently, approval for the rates that result from that. You may ask why we have rates in there given where we're going on the distribution side? Effectively, the transmission application applies for all of the year 1999 and 2000, so these rates would be needed when and if open access comes during the year 2000. And actually the rates actually provide a useful benchmark and building block for some of the work that has to go on in establishing export rates in the province as well. OHSC Presentation 195 (M. Gillespie) I think I would like to turn it back over to Michael now. Thanks. MR. GILLESPIE: Thank you. PRESENTATION BY MR. GILLESPIE: I'll talk for just a few minutes about the nature of the Ontario Hydro Services Company as a business entity, its location in the electricity value chain. And you can see it embraces both transmission business, the distribution business - that's the distribution delivery business - and retail businesses that have both the commodity aspect, the actual energy itself - procuring and sales - and also other related energy services. On the governance of the Ontario Hydro Services Company, it has its own board of directors and single shareholder, currently the Government of Ontario, and it includes businesses regulated by the Ontario Energy Board. It also includes businesses that are competitive in nature, going back to the previous overhead, in the retail sector, certainly retail merchant and other retail services. And I think we must recognize too that there's a very small amount of competitive activity that would be undertaken by the regulated businesses of transmission and distribution as well separately identified and tracked, of course. So the shape of the businesses looks like this. for the most part, the regulated business of transmission OHSC Presentation 196 (M. Gillespie) distribution. There's also the default supply operation; that is, when the market opens and customers can choose the specific obligation to sell to customers who don't exercise that choice belongs to the distribution company. I guess it's fair to say probably the terminology during the interim period before open access is default supply is a continuation of monopoly supply. And then there is the specific obligation for remote communities. In the non-regulated there's competitive retail merchant services and other new businesses such as -- quite unrelated, such as those out of Ontario or unrelated to electricity within Ontario. On the status of the Ontario Hydro Services Company, it was incorporated a little over -- about two weeks ago. Its chairman and nine directors were appointed back in November. Its first board meeting was held just last week and the president -- three chief officers have been appointed: the President and CEO, Chief Financial Officer and General Counsel and Secretary. The Service Company -- the plan is to have the Service Company up and operating as an independent corporation on April 1st and that will require a number of activities to be in place. The transfer orders which actually will allocate former assets and liabilities, et cetera, of Ontario Hydro to the Ontario Hydro Services Company, and the generating company will have to be completed by April 1st, and that work is ongoing. OHSC Presentation 197 (M. Gillespie) The rate orders which you have before you will have to be in place. Licences will have to be issued, and that licence process is currently underway by the Ontario Energy Board, draft licences have been issued for comment. And there will be an agreement with the independent market operator on the operation of a transmission system that will have to be put into place before April as well to sort out the roles and obligations and arrangements pertaining to their role in transmission. There's a number of things I want to signal about the nature of the Ontario Hydro Services Company and I'll talk about each of these in turn. a) that it's new. It's committed to efficient regulation; that it's a commercial business and organizing commercially; that it does have some line of future direction involving investments and assets; and that it's going to have to develop further some service standards. We'll talk about each of these briefly. First of all, it's very important to recognize that OHSC will be constituting itself for a totally new kind of environment than the one that Ontario Hydro faced looking at global trends that are changing quite dramatically in some cases and that OHSC has to be aligned with those trends. As a new company, it certainly has its roots in Ontario Hydro. The assets and systems and liabilities certainly are drawn from there, but OHSC will need to strike and is, in fact, doing that, striking its own OHSC Presentation 198 (M. Gillespie) course as a commercial company. It needs to adapt to a number of areas, new systems, new ways of management, adapting to a new regulatory environment which is certainly new for us as well. That involves reporting and tracking and control and monitoring systems that we never had to have as a sort of self-regulating entity. The commercial course will require, you know, a view to dividend creation, growth, efficiency, flexibility, risk management, customer orientation that were either not there at all or not there to the same degree in the old monopoly structure. Efficiency and regulation is certainly a direction that the White Paper indicated. We are proposing for at least transmission a performance-based regulation type of framework. And that performance-based regulation framework initiative is currently underway by the Ontario Energy Board for the distribution sector which we are participating in as well. Work toward efficient regulation through systems that can deliver regulatory judgments with material kinds of information and understanding of the businesses being regulated, is certainly something we're interested in pursuing and cooperating as the regulator defines those. Part of the organizing for commercial business efficiency requires that the capital structure that Bill referred to, you have to be able to go out and borrow, you OHSC Presentation 199 (M. Gillespie) need a certain kind of capital structure to borrow competitively. And it's fair to say that even as a regulated business, you are in a sense competing with other regulated businesses, and certainly there's an efficiency driver to get your costs down and get your value up. We are doing a lot of work on re-engineering processes and practices to improve performance. We have in place a whole unit dedicated to that. Some of the old Ontario Hydro systems and practices will survive, many others will be superseded, and we need information base, work practices, management systems, consolidation of work centres and redesigning processes is all part of that work. Key to this whole structure is an asset management model that we are pursuing in the longer term which basically separates the providing of the services -- it separates the actual assets themselves and their management from all of the service work needed to maintain and operate those assets. The idea is to create a much more clear and transparent relationship between the service provider and the manager of the assets that need the service, the smart buyer/efficient supplier relationship. In the long run, the idea is to be able to source a lot of these services on a fully competitive basis. The assets base itself needs some attention. The condition of those assets needs more careful assessment as OHSC Presentation 200 (M. Gillespie) we move forward than it has had in the past, it's part of the evolution, and we're certainly implementing work management systems to not only assess the condition of the assets but to restore them and sustain them. And there is some catch-up work to be done in doing that in both the transmission and distribution sector and the asset base, and that's reflected in the rate order applications. The performance standards that were there for the Ontario Hydro company will have to evolve. The kind of standards you are going to need to show development, to get the transparency you need in the commercial business operation will need to be put on a good solid base. In all cases -- in some cases, they're not there - at least, that base hasn't been established - and we are working to establish that base so that we have the proper measures in place and can establish appropriate targets based on those measures. That's a lot of work to be done. It's important that we get the measures right, so that the customers' satisfaction can be addressed to the kind of areas that matter most, and that we can establish the kind of reliability criteria that could provide a solid base for not only business reasons, but also for regulatory, of course, requirements to be able to guarantee to customers that the money being granted through, or being approved through the regulatory process is, in fact, delivering on the service side the kind of benefits that customers OHSC Presentation 201 (M. Gillespie) expect and that the competitive market will need. Finally... Well, this rather complicated figure perhaps -- what it intends to show is that while we structured initially as we were part of Ontario Hydro into an asset management model with a separate asset manager indicated down in this column, separate network services group, and other wires support group here, and an Ontario Hydro Services Company corporate component, you can actually see how all of these work activities and costs are part of what you can define as a transmission business or as a distribution business or as a monopoly default supply business. The asset manager makes a contribution to the transmission business, the wire support, the network services and the corporate services and the functions provided all can be traced to transmission, all can be traced to distribution. And there are also some of those services, of course, that go to support monopoly supply. And then there's competitive lines of business, too, that draw some work, little bit from network services and some work from corporate support, as well as having their own funds that would be supported through net income. That concludes that section. MR. HARDY: Okay. I would like to thank Michael and Bill for getting through a lot of information in a short time period. Are there any questions or comments on the OHSC Presentation 202 (M. Reghelini) information provided? ---(No verbal response) MR. HARDY: If there are questions that come up through the rest of the day on any of the context information, bring them up and we will entertain them. Thank you. Let's see. At this point, Marcel, are you ready to present? MR. REGHELINI: Sure. MR. HARDY: Okay. Why don't you introduce yourself, as well, and then take us through the first part of your presentation. PRESENTATION BY MR. REGHELINI: Good morning. My name is Marcel Reghelini and I'm the Manager of Distribution Regulation at Ontario Hydro Services Corporation. I'm here to talk to you today about the distribution application, give a brief overview of what is contained in the application, and also to look from you for issues that may be of concern, preliminary issues that will allow us to provide meaningful information at the technical sessions coming up in January. So what I will discuss today is the basic distribution business and strategy that provided the framework in which the application was put together. We will discuss a bit about the regulatory framework, and then get into the details of the revenue requirement and touch on the remote communities and retail OHSC Presentation 203 (M. Reghelini) monopoly supply. As Bill spoke earlier, the distribution rate order application requests approval for 1999 and 2000 revenue requirements, but is only intended to go until the point at which open access occurs. And prior to open access actually occurring, the OHSC would have to come back before the OEB to deal with unbundled rates for distribution services. As a result, we're just applying for approval at this point to distribute electricity in accordance with the current retail rates, and also for approval of the remote rate protection and associated compensation. A brief description of the system. As of the end of '98, there will be approximately 2.5-billion worth of assets. The distribution system is largely radial in design. There are approximately 940 stations, one-third of which are over 40 years old. And, as a result, you will see in the programs that we're proposing that we are paying particular attention to the age and condition of the system. There's over 119,000 kilometres of lines and there's the buildings, land, vehicles and minor assets associated with supporting a distribution system. In terms of the customers that we serve, there are approximately 200 municipal electric utilities, 960,000 retail customers, residential or rural, farm-type customers, 40 large industrial customers, and 17 generating stations are connected to the distribution OHSC Presentation 204 (M. Reghelini) system, and numerous small customer-owned generators. Schematically, the system takes power from the transmission system that we talked about yesterday and steps down the voltage through a series of stations, and the customers are served off various points in the system. Some of the generators and some of the other distributors are after the first voltage cut, but there are still industrials and distributors that are served after a number of voltage cuts have been taken. Just generally, these facilities are comprised, as I said, of approximately 2.5-billion worth of assets, the majority of which are the major assets; the poles, the lines and the stations. And then there's a minor amount of fixed assets which are the computers, the office equipment, transportation and work equipment and other smaller service equipment. Turning now to the strategy. The strategy is comprised of three main themes and the primary one is to deliver customer value in terms of enhanced reliability and improved customer service and improved operational effectiveness. Essentially, what this means is, we're attempting to provide a safe and reliable service, and looking in the initial stages to maintain the current level of service and reliability, but looking forward to, in the future, to understand the system in greater detail. And you will find that a number of the programs; OHSC Presentation 205 (M. Reghelini) for instance, the DOMCAMS program and the SCADA program are aimed at getting to know the system better on a real-time basis, to be able to measure performance and to be able to deliver the kind of customer service that customers demand. Associated with this strategy is to deliver value for our shareholder, the Province of Ontario, through solid financial performance, and this is obviously linked into the customer value, in that if you provide solid financial performance through efficient and effective operations, well, you're going to deliver good customer service; and by creating shareholder value, you're ensuring continued access to financing and capital at reasonable rates which, again, are to the benefit of the customer. Our third plank in the strategy is stewardship, and OHSC is committed to protecting the environment, to efficient energy use and committed to ensuring public and worker safety in all its operations. As with the transmission system, the method of achieving our stewardship objectives will be the implementation of an environmental management system as we move forward. Underpinning all this is that asset management model that has been talked about earlier, both today and yesterday. And although we're taking the first step of separating the management of the assets from the servicing of the assets - and it will take us some time to fully OHSC Presentation 206 (M. Reghelini) achieve all the benefits of this model - there's still a benefit in the period of the proposed -- of the applications of providing that separation so that you do have a clear focus on what the assets need, and you have another separate organization focusing on what -- how best to service those assets. That's the general overview of the business and of the business strategy. And before I proceed into the regulatory framework of the applications, I would just pause and ask if there are any specific questions with respect to the first part of that presentation. MR. HARDY: Any questions, clarifications? Please come up. I just suggest that for those who are sitting at the mikes, that after the break, if you actually want to move back to the first row, that will allow some people to have greater access to the mikes, okay? Thanks. MS. BIRENBAUM: I'm assuming now is as good a time as any to ask these questions with respect to DSM since we're -- sorry, I'm Joanna Birenbaum from Iler, Campbell, Klippenstein on behalf of Pollution Probe. Since, in general, we've talked about stewardship and efficient energy use and the goals of increasing customer value and improving operational effectiveness, I'm assuming that now would be a good time to ask a few questions about DSM. OHSC Presentation 207 (M. Reghelini) And I know that these were asked yesterday, but they're important questions and it's an important issue, so I think it's important to ask them again. And since Pollution Probe didn't ask these questions yesterday, I just want to make it clear that our questions with respect to DSM apply equally to transmission and to distribution. Yesterday the discussion about DSM seemed to focus quite narrowly on transmission efforts from essentially a company perspective rather than from a more customer-focused understanding of DSM. So today I have four questions that are trying to understand SERVCO's approach to DSM from -- well, in its move to a competitive market. And so first: What tests are you planning to use to evaluate the effectiveness of different DSM programs? And I understand from yesterday's discussion of DSM that there isn't a single entity that's going to be moving a DSM program forward, so I'm using DSM programs because I understand that the approach to DSM is somewhat fragmented. In particular, in view of the value of consistency and having a level playing field between electric and gas utilities, do you intend to adopt the same test as was endorsed by the Board in the context of gas utilities in the decision in EBO 169-3? And to help you out, if you're not familiar with it, that's the societal cost test. I'll just ask all the OHSC Presentation 208 (M. Reghelini) four questions at one time, then you can answer what you're able to. Secondly: What PBR incentives are in place or will be in place to achieve greater savings and energy efficiency? Now, I know that this question was addressed to some extent yesterday. I think it was Mr. Curtis said that, since there's a revenue cap in the PBR recommendations, that this would tend to support DSM solutions to transmission issues. So, more specifically, I'm wondering what PBR incentives are in place in addition to that and which will directly translate into customer savings? Third: How many kilowatthours are you forecasting will be saved from DSM measures, whether from a distribution or transmission context -- or from distribution or transmission DSM programs? And finally: What is the budget for DSM programs or efforts in the SERVCO budget? MR. REGHELINI: Thank you. I'll address each one of those in turn. MR. HARDY: Just for people who may not be clear, DSM...? MS. BIRENBAUM: Demand side management. MR. REGHELINI: I think we talked about this a little bit yesterday in terms of what was OHSC looking at in terms of what DSM it would or would not do. And the answer is: It's the same for the OHSC Presentation 209 (M. Reghelini) distribution system as it is for the transmission system, we are looking at DSM that results in optimal -- an optimal system, whether distribution or transmission, and yields cost savings and effectively rate savings to our customers. So, in terms of a test, I guess what we'd be looking at is a ratepayer impact measure test. In the distribution application, I would have to say that the distribution planning and system is not as far along as the transmission planning and some of the projects that we're looking at doing in '99 and 2000 are to get us into a shape to better understand how that system is performing on a real-time basis and to allow us to do -- to effectively evaluate DSM. So, just to be clear, the OM&A programs for the distribution application do not include any DSM in the period that we're proposing, but there is provision for DSM in the transmission application. Unfortunately, I'm not the person who would be able to speak to exactly what kilowatt savings would come from those DSM programs, David would have been better to speak to that, but we can take that under advisement and be prepared to address that issue. And, similarly, with respect to the budget that's in transmission for DSM programs. MR. HARDY: I'm not sure if the performance-based incentive question got answered. MR. REGHELINI: Again, because we're looking at OHSC Presentation 210 (M. Reghelini) DSM programs that result in lower costs on the utility system itself, the fact that you have a PBR framework that incents the company to get efficient, that's sort of the overall incentive that will drive to you do those kinds of DSM programs. Beyond that, again, I wouldn't like to say because in the distribution application we're not proposing PBR at this time, and perhaps we can address the PBR incentives in a bit more detail in the technical sessions when the transmission people are here again. MR. HARDY: Joanna, do you have any follow-up questions? MR. POCH: David Poch -- MR. GILLESPIE: Sorry, can I just comment a little further? MR. POCH: Sure. MR. GILLESPIE: Of course, there's a whole realm of demand side management activity that would fall neither explicitly into transmission nor into distribution, but rather into one of the competitive businesses of the Ontario Hydro Services Company being offered on that kind of basis. And I can't speak to detail on that, but I think what we'd like to do is ensure that information about that is brought to you for the January sessions, if that's suitable. MR. POCH: Any information is welcome, of course. MR. HARDY: Would you introduce yourself, please? OHSC Presentation 211 Questions MR. POCH: Yes. I'm David Poch on behalf of the Green Energy Coalition. I'm also concerned about demand side management, energy efficiency matters. Just first of all, Michael, just so I understand your point there, certainly whatever the competitive business has offered is only going to be efficiency offerings that pass participant costs that are attractive to a particular participant and earn a return and don't require any subsidy or cross-subsidy or any support or recognition of societal savings, what have you. I take it, they're things that are attractive as simply from a business perspective, correct? MR. GILLESPIE: (nodding) MR. POCH: So I think, just to be clear, that's all well and good, but... So you understand the genesis of our concern, it's for all the energy efficiency that the market doesn't pick up because of market barriers. That's the very essence of the rationale for DSM in the utility sector. And, you know, we've been through, gee, I guess about 10 years now of this on the gas side. We certainly had a period of it with electricity too, as I know you're well aware, and we've developed a whole set of rules and what have you for the gas side which are still in place, still supported by this Board. We've had -- even though we've had commodity deregulation on the gas side for a decade. So there is a parallel to the world we're going into -- a partial OHSC Presentation 212 Questions parallel to the world we're going into on the electricity side. And I'm just wondering, since you've obviously not embraced that model, before we get into sort of some kind of debate, you know, in January, whenever it is, about how the RIM test has been discredited or what have you, are we missing some bigger vision that you have in terms of who is going to be seeing that this -- you know, the efficiency that is societally beneficial but that markets don't pursue is being picked up? l. I'm wondering if behind your assumptions is another assumption that there's going to be some other entity responsible or what have you. And, in responding to that, I'm wondering if you could give also your perspective on the consistency of your approach with the Board's guiding objectives which now include energy efficiency, and they never did before. MR. GILLESPIE: Well, I think there's -- you rightly identified that there's the specific business-driven entities that fall into transmission and distribution end as a service. I think it's fair to say that our thinking is not really developed at this point of where SERVCO is along the lines of something that might be driven by some direction from government in terms of policy, some direction from the Ontario Energy Board or some overall business strategy that embraces all of the areas of the Ontario Hydro Services Company, you know, across all the OHSC Presentation 213 Questions areas. We'd like some time to think about that actually, David, if we can for January. MR. POCH: Well, that's great, and I -- MR. HARPER: You know, I think the other thing we have to recognize is on the gas side. You say is -- are there initiatives in this area, but sort of -- there are also regulatory mechanisms that are used to address -- you know, to address that from the utility side, whether it be sort of compensation for lost revenue, discussions around, you know, societal sharing mechanisms which, so... We haven't gotten to the point of looking at or addressing those within a regulatory framework either. So I think, as Michael says, we're just at the initial stages in this. MR.POCH: Okay. Well, let me -- just to be clear, let me say I'm delighted to hear you say that the book isn't closed on this and there's some possibility that the company might be thinking about finding a way to make this work. I think you understand the position we're in. And we do appreciate there's a fluid context right now. But I think, from our perspective, this is the launching point and we'd like to get off on the right foot. MR. HARDY: Other questions, issues, comments? Okay. I planned to take a break at 10:15, but just to get a sense of timing, how long would it take to get to OHSC Presentation 214 (M. Reghelini) the next portion of your presentation? MR. REGHELINI: Ten minutes. MR. HARDY: Why don't we hear the next portion of your presentation and then we'll break, and then take questions after that, okay? SECOND PORTION OF THE PRESENTATION BY MR. REGHELINI: Just to briefly go over the regulatory framework that this application is filed under, it's generally a cost of service regulatory framework. Although the company was interested in moving forward on PBR for distribution as well as transmission, we elected not to do that for distribution as the OEB has its own process for establishing how PBR should fit into electricity distribution in Ontario, and we are participating in that and would hope to be in a position, once that process concludes, to very quickly look towards putting in a PBR framework for distribution. But generally this application is under a cost of service framework. And what that essentially is, is summing all the costs of providing utility service, including the cost of financing the shareholder investment in utility assets that are needed to provide that service. And that's what drives the costs such as depreciation and taxes, rate of return on equity and the interest on the debt. And, of course, the other type of costs that are in the cost of service are the operating, maintenance and administrative expenses and the line losses that are OHSC Presentation 215 (M. Reghelini) incurred on the distribution system. So these would all be summed up and that would yield the revenue requirement which would require approval of the OEB, and that will be the basis of the revenue from -- the total bundled rate revenues that will be provided to the distribution system for service during '99 and 2000. I don't want to dwell on PBR very long, just to say that we have given some thought to PBR and in Appendix 4 of the application there's a response that we provided to the OEB on PBR mechanisms for electricity distribution that you can have a look at to see where our preliminary thinking on PBR and distribution is. I guess the one thing I would point out is that we'd be proposing a price cap as opposed to a revenue cap for distribution, partly because it's a little simpler, easier for residential and rural type -- individual type customers to understand. So that's sort of where we're going in the future, but in the context of these applications we'll be dealing with the cost of service framework. Are there any questions about how the cost of service framework fits with the particular application that we've filed? MR. STEPHENSON: Richard Stephenson for the Power Workers Union. I'm just interested in understanding. There are going to be certain competitive activities that the OHSC Presentation 216 (M. Reghelini) distribution company is going to be getting into sooner or later and in terms of -- obviously, those activities won't be part of your cost of service, rate of return regulation I assume. Are those activities being set up in any respect in -- what's the plan in terms of separate subs versus operating divisions, and what's the mechanism to functionally disaggregate those activities out of your cost of service regulated businesses? MR. REGHELINI: As we discussed yesterday on the transmission side, both in transmission and distribution there's the network services organization which is servicing the assets and some competitive work is being done by that division, and the costs of which are included in the revenue requirements in both applications, and the revenue is included as a revenue offset and the revenue includes a margin over and above the overhead loaded costs. I think we talked about the whole asset management model, seeing that kind of a function over time evolving to a more independent and perhaps separate subsidiary. MR. STEPHENSON: Well, within your rate years you're looking for, are you -- I mean, I've always assumed that the distribution company is going to be getting into a competitive retail merchant business. MR. GILLESPIE: No, let's distinguish different kinds of competitive activity. OHSC Presentation 217 (M. Reghelini) I think what Marcel is referring to today and what David was referring to today was sort of a very small kind of spin-off, if you want to call it, activity that network services might do for another utility. MR. STEPHENSON: I understand that. I'm going to the next step. There is going to be some kind of a competitive retail merchant function that SERVCO is going to run. Is that going to be on a separate sub? MR. GILLESPIE: Has to be. The legislation is very clear about that, that it will be in a separate subsidiary and I think the applications signal that. MR. STEPHENSON: Okay. So there's nothing in here in terms of costs related to the establishment of that enterprise? MR. GILLESPIE: Right. MR. STEPHENSON: Is there going to be shared services as between those two entities? MR. GILLESPIE: At the holding company level there will be some, yes. MR. STEPHENSON: Where is the detail about your transfer pricing scheme in here in terms of both how you're dealing with those small ancillary services for network services and whatever shared services you're going to have as between your competitive retail function and your cost of service regulated functions? MR. REGHELINI: Appendix 8 provides a brief description of the allocation procedure for the corporate OHSC Presentation 218 (M. Reghelini) functions that are allocated both to the regulated businesses and the competitive businesses and we're working towards providing some supplementary information that details the actual mechanics of that. MR. STEPHENSON: Just going forward, I mean it seems to me that the one thing that the legislation and the government have been absolutely crystal clear on is that there is going to have to be a very high degree of assurance that the Board ultimately will be policing that cross-subsidization and all of that stuff, and there's nothing in here I think that will give the Board sufficient comfort to know that that's not going on. So I think they're going to need something more than I see so far in this material anyway. Anyway, thank you. MR. HARDY: Are there other questions? Okay. Marcel, just so I get it clear, are you through the regulatory framework explanation? MR. REGHELINI: Yes. MR. HARDY: Is it all right if we break before we -- MR. REGHELINI: Yes. MR. HARDY: Let's take a break for fifteen minutes. We'll come back and start with Ken's question. Okay. MR. HARPER: Before everybody leaves the room, is there anybody here who does not have a copy of the OHSC Presentation 219 (M. Reghelini) distribution application? Maybe you could put your hands up and we've got some spares. I can arrange for somebody to bring a few up. Okay, thanks. We'll have some brought up during the break. ---Recessed at 10:18 a.m. ---On resuming at 10:35 a.m. MR. HARDY: Okay. Just to bring everybody up to speed, we're at No. 2. We finished hearing about the regulatory framework, taking questions on that. Again, the way we'll proceed throughout the day is if we finish items earlier, we're going to end off earlier; if we take longer, we'll take the full agenda. And, as long as we have questions or we need clarification, we'll continue; if we don't, we'll stop early. Just to remind you, this is our main opportunity to get our questions answered, to get clarification, to raise any preliminary issues about this application. So we would be pleased to take any questions. Where we ended off, I think it's Ken. Why don't we begin with your question, Ken? MR. SNELSON: Okay. It's Ken Snelson representing AMPCO. I have two questions, quite different, that might be appropriate at this time. The first one is: Perhaps we could have a little OHSC Presentation 220 (M. Reghelini) more explanation of why SERVCO thinks that price cap regulation is appropriate for distribution and revenue cap is appropriate for transmission? And within the context of that is that, if I understand it correctly, sort of once the market opens, then the performance-based regulation will apply primarily to the wires part of the distribution business. And it seems as though very similar schemes should be applied to both the wires part of a distribution business as to the wires part of a transmission business. I'm presuming that the energy part of the retail rates will not be subject to the price cap, but will be subject to whatever is the default supply or competitive supply arrangement that is made for energy. So that's the first question. Perhaps we should deal with that before we go to the second one. MR. REGHELINI: Just to confirm, the energy part is not subject to a price cap. What we would be talking about is just applying the PBR mechanism to the regulated distribution business. And, as I said, our discussion is in Appendix 4 as to why we are proposing a price cap. But, generally, it's the idea of simplicity that would relate more to what a typical retail customer would understand. At the same time, if you get the rate design right, you can ensure that the proper economic signals are provided to customers and, at the same time, the company gets the proper incentives to do the right things as well. OHSC Presentation 221 (M. Reghelini) MR. SNELSON: Well, one of the reasons that was given for revenue cap for transmission was that it would inappropriately incent the transmission company to go after increases in load and there would be effects on the incentives for demand/supply demand side management. Would that argument not also apply at the distribution level? MR. REGHELINI: Again, our thoughts were that if you got the appropriate split between the costs you were recovering on an energy basis and the costs you were covering on a fixed basis, that you could effectively remove that inappropriate incentive. MR. SNELSON: Okay. I guess this will become an issue as we get into -- I understand that PBR is not the subject -- primary subject of this application, and so I presume this will be debated further when we get to a PBR application. The other question which is of a general nature - and I'm not sure when is the right time to ask it, but I will ask it now anyway - and that is: Are there any costs included in this application to prepare for a competitive retail supply market? And the kinds of costs that might be -- that I expect will be required prior to market opening will be things like load profiling of customers who have energy meters but not sort of interval time meters; if others are to be involved in the retail supply, then there will need to be some kind of settlement system for retail OHSC Presentation 222 (M. Reghelini) competition, and there will need to be a billing system which would allow the disaggregation of the bill between energy and wires and the allocation of the energy part to an appropriate energy supplier. There may also be some costs for metering or communications upgrades to allow some of these things to take place. And the question is: Are there any costs in here to do that? If not, where will those monies come from to prepare for the open market and how will those monies be recovered? MR. REGHELINI: There are costs in this application for preparing the distribution business to be able to function in an open access environment, including modifications to billing systems and the like, to be able to handle multiple suppliers. But it's all in the context of the actual billing function being provided as part of the distribution service. You'll find those costs are in the customer care program. And I believe in the initial applications that we sent out, the page on customer care on the O&M side was missing, but we've got - sorry, it was the capital side - and we do have copies of that page that can be made available, if it hasn't been made available to you already. MR. SNELSON: It just seems that perhaps some detail in these areas might be useful. MR. REGHELINI: Okay. OHSC Presentation 223 (M. Reghelini) MR. HARDY: Other questions or comments? MR. POCH: Can I ask a follow-up on that? MR. HARDY: Go ahead. MR. POCH: Just a follow-up on that last one, Marcel. On these billing costs which you're billing transmission, your distribution, you're also billing the commodity. In the interim rate application, is there any income to the distribution company from the commodity, so from Genco, I guess, for the fact that your -- in anticipation of your eventual role as biller? I gather you're anticipating you will be the entity that does the billing for at least some of the commodity sellers, retailers or -- and I'm sorry, I shouldn't have said Genco, I should have said from a notional retail -- competitive retail arm. MR. REGHELINI: The way our application is structured is that the billing will be part of the essential or basic distribution service. So the costs are in the distribution revenue requirement and the revenues that would come through the revenue allocation for the approved distribution revenue requirement would cover that. There are no notional revenues being paid by a retail merchant or a competitive merchant. MR. POCH: Eventually, when we're -- post-open access, can you give us a sense of how you think this is OHSC Presentation 224 (M. Reghelini) going to work in terms of -- I guess, there's going to be a mix of ways it's going to work. But I assume in some cases you will be providing information to retailers about the energy sales to a customer that is their customer; and, in other cases, it might be reversed, I don't know. MR. REGHELINI: I think there's a whole spectrum of how that can develop, and we sort of looked at the gas model and how it unfolded there with those services primarily being in the distribution regulated utility at first, although we do see what is going on in North America and how some of those services are slowly being rolled out into more competitive markets. And so, in general, we would take the lead from the OEB as how the OEB saw those services becoming more competitive, then maybe needing to be rolled out. And certainly we would look to, if there's any increased cost that comes from dealing with a multiple supplier environment that is imposed on the distribution business, that those costs would be reflected and, if appropriate, charged back to these competitive suppliers or included, if appropriate, in the costs for all distribution customers. MR. GILLESPIE: There are still some market rules, especially down in the retail end, from the Market Design Committee to be worked out on this, and I think it's fair to say that, you know, it could have some... MR. HARDY: Any other questions? Why don't we OHSC Presentation 225 (M. Reghelini) move along then, Marcel, to -- you're going to be talking about the revenue requirement now, I believe? MR. REGHELINI: Yes. MR. HARDY: Okay. THIRD PORTION OF THE PRESENTATION BY MR. REGHELINI: So now we will just do a brief overview of all of the costs that are included in revenue requirement that we are asking the OEB to approve. What you have in front of you is a pictorial view of the components of the revenue requirement, and it's approximately 700-million in 1999 and 640-million in 2000. The interesting thing to note here is that depreciation, interest, taxes and the net income or return on equity, which are the asset-based costs, represent roughly just over 50 per cent of the costs or revenue requirement of the distribution utility. That compares with the transmission business which had roughly two-thirds of its costs were asset-based. So before you can determine those asset-based costs, you have to set what the asset base is, and that's often termed rate base in regulatory proceedings. But it's essentially the sum of all your fixed -- all of your assets, and it would also include a provision for any investment or financing requirement for operations that arises out of the timing difference between when you have to make payments for services and when revenues are received from customers. OHSC Presentation 226 (M. Reghelini) In our application, that's the net of our receivables and payables on a balance sheet basis. So what the rate base is, is the mid-year average of these costs, and you can see that we're at approximately 2.6-billion in '99 and in 2000 for an asset base. In terms of new programs that are occurring or programs that add to the asset base during the test period, they are broken out into a number of categories. There's the sustaining programs, and these have to do with ensuring that the assets are kept in a condition that allows the reliability of service to stay within historic levels. The majority of these costs are for lines and stations and there's a significant component as well that has to do with asset condition restoration. In 1997, a preliminary asset condition assessment review took place and that indicated areas where work was either needed to be done or more detailed assessments are required during the proposed test period, and so a significant provision for those kinds of activities are included in the sustaining programs. The development programs have to do with providing facilities for new customers or providing facilities for increased load of existing customers. So that's all your connections associated with the customers that are forecast to come on the system and any capital work required to address reliability caused by OHSC Presentation 227 (M. Reghelini) increasing loads of existing customers. On the operations programs, there's two main thrusts there and they go to understanding the distribution system and how it's performing in a real-time basis to allow the company to better be prepared to manage in an open access environment and to ensure that it can understand where reliability may be deteriorating on parts of the system and address resources to fix and bring that reliability back to where it should be. These two projects are the distribution, operation, maintenance centre, the DOMCAMS program and the SCADA program which is for system control and data acquisition which, as I say, will allow management of the system in a real-time basis. The customer care programs are associated with things like the customer billing system, meters, and a number of the costs that are involved are what we were talking about earlier of getting ready for open access, to be able to deal with a multi-client environment where there's more than one supplier. And that requires the ability to put the appropriate confidentiality safeguards in place on customer data. There's also an aspect of Y2K readiness involved in these programs. And then on the distribution support side, that's all capital needed for the administrative support of the distribution business and there's some Y2K work going on there as well. OHSC Presentation 228 (M. Reghelini) There's the performance enhancement program which was identified by Dave yesterday. There's infrastructure costs associated with getting information technology systems up to speed for the new companies in a standard environment and a new payroll system. So that's the total of the capital programs for the distribution. MR. STEPHENSON: Sorry, maybe I can just interrupt now - I apologize - but can you just go back to what distribution support is and why it goes so drastically from '99 to 2000? MR. REGHELINI: The distribution support are the kind of administrative support functions, and you'll find this on the transmission side as well called transmission support. There's a description of three major programs that are taking place that are occurring primarily in 1999. I believe it's on page 76. As I said, a major component of this is dealing with year 2000, so that's why these kind of expenditures are front-loaded. MR. HARDY: That's page 76, Marcel? MR. REGHELINI: Yes. MR. POCH: Is it fair to say these are like transition costs to the new world? MR. REGHELINI: Yes, I think that's a fair characterization. As I said, all these -- that asset value will OHSC Presentation 229 (M. Reghelini) then drive the asset-based costs which are your depreciation, which is the return to shareholders of the capital invested in the company, the interest, which is the cost of the debt financing for the debt portion of the assets, the return on equity, which is the profit provision for the shareholders of the utility, and any taxes that are generated as a result of that after-tax return on equity. MR. RODGER: Marcel, Mark Rodger. As was the case with the transmission side yesterday, your target rate of return is 10 per cent after taxes? MR. REGHELINI: That's correct. MR. RODGER: Thank you. MR. REGHELINI: In terms of the depreciation and amortization, the expenses is roughly 151- to 153-million per year. As I said, it's just recovery of the costs associated with the actual asset itself and over time recovering the investment. In the past, there's been a Depreciation Review Committee at Ontario Hydro that has reviewed the depreciation rates and the lives of assets that were being experienced. OHSC, as we move forward, will have to put in place its own process, but some similar process is envisioned to ensure that the depreciation that gets taken is reviewed on a regular basis and the service lives and depreciation expense are matched appropriately. OHSC Presentation 230 (M. Reghelini) The financing charges or interest costs that drive out of the debt finance portion of the rate base is approximately 119- to 117-million a year and it comes from the embedded cost of debt that came out of the financial restructuring process that was talked about at the start today, and it's based on an embedded cost of roughly 7.8 per cent, and that also includes some refinancings that take place during the period. The taxes, which are really proxy taxes that will end up being payments to the financial corporation to retire the debt, are to be calculated on an accounting basis, and... so there is a provision of 100-million to 96-million for federal and provincial taxes and any capital taxes that are applicable. The net income provision is 105-million per year and it is based on a 10 per cent return on the equity component of the rate base, and the equity component of the rate base is 40 per cent equity. Both capital structure and the return on equity have come from the financial restructuring process that we talked about earlier; however, OHSC has reviewed and participated in development of that and OHSC certainly supports both the return on equity and the capital structure as appropriate for a company such as ours moving into open access. Now, moving on to the OM&A programs, these programs are grouped into categories similar to the capital programs with a few extra ones. OHSC Presentation 231 (M. Reghelini) But generally the sustaining programs, again, are to do with ensuring that the condition of the distribution system is such that reliability is maintained. If we look at the sustaining programs, roughly 45-million a year has to do with dealing with trouble calls, dealing with connections, disconnections and reconnects. Another 60-million to 61-million a year has to do with vegetation management, ensuring that vegetation isn't interferring with the lines. And the balance is from a number of smaller programs. Each one of those programs are detailed in the application. In the development programs, those deal primarily with the costs associated with administering right-of-ways. And the operation programs, as with the capital operation programs, are the expense side of dealing with the DOMCAMS project and the SCADA project. On the recoverable work side, this is work -- the competitive work we talked about earlier. MR. HARDY: Marcel, I just wondered, we've moved on to the next item now, I just wanted to see if there were any questions on the previous item. MR. REGHELINI: Sure. MR. HARDY: Before we move on to OM&A, were there any questions on rate base and capital programs; are there issues? OHSC Presentation 232 (M. Reghelini) MR. STEPHENSON: Richard Stephenson for the PWU. One issue that was raised yesterday in conjunction with transmission, I think it's equally applicable here, is the need for some historical comparative data so we can understand what's happening in terms of the capital program; for example, I mean, this applies also to OM&A and others. And it seems to me, at minimum, what we really need is a comparison between '98 actuals or whatever the most recent actuals are. And, in addition to that, I think it would be really useful for the Board and for everybody is if you could compare what you're looking for in terms of '99 -- your test years compared to what the old forecasts were for '99 and 2000 from the integrated company and to show us what you're doing - you know, you've got a new company, a new philosophy, et cetera, et cetera, et cetera, presumably you've got new priorities - and maybe you can explain, you know, why this has gone up and that's gone down and so forth, as compared to the capital plan that existed back in the old company. And, so you can show us what a -- how much of a better job you're doing. MR. REGHELINI: We indicated yesterday that we're putting together a piece on '98 with some explanation of what's going on moving from '98 to '99. I'm not sure if we could respond to your second request as the '99 and 2000 years were really forecast OHSC Presentation 233 (M. Reghelini) based on the new company being in place, but perhaps Michael can... MR. GILLESPIE: Sorry. I think the actuals, as we indicated yesterday, we're looking to provide some information on, certainly for '98. As for reconstituting or, rather, retrieving forecasts, I'm not sure what the basis of that would be or where you'd want to start or... I suppose what the value might -- we may have more of a problem with that, but certainly the actuals we can deliver on. MR. STEPHENSON: I mean, just to clarify. I mean, Hydro has produced capital plans since day 1 and so they've had capital plan for '99 and 2000 probably starting five years ago and then moving forward every year. And I guess the point really is, that your thesis is -- you know, you've got a new emphasis on maintaining your assets and asset management and so forth, and presumably that's reflected in some respect from a change -- that change in philosophy is reflected in a change in, for example, your emphasis on what you're spending your capital on, for example. And it seems to me that's relevant to the Board's understanding about the validity and the reasonableness of your expenditures and that this is a new world and how you justify going from what you were to where you're going. MR. GILLESPIE: Well, as I said, I think the OHSC Presentation 234 (M. Reghelini) actuals aren't a problem. I'm not sure about the forecast, but we'll take the question certainly and consider it. MR. HARDY: Ken? MR. SNELSON: Ken Snelson, AMPCO. I'd just like to follow up on that request and deal with the issue of, if you are relying upon asset -- additional costs being acquired for asset restoration, to restore performance of assets to adequate levels, then the information that the OEB should have to look at should include historical information on the reliability of the distribution system. Presumably if assets have been deteriorating, then that would show up, you would expect that to show up in the reliability performance of the distribution system, and I believe Ontario Hydro does keep such statistics, so that should be available. MR. HARDY: Are there other questions? MR. STEPHENSON: Let me just come back - it's Richard Stephenson again. I know that there's no PBR plan being proposed here, and maybe this isn't the right place to ask this question but, if it's not, I'm happy to defer. But it comes back to the service quality indicators issue that was raised yesterday in the context of transmission. You're going to clearly be proposing a PBR scheme going forward and I guess the question I have is: What work is being done vis-a-vis developing your service OHSC Presentation 235 (M. Reghelini) quality indicators? Both the prior question was, I guess, historical, but the question I have now is prospective, and that is: What are you going to be using? What's the basis for them and so forth? Is that in your presentation this year? Maybe it should be. MR. REGHELINI: The specific quality service measures are not included in the application that we've brought forward this year. And it goes back to what I was saying earlier, on the distribution side we're a little bit further behind than the transmission side and work is being done to really assess what are appropriate quality service measures for the distribution system on an ongoing basis. And, again, work is being done on getting into a position to be able to measure the performance level of the system in a more extensive way than has been done in the past. So I would agree with you that when we come forward with a PBR application, there will certainly have to be performance standards and measurement addressed in that application. But, in the context of this one, we felt we weren't ready yet and, given that we were working on a cost of service framework, what we would work towards is maintaining the existing level of reliability and work towards being able to measure that effectively. MR. GILLESPIE: Let me just comment. OHSC Presentation 236 (M. Reghelini) As you know, the Ontario Energy Board has a performance-based regulation initiative for distribution utilities underway for Ontario, and I don't recall exactly but I think that performance standards are part of that and that's certainly something that we would be aligning ourselves with in terms of developing our standards as well. MR. HARDY: I don't see any other questions. Why don't we continue with OM&A. MR. REGHELINI: Okay. We've sort of worked halfway down the OM&A table. And the next item that was included is the recoverable work. This is the competitive work that is being provided through the Network Services Division of the distribution business, or of OHSC, and the costs are included in the OM&A programs. And you will see also in the revenue requirement, the revenue offset that comes in to not only offset that but to provide a margin on top of it. The customer care costs are the operating costs associated with the customer billing system essentially and with metering and billing for the retail customers. Grants in lieu have to do with payments for property taxes or in place of property taxes to municipalities. And, finally, distribution support is the O&M side of the distribution support we were talking about on the capital, so that's support such as finance and OHSC Presentation 237 (M. Reghelini) corporate functions that are required on the distribution side. The last component in revenue requirement is the line losses and they've been forecast in this application at 8 per cent of the bulk power purchased. Losses are incurred on all electrical systems and they're influenced by the wire size, the operating voltage and the line length over which the power is being transmitted. There is an ability, through system design, to minimize those losses and, as I had identified in some of the programs, the SCADA and the DOMCAMS initiative have a component at looking at where losses are being incurred on the system so that in the future the system can be proactively managed to address areas where losses can be minimized. MR. POCH: Can I just ask: Where are we at, do we know, on the market rules on how that's going to get picked up? Who's picking up that? MR. GILLESPIE: We'll have to find out. MR. POCH: I assume on the transmission side, since they're talking about giving you guys an incentive to reduce it, that someone else is picking it up? MR. GILLESPIE: You're talking about line losses on distribution? MR. POCH: Yes. MR. GILLESPIE: Get back to you. MR. REGHELINI: Just to recap then, all of these OHSC Presentation 238 (M. Reghelini) cost elements add up to be the distribution revenue requirement which amounts to, before the revenue offsets, just over 800-million in 1999 and about 750-million in 2000. And when you bring in the revenue offset from recoverable work, also facility charges to Genco for the use of the distribution system in servicing the municipal electrical utilities and attaching to the generators, the net revenue requirement is reduced to approximately 700-million in 1999 and 640-million in the year 2000. MR. HARDY: Okay. That finishes OM&A. Questions on OM&A programs and losses? Go ahead. You have to come to a mike, because it's being transcribed, and you have to introduce yourself. MR. BOLKOVIC: My name is Milan Bolkovic, Markham Hydro. I was just curious in the costs relating to the DOMCAMS and SCADA, it seems to be 35-million over the next two years. What I'm concerned about is what information do you have that your customers demand this sort of service? It sounds as though it might be a considerable change to what you're doing at the present time. And in your statement here that this will allow for crews to attend outages more quickly, reducing the duration of outages, again this sounds like an information system. It doesn't sound as though it will get crews out to the OHSC Presentation 239 (M. Reghelini) outage faster. So I guess my question is: How will that address customer needs and how have you measured these customer needs? MR. REGHELINI: I think the detail on that would be spoken to at the January sessions by the people involved in that project but, just generally, it will provide information to the company, to various parts in the company so that those kinds of activities can be coordinated. And when a customer calls in and reports an outage, that the information necessary to identify where that outage is occurring is received faster, and if customers are calling in asking about what the status of attending to an outage is, there's also information coming into the system that is reporting on what that status is so that that can be communicated back to customers as well. MR. HARPER: Marcel, maybe I could help. In terms of how it specifically addresses customer response, by having a better understanding of the nature of outages, we're able to dispatch more quickly the appropriate and right size crew in order to address that particular problem. Whereas, if one customer phones in and has a problem and you send out a crew to try and address that problem, you find the problem is more extensive -- maybe all the customers haven't phoned in, but the problem is OHSC Presentation 240 (M. Reghelini) more extensive, then there's lost time in terms of re-dispatching the balance of resources required. Whereas, if you have a better understanding of your system and can get a better read on what actually is the extent of the problem, you can dispatch the appropriate resources more quickly and get services restored more quickly. So that was what the tie was to customer response and customer need. MR. BOLKOVIC: Do you have any measurements that indicate that customers need better service than you're providing right now? MR. REGHELINI: Well, our application is predicated, first of all, in maintaining the existing level of reliability and service, so... MR. BOLKOVIC: This is additions, though, right? This isn't just maintaining the existing system, this is either improving a system or completely putting in a new building and new information system, new computers and software; right? MR. REGHELINI: But it will provide the company the information necessary to ensure that it can maintain the existing service level. It's aimed at filling an information gap that is there right now. But, as I said earlier, the person to talk to this is the individual responsible for this program and that individual will be better able to address the specifications of your concerns in January. OHSC Presentation 241 (M. Reghelini) But we'll take your question under advisement. MR. BOLKOVIC: So as far as measuring customer needs and what the response is to the customer needs, that you will address in January? MR. REGHELINI: True. MR. HARPER: I think the other thing, just to note in general, I mean SCADA systems is something that a lot of the municipal utilities in Ontario already have installed. A number of them are installing them, have installed them. I mean, to some extent this is bringing us up to the current state of the art and technology. And, you know -- and then on that basis sort of responding to what's the level of expectation that seems to be genuinely expressed across the province from customers. MR. BOLKOVIC: Again, this sounds like rhetoric, not measurement. And I guess my question was: Do you have information from your customers, any kind of information stating that they feel that your service is not adequate at the moment and an estimate from you of how DOMCAMS and the additional SCADA costs will respond or improve service to address your customers' needs. MR. HARDY: Thank you. Other questions? MR. O'DONNELL: Bob O'Donnell with the Electrical Contractors Association. I just need a point of clarification on the issue of recoverable work. It seems to be identified in a OHSC Presentation 242 (M. Reghelini) couple of locations here, first under the OM&A budget. I think there's 29-million identified as recoverable growth as far as revenues go. Then you've also identified under 'Other Revenue' an additional $54-million. Is there a distinction between the two? MR. REGHELINI: One is the cost of doing the work and the other is the revenue that's being charged for that work. And so the revenue demonstrates that we're, in fact, charging a margin over and above the overhead loaded cost of providing that work. MR. O'DONNELL: So this is all contestable work as competitive work goes? MR. REGHELINI: My understanding is that it is, but I can confirm that for you. MR. O'DONNELL: You've identified the costs as being 29-million and the revenue as being 54-million? MR. REGHELINI: Yes. MR. O'DONNELL: Is that based on any kind of market knowledge, or... MR. POCH: It's contestable but it's no contest, obviously. MR. O'DONNELL: I'd just like to know where you came up with that kind of margin? MR. HARPER: I think the point you have to recognize is on the OM&A side that's the OM&A costs associated with the work. Obviously if you have capital OHSC Presentation 243 (M. Reghelini) equipment involved in doing the work, there would be capital costs associated with that capital equipment. So that -- I mean, so that margin as you're seeing there is not all going straight to the bottom line. But the way the individual work projects are priced, they're priced to cover all of those costs and still return a margin. MR. O'DONNELL: Perhaps it could be separated out on a balance sheet then, all the costs then, as opposed to a variety of places on the cost side? MR. HARPER: Okay. We'll take that. MR. HARDY: Any other questions, Bob? ---(No verbal response) MR. HARDY: Okay, fine. Go ahead. MR. WINN: I'm Robert Winn from Cornwall Electric. I'm very interested in the methodology you've used for setting transfer prices between work done by network services for the distribution side of the business. I would like to know how you have set the transfer price for the work done by network services. MR. REGHELINI: Basically, what we are doing is network service is providing service to distribution, transmission and is doing some of this recoverable work, and we are allocating the costs of the network services unit among those. We're working on a supplementary that describes OHSC Presentation 244 (M. Reghelini) the cost allocation process. So that, we're hoping to file before the January sessions. MR. WINN: I guess my concern is that there's no cross-subsidization, and it should be demonstrable that there is no cost subsidization between them. MR. REGHELINI: Right. We understand that. MR. HARDY: Stan. Do you have any follow-up questions? Okay. MR. PAWLOWICZ: It's Stan Pawlowicz from Sudbury Hydro. Within a corporation with $2.5-billion worth of assets, and wires and lines being a significant component of that, how do we rationalize overheads in distribution and support accounting for about 20 per cent of expenditures and only a half a percentage point being allocated to line repair and maintenance? Specifically, I'm looking at 11.2, 1.2, where you're spending $18-million in 1999 and $3-million in the year 2000-- MR. HARDY: Sorry. What page? MR. PAWLOWICZ: --out of a total cost of 343-million in 1999 and 290-million in the year 2000? MR. HARDY: What page are you on? MR. PAWLOWICZ: 86 and 95. MR. REGHELINI: Did you get your copy of the application off the web site? MR. PAWLOWICZ: Yes. MR. REGHELINI: Okay. There's a little confusion OHSC Presentation 245 (M. Reghelini) there because in converting it to the web site, it changed the page numbers. MR. POCH: 87 and 96 I think is probably the ones on the printed version. MR. RODGER: I think it's pages 87 and 96. MR. HARDY: Okay. So 11.0 is on the other document, page 87, and you're also looking at 11.2 1.2, which is on page 96 of the other document. MR. REGHELINI: I think what we're preparing to show, how the costs are split to the different units and which will include not only a description, but also tracking the dollars. You will see how those total dollars get allocated. Some of what is going on is the costs are going into network services and then network services is being allocated then between transmission and distribution. So... MR. PAWLOWICZ: Does that description not say "line maintenance and repair" and the extract talks about reliability of the system and the need to replace or to maintain 40,000 wood pins and 100,000 insulators, et cetera, et cetera? MR. REGHELINI: I think maybe I'm a little confused. Can you just go back to the start and restate your question? MR. PAWLOWICZ: Okay. The question is, in a corporation with assets with a value of $2.5-billion or some amount thereabout, the wires, the lines basically OHSC Presentation 246 (M. Reghelini) being a significant component of that investment, how do we rationalize on spending a half a percentage point in 1999 on line maintenance and repair versus spending 17.5 per cent on overhead-type items as distribution support, the 18 being a component of the 158 which is part of the sustaining costs, okay. MR. REGHELINI: Right. MR. PAWLOWICZ: And then getting a reduction down to 3-million on that kind of a system in the year that follows. MR. REGHELINI: Right. MR. PAWLOWICZ: You know, we're a small utility and we spend those kinds of monies. MR. REGHELINI: Okay. Well, we'll talk to the individual responsible for that program and address that specifically. MR. HARDY: Other questions? Issues? MR. STEPHENSON: Yes. Richard Stephenson. Just, we talked about this in terms of transmission. I think it would be useful, as well, if we had a corporate org chart setting out the distribution side of the business, giving us some sense of the various operating - whatever you call it - aspects of however the business is organized together with some kind of staffing breakdown by function or however you organize your business, and that presumably for both of the test years. And if there is some way of comparing that as OHSC Presentation 247 (M. Reghelini) compared to '98 actuals, I think that would be useful, as well. MR. REGHELINI: Okay. MR. HARDY: Ken? MR. SNELSON: Ken Snelson, AMPCO. A couple of questions. One is a parallel question to the one I asked yesterday on transmission and it appears in the distribution document on page 88 where it says that certain expenditures that were written off in 1997 are going to be recovered through O&M on an ongoing basis. At least the distribution document tells us how much. In this case, it tells us that it's $20.4-million in 1999 and the year 2000. It doesn't to tell us which of the O&M programs these costs are embedded in and it doesn't justify this form of accounting treatment, and I think this could be an important issue for some participants. MR. REGHELINI: Okay. MR. SNELSON: So hopefully those will be addressed in January. A somewhat simple question. I know we're going to come this afternoon or later on to deal with sections 19 and 20 that deal with remote services and the monopoly retailing function which eventually will transmogrify itself into perhaps the default supply retailing function, and there are costs in those sections, and my question is, where are those costs shown in the revenue requirement in OHSC Presentation 248 (M. Reghelini) this application? What categories do they fall in? They don't appear to be separated out. MR. REGHELINI: All right. Each of those three pieces are a separate part of the document, so the bulk of the application is dealing with the transmission grid connected distribution system and it calculates a revenue requirement for that system by itself. So in respect of the remotes, the costs of dealing with the remotes are just in the section on remotes and we're asking the Board to approve the revenue requirement of dealing with remotes, and the remote assistance that falls out of that. In terms of the default supply or what we're calling monopoly supply in the transition, those costs do not roll into either one of the revenue requirements for distribution, whether it's the grid connected or the remote. And we are not asking for the OEB's approval of those costs. It's a piece of the puzzle that we're providing information on that will aid in understanding the transition period. MR. SNELSON: Will those costs occur in '99 and 2000? MR. REGHELINI: The costs for monopoly supply? MR. SNELSON: Yes. MR. REGHELINI: Yes. MR. SNELSON: And do we gather then that they're not going to be paid, that the company isn't going to be OHSC Presentation 249 (M. Reghelini) recompensed for them if you're not seeking approval of that revenue requirement? MR. REGHELINI: Those costs will be covered through the revenue allocation process that was described earlier on briefly this morning and in a bit more detail yesterday. MR. SNELSON: But the revenue allocation process appeared to be an allocation of an OEB-approved revenue requirement. MR. GILLESPIE: Not all of it. MR. SNELSON: Not all of it? MR. GILLESPIE: Not all of it. MR. SNELSON: That's interesting. And I also wanted to follow up on a question yesterday. There's a cost category in the existing cost allocation structure and rate structure called shared LV lines; that is, 44 kV lines feeding mostly embedded municipal utilities and also some direct industrial customers who are fed from that system and -- MR. HARDY: Low voltage lines? LV, low voltage? MR. SNELSON: Shared low voltage lines I think is what it's called. And the transmission people didn't seem to know whether it was in the transmission category, but thought it probably was in the distribution. And maybe you, as the distribution man, would know whether it's in distribution. MR. REGHELINI: Well, there's definitely low OHSC Presentation 250 (M. Reghelini) voltage lines in the distribution costs which serve municipal electric utilities and the facilities charge, that is a revenue offset to the distribution revenue requirement, is to recover some of the costs of providing that service. Whether it's specifically the definition of what was used in the past as shared low voltage lines, I don't have that information at this point. But we took your question yesterday and we are preparing to address that specifically next, in the January session. MR. SNELSON: Good. MR. HARDY: Okay. Any other questions related to O&M? ---(No verbal response) MR. HARDY: Okay. Why don't we move on to the next subject, which is rates, is it? MR. REGHELINI: Yes. MR. HARDY: Okay. FOURTH PORTION OF THE PRESENTATION BY MR. REGHELINI: The distribution application, as we have identified earlier, differs from the transmission application in the sense that we are not calculating unbundled distribution rates because the intent of our application is only to apply up and to the point that open access occurs. And we will come forward with unbundled distribution rates prior to open access being declared, so that the transition to open access can be done smoothly. But during the period that this application is to OHSC Presentation 251 (M. Reghelini) apply for, the existing bundled rates are to apply. And Ontario Hydro Services Company is not proposing any changes to the existing retail rates. Again, the reason why we haven't gone through and calculated unbundled rates is we have a significant amount of work to do to actually determine what the unbundled costs -- how they should be allocated between customer classes, what are the appropriate customer classes. And given that those unbundled rates are not to be used immediately, we considered it better to just to go forward for approval on the revenue requirement and take the time to do that exercise properly. And again, in terms of the remotes, they would be the existing bundled rates that would apply there as well. So that was all I really wanted to touch on with respect to rates. MR. HARDY: Any additional questions on rates then? (No response) Okay. Again, this is our opportunity to ask any questions, become familiar with this document and identify any issues. I don't want to go too fast because I know the information is quite important, so if there are any questions .... Marcel, then why don't we move on? MR. REGHELINI: I have one slide on remote communities, just to identify that what we're asking the Board for approval is approximately 30-million in revenue OHSC Presentation 252 (M. Reghelini) requirement to service these remote communities in '99 and 2000. The costs are for serving 21 off-grid communities in northern Ontario and the costs do include generation assets for generating the power in the communities. One of the things that we will have to get is a regulation allowing in remote communities the generation to be provided within the distribution business, but what we foresee is obtaining that regulation and then providing distribution service in those communities on a bundled basis. So again, that's why we're anticipating the regulation leaving the existing retail rates in place during the transition and that results in a requirement for a remote subsidy that will be dealt with by the regulation. And again, we're asking that the Board, once the regulation is finalized and issued, takes that into account in setting the revenue requirement and any remote subsidy that's necessary. Are there any specific questions on remote communities? (No response) MR. HARDY: Go ahead then. MR. REGHELINI: The last issue dealt with in the application is the provision of retail monopoly supply. And as I said earlier, we provide this information so that the Board understands the entire picture of how customers are going to receive their total electric service. The administrative costs associated with providing the OHSC Presentation 253 (M. Reghelini) monopoly supply range between 62- and 66-million over the test period. Again, the recovery -- the rates that will be paid by the customers will not be unbundled components but will be the bundled rate and this function will transform into default supply once those provisions of the Act are declared and once open access occurs. And at that time, default supply will be regulated by the OEB and it will -- OHSC will be required to keep that in a subsidiary separate from the distribution business, although it will be the distribution business' obligation to ensure that default supply is provided for. Are there any questions about the material on retail monopoly supply or issues that you'd like the company to address in January? MR. STEPHENSON: It's Richard Stephenson. I take it these numbers here, just so I understand, they are essentially -- if all of the customers being served were being served under your retail monopoly model that will come into place later, those would be the costs associated with it; is that what -- MR. REGHELINI: That's the administrative cost associated with dealing with them. MR. STEPHENSON: So I take it that you've already made some decisions about what kinds of costs are going to get allocated into default supply as opposed to your wires charge when that takes place because you've already notionally calculated that out. OHSC Presentation 254 (M. Reghelini) MR. REGHELINI: We've made some decisions if you want to call them that in preparing for these applications, although we do acknowledge that again, depending on what market rules end up getting put in place and what the government's decisions are on the MDC recommendations, that can affect things. And we were talking about earlier how there could be a spectrum of what services are provided through the retail merchant and what's sitting in the distribution business. And to the extent that we've made is impacted by those decisions, well, then, the OEB would have to issue its decision recognizing that. MR. STEPHENSON: Right, and what goes in, those numbers may go up and down depending on what ultimately goes in. MR. REGHELINI: Right. MR. STEPHENSON: Just so I'm clear, in my mind though, the retail -- that charge is essentially a commodity-based charge and I guess there's some administration involved in it, but it's distinct from the -- these retail or default customers are still going to get a wires charge tacked on top that's not included in those numbers. MR. HARPER: That's right. I think if you look at the application, it details the types of activities these costs are meant to cover, such things as power acquisition and settlements, retail merchant activities themselves, financing of working capital that would be OHSC Presentation 255 (M. Reghelini) involved in carrying the commodity portion of the power, you know, of the bill that you're delivering to customers. So it's those activities that are viewed as being associated with the delivery of the commodity specifically as opposed to those that are related with the wires business. MR. HARDY: Is there a follow-up? MR. STEPHENSON: No. I think that's .... MR. HARDY: Okay, thanks. Go ahead. MR. BOLKOVIC: Milan Bolkovic, Markham Hydro. You may have conferred this yesterday, so if you did, I apologize: The rate freeze, does this apply to the particular rates charged to each utility or is this a rate freeze on average and then it may change depending on geographical location of the utility? MR. HARPER: Our understanding -- from our point of view, the rate freeze applies to the wholesale rates and to the specific rates that apply to utilities. So it's not on an average basis. It's on the actual rate schedule that that... MR. BOLKOVIC: So that the bill that we receive after January or whenever this gets approved will be no different than the bill that we received six months ago. MR. HARPER: Providing your consumption doesn't change. MR. BOLKOVIC: On a per unit basis. MR. HARPER: Yes. OHSC Presentation 256 (M. Reghelini) MR. BOLKOVIC: Okay, thank you. MR. HARDY: Any other questions on monopoly service supply? (No response) Are you finished then your presentation? MR. REGHELINI: Yes. MR. HARDY: Okay. So we're finished all the information Ontario Hydro Services Company is presenting on the distribution rate order application. I want to make sure though that we've had the opportunity to hear all the information we need to understand the application. Are there any other questions or issues to raise or concerns? Please come forward. MR. MACKIE: Chris Mackie, Board Staff. You're asking the Board to establish the revenue requirement for the '99 and the year 2000 and you've given us a set of established bundled rates, but what is missing is anything akin to a load forecast or an energy forecast for the years '99 and 2000 so the Board can make a reconciliation between the energy sales forecast and the rates that are going to be applied to confirm that it's going to recover or that Ontario Hydro Services Corporation is going to recover the approved revenue requirement. Can you comment on this omission? MR. HARPER: I think actually there was a reference to load forecast that came up yesterday during the discussion of the transmission application and we realized then when we flipped back to the appendix talking Issues/Concerns 257 about planning assumptions that just made reference to a load forecast as opposed to what the specific kilowatthours were. I think that is something that we can address and make sure that the actual loads forecasted are available as part of the process. MR. MACKIE: Because at the end of the day, as I understand it, Ontario Hydro is expecting to be able to earn a revenue surplus in order that it can make a contribution to the general Ontario Hydro financial corporation and I'm sure that the Board will need to confirm that the actual rates will more than recover the approved revenue requirement. MR. HARPER: On the distribution and transmission businesses, we're expecting to recover a revenue requirement consistent with what the Board approves here during this process. The overall retail rates we charge, we'll provide revenues for those specific purposes, the transmission and distribution, as well as revenues to address the revenue requirement needs of the power corporation, the IMO and others. MR. MACKIE: So we don't know that without the energy sales forecast, but I gather you're going to provide that information. MR. HARPER: Yes, we'll provide the energy sales forecast. MR. MACKIE: Thank you. MR. HARDY: Ken? Issues/Concerns 258 MR. SNELSON: This is a question that probably applies both to transmission and distribution, and that is that -- it comes back to what this gentleman was just talking about in terms of payments to the financial corporation. Both submissions, the one on transmission and the one on distribution, show the generation of net income as they should and I am presuming that a proportion of that net income will be returned to the financial company as a dividend to the owner of the new corporations. And I'm just wondering if there's any information available on the policy that your corporations are going to adopt or going to be required to adopt in terms of what proportion of net income will be returned as dividends and what will be retained in the company as retained earnings. MR. HARPER: I think that's something to be best left to the financial people who will be addressing the application in January. It's my understanding, subject to check there, is that, you know, the issue of dividends will be covered as part of the shareholders agreement that the shareholder will have with OHSC and that's something that hasn't been totally finalized yet. MR. SNELSON: Okay. MR. HARDY: Good. I'm going to start to close off the meeting now or the educational session. Please come forward. MS. SIMMONS: Susan Simmons with Reed Consulting Group on behalf of the OEB staff. A number of people have Issues/Concerns 259 asked this question and I'm just wondering whether this is a suggestion or something you could provide that would help us. In your presentation yesterday and this morning, you've shown us this graph here that shows the revenue allocation during the transition. One of the things that I think would help us is if, you know, in addition to the lines here we could see the dollar flows that you forecasted or I assume someone in some organization forecasted. And I understand obviously some of this comes from other areas, but this would really help get a sense of the big picture and help understand what people have termed 'reconciliation'. I understand we probably will get a load forecast, but we have rates and we don't necessarily -- load forecast doesn't translate to billing determinants. So to the extent that you can provide us the information so we can do this or if you can actually prepare that for us, it's something that I think would help us get an understanding as to how these revenues are going to come back. MR. GILLESPIE: We are actually pursuing that. MS. SIMMONS: Good. Thank you. MR. HARDY: Susan, is that diagram in the document anywhere? MS. SIMMONS: It is -- I'm looking at diagram No. A13 on the overview of transmission and distribution rate order applications. Issues/Concerns 260 MR. HARPER: I think it was the financial flows diagram as part of the financial restructuring presentation. MS. SIMMONS: Thank you. MR. HARDY: Any other questions, issues? MR. RODGER: I'm just wondering if anybody at SERVCO has had an opportunity or is in a position to respond to the question I raised at the outset of today's proceedings about IPP's and connection costs and whether transmission tariffs apply to those entities? MR. SCHNEIDER: Yes, I'm Gary Schneider from OHSC. For independent power producers or any generator for that matter the transmission tariffs will not be charged. They're going to be charged to load customers - that's in the proposal - load customers being distributors and end use customers directly connected to transmission. For load customers who do own their own connection they will be paying a network charge and they will not be paying the connection charge since they own their own connection facilities. MR. RODGER: Thank you very much. MR. POCH: Can I just ask on that, I think maybe I misunderstood incorrectly yesterday. Is there not the potential for a connection charge for a generator? MR. SCHNEIDER: As the proposal stands today generators will be paying their own connection costs and thereby not being charged a connection charge. Issues/Concerns 261 MR. POCH: Right, okay. MR. HARDY: Okay. Last call. Just for the record is there anybody who hasn't had an opportunity to ask a question, state an issue or get clarification on the application that's been before us this morning? I don't see any hands up or anybody coming forward. Okay. Then I wondered if -- also have you got the information -- generally the information you need to move forward? Then I wonder if I could call on somebody from the Board staff to just close with where we're going from here? MR. PUGH: Sorry, I wasn't here for the opening. I believe you were given some instructions or general impressions on what's going on at the beginning of January. I guess at this point in time I'd like to thank you very much for coming and for sharing your views with us. We're going to be developing an Issues List shortly. Some of the issues you will see on that list -- I have been listening to the discussion for the last day and a half. Some of our issues are a little bit more technical in nature and since the upcoming conferences are more technical we haven't particularly raised those issues at this point in time. I hope you find the Issues List will address the concerns that you have. And we look forward to seeing you at the Issues/Concerns 262 beginning of January. Thank you very much. MR. HARDY: Thanks very much. ---Whereupon, the proceedings were concluded at 11:57 a.m. 263 I N D E X O F P R O C E E D I N G S Page No. Opening Remarks: Facilitator 175-180 N. McKay 180-183 Questions: 183-184 OHSC Presentation: M. Gillespie - overall context 184-188 W. Harper - financial architecture 188-194 M. Gillespie - nature of SERVCO 195-201 M. Reghelini - distribution application 202-210 Questions 210-213 - regulatory framework 214-224 - revenue requirement 225-250 - rates 251-256 Issues and Concerns 256-262 Parties who questioned: Joanna Birenbaum......Pollution Probe Milan Bolkovic........Markham Hydro Keith Bryan...........Union Gas Limited Peter Budd............Bennett Jones Verchere Al Clark..............Waterloo North Hydro Ziyaad Mia............IPPSO Kevin Mullins.........Ministry of Energy Bob O'Donnell.........Electrical Contractors Association of Ontario Stan Pawlowicz........Sudbury Hydro David Poch............Green Energy Coalition Adrian Pye............Enbridge Consumers Gas Mark Rodger...........Toronto Hydro Gary Schneider........OHSC Kenneth Snelson.......AMPCO Richard Stephenson....Power Workers' Union Roger White...........ECMI Gravenhurst Robert Winn...........Cornwall Electric Lawrence Wu...........Hydro Mississauga JB/LJ/BV [FARR (c) copyright 1985].