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 Monday, December 14, 1998, commencing at 9:00 a.m. --------------------- INFORMATION SESSION DAY ONE --------------------- F A C I L I T A T O R : DAVID HARDY Board Technical Staff 2 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 ) 3 ---Upon commencing at 9:00 a.m. MR. HARDY: Okay, why don't we begin? This is a bit different setup. It's a meeting, not a Board hearing. I'm kind of trapped in the middle here. I'm going to be facilitating the session. My name is Dave Hardy so I've been asked to facilitate the two educational conferences. I'm going to be going through today's agenda in a moment; however, I'm going to start by explaining the purpose of these two conferences being held today and tomorrow. As most of you are aware, the recent legislative changes which changes the Electricity Act and changes the Ontario Energy Board Act have resulted in Ontario Hydro Services Company having to obtain approval for transmission and distribution rates from the Ontario Energy Board. A week ago the Ontario Hydro Services Company, SERVCO, filed applications with the Ontario Energy Board for interim rates and interim -- for transmission and interim distribution rates. Now, I know that most of us haven't had a lot of time to review the applications and, because of this, one of the purposes of the sessions today and tomorrow, the educational conferences, is to bring us up to speed on the content of the filings and to learn about the transmission and the distribution rate applications. As I said at the beginning that these are Opening Remarks 4 (Facilitator) educational sessions. There's about half a dozen goals we're hoping to achieve out of the educational sessions: First of all, to provide all of us an overview of the content of the applications and to learn about the different areas of the applications; then to be brought up to date on the overall SERVCO corporate context within which the applications are being filed. It gives us an informal opportunity to ask questions of clarification; it also helps through our comments to SERVCO, provide SERVCO with any information we think is outstanding; also, to hear preliminary information now in advance of opportunities for a line-by-line review of the applications in the upcoming technical sessions; and, also, to suggest preliminary issues in relation to the findings. Today's session is going to focus on the transmission application, tomorrow's session is going to be focusing on the distribution application. Now, for those of you who can't -- or the people who can't attend tomorrow, if time allows, we're going to allow a little bit of time for the distribution -- some distribution issues to come forward but, overall, the focus of today is still transmission. In addition, if there are issues that come up -- well, there are corporate issues that we'll try to repeat a bit tomorrow as well for those people that can only attend tomorrow. Again, these educational sessions are meant to be Opening Remarks 5 (Facilitator) informal. They're to help us understand the filings and the differences with the filings. No question on your mind is too simple or too trivial to be asked and no questions are irrelevant here. If you think you have a question that you'd like to ask, it's a good chance that somebody else has the same question on their mind, so please ask that question to get that clarification. In addition, this is an initial filing. Our purpose today is not to flag issues toward the preparation of a formal issues list; however, the session will be transcribed and we have some difficulties using the boardroom for transcription, so it means that if you have questions, you're going to have to come up to the front and ask those questions so that we can get it miked, but please, we'll try to keep it as informal as possible. Also, if you are speaking, we're going to have to ask you to identify who you are so that for purpose of the transcription they'll know who you are and, particularly, who you represent. Now, Ontario Hydro is going to be explaining their application in much more detail throughout the day. Your questions and comments, again, will allow SERVCO to understand the information they need to provide us and assist us in understanding the full application. Now, I know that numbers are larger than I thought, so I'm going to have some initial introductions in a moment and, at that point, you'll find out who some Opening Remarks 6 (Facilitator) of the people are around the table here. Again, throughout the day, when you speak, I'm going to ask you to introduce yourselves. I'm also going to ask the Board Staff to say a few words in a moment just to give a set of context for today's educational session. My role, as a facilitator, I don't have a stake in the subject matter or a concern about the outcome of the application, my concerns are with matters of process and fairness. To this end, I'm going to try to keep the agenda on track to ensure that we're getting the most out of this meeting. I'm also concerned, again, with process and fairness, so that if you have a question that takes some time to ask, I'm going to make sure you have the opportunity to ask it. I'm going to also maximize listening, so that if you need an answer, I'm going to make sure you have the time to get that answer. Also, I'm going to be looking for any jargon that's coming up and making sure that we clarify any jargon that comes forward. The main things I'm going to be asking you is, what questions do you have of the application, what information do you need to better understand the application, and what are some of the issues the Board might want to think about considering and why are those issues important? I'm going to be keeping occasional flip chart Opening Remarks 7 (Facilitator) notes. Those notes are for my use and not part of the record. Again, it is going to be transcribed. We can get the transcriptions from Farr & Associates, I guess it is, and their telephone number is in the book. And if you can't find it, I'm sure the Board Staff will help. We're going to be having a very short morning break and afternoon break. We're going to be breaking at noon for lunch and you're on your own for that. Washrooms, I guess, are down the hall; men's to the left and women's to the right. Okay. At this point, I'm going to go through the agenda and, after I go through the agenda, I'm going to do some introductions and ask the Board Staff to say a few words. Here is what we're proposing for the agenda for today's meeting. We're almost through the introduction and purpose. I'm going to ask the Board Staff to talk about the educational and technical conferences and to fill us in about that and provide some context. After that, we're going to go through the context of the rate order applications and SERVCO will be making a number of presentations. We'll have lots of time to understand that and to ask questions. That will take us generally 'til noon. Afternoon, we'll generally be getting into the transmission rate order application. We'll be talking Opening Remarks 8 (Facilitator) about transmission business and strategy, the regulatory framework, asset base and capital programs, revenue requirements and OM&A and then cost allocation and rates. We expect to close around 4:30, 5:00 or so. If we need to go faster, we'll do that. If we're going slower, we'll take a little bit more time. Is there anything else that you feel needs to be on the agenda today? (No response) If there are items that come up during the day, let me know and we'll add them, okay? At this point I'm going to ask a Board representative to -- or actually, I should do some quick introductions first then I'm -- let's see. Oh actually, you can do the introductions; can't you, of the Board staff? MR. PUGH: Sure. MR. HARDY: Okay. I'm going to ask the Board representative to say a few words and then we can get into the gist of the agenda. MR. PUGH: Thanks, Dave. My name is Randy Pugh. I work for the Ontario Energy Board. Between myself and Chris Mackie, we're going to have general carriage of the distribution side of the application. Kirsten Walli and Neil McKay will be generally looking after transmission and Brian Hewson has general carriage for both sides of both orders. Opening Remarks 9 (R. Pugh) We acquired some technical assistants to help us through this process. They're the Reed Consulting Group and I'd just like to introduce those members whose faces may be less familiar to you. Bill Hopkins and Michael Harris and Susan Simmons are here from Reed. Anne Buckley is also from Reed, and she'll be providing us with some assistance and she will not be here until tomorrow. What I'd like to do now is just to take this opportunity for the record to provide some context and read into the record so the people who aren't here will be able to refer to it: 'The Ontario Energy Board Act, 1998 requires that a transmitter or distributor of electrical energy must charge for services in accordance with an approved rate order. Section 129 of the Act specifically provides for an interim rate order to be issued without a hearing and that any interim rate order is subject to the approval of the Minister. 'The Board is hosting these meetings and requesting your comments to assist us in preparing a recommendation to the Minister. 'The government has signaled its intention that OHSC be in a position to be operational by April 1, 1999. OHSC will require a rate order for both its transmission and distribution business activities in order to finalize business Opening Remarks 10 (R. Pugh) plans and to obtain credit ratings necessary for external financing. 'As a result, OHSC will require rate orders prior to April 1, 1999.' We are working to that timetable. The Board believes it's important to consult with interested parties to obtain their views. The meetings today and tomorrow are informational meetings to provide parties with a basic understanding of the applications and the material filed in support of these applications. The meetings will also be used to define issues of importance and to gather your views on the adequacy of the filed information in enabling those issues to be properly pursued. Technical conferences will be held commencing the first week of January, at which time OHSC representatives will both present information on each of the applications and answer stakeholder questions on the content of the application and supporting material. Prior to these technical conferences, the Board intends to issue a procedural letter. That letter will define the issues and attendant materiality guidelines, the scheduling and location of technical conferences, and the details of financial support for broader public interest and small consumer groups. Before I turn the ball over to OHSC, I just wanted to highlight a few things: The Board has commenced Opening Remarks 11 (R. Pugh) a separate process in order to solicit public input on the content of licences. That is the appropriate forum for advancing comments on the licences. We'd like to keep this as streamlined as possible. While the details of financial support have not been established, we'd appreciate it if you would register your attendance by signing on the sheet on the side. That will help us to determine the amounts that you will receive at the end of the day. The OHSC have prepared separate binders of information supporting the applications. If you have not received this information, it's available from the Ontario Hydro web site or it can be obtained by contacting Ontario Hydro directly. The Board itself does not have extra copies of the applications and supporting materials; however, a copy is available in our public files room, if you want to look at it there. Without further ado, I'm going to pass the ball over to OHSC, so they can walk through their applications and supporting information. MR. POCH: Randy, just before you leave, I'm David Poch, counsel for the Green Energy Coalition. You've mentioned that the Board will issue a procedural letter-- MR. PUGH: Yes. MR. POCH: --prior to those days in the beginning of January, and I assume that will include an issues list. Opening Remarks 12 MR. PUGH: Yes. MR. POCH: Is there any mechanism proposed for those of us, as interested parties, to have some input into what is on the issues list, or is the Board going to read today's transcript and -- MR. PUGH: Actually, as part of the meeting today that Dave is going to try and draw out is what issues you feel are important, why, and whether the information there is adequate to address the issue. After that point in time, you've made your representation and we'll be tracking the issues list. At the end of the day, it's the Board that has to make a recommendation to the Minister and we have to consider what issues we need in order to do so, but we're certainly interested in gathering your input. MR. POCH: So the mechanism is simply that the Board will be reviewing the transcript of today? MR. PUGH: It will be reviewing the transcript, but Dave is intending to focus the conversation, so that people have a chance to say: 'Here is an issue that I see is important. Here is why.' So there will be an opportunity to kind of have an active discussion that way. MR. POCH: Mm-hmm. MR. PUGH: Does that help? MR. POCH: That's helpful. Thank you. MR. PUGH: Thank you. MR. HARDY: Are there any other questions of Opening Remarks 13 Randy before we move on to the Hydro presentation? ---(No verbal response) MR. HARDY: Okay. MR. PUGH: Thanks, Dave. MR. HARDY: Why don't you go ahead and, Michael, if you can introduce, or each Hydro or SERVCO person could introduce themselves as you come up, please. PRESENTATION BY MR. GILLESPIE: Hi. I'm Michael Gillespie, Director of Regulatory Affairs at Ontario Hydro Services Company, and I will be involved in the first session that's on your agenda, along with Bill Harper from the regulation side and Fred Long who is from the financial side of the Corporation. This afternoon, David Curtis will speak to the transmission rate order application and scheduled for tomorrow Marcel Reghelini will address the distribution application. The first session is going to really look at three different aspects, and the purpose of this is to set the broad context for the applications which both David and Marcel will speak to this afternoon and tomorrow respectively. I think it's quite important to get basically the context because of the new Act and the role that the rate applications play in satisfying requirements of the new Act which were certainly referenced by Randy Pugh. I want to set a little bit of the context of the OHSC Presentation 14 (M. Gillespie) Applicant and of the actual form and the requirements and the general context in which these applications are made. First is to talk a little bit about the -- first, this gives us the three things, the context of this morning and the transmission rate order application this afternoon, and then the distribution one tomorrow. I will speak initially about the genesis of this whole new enterprise or context in which the Ontario Hydro Services Company comes under regulation; that is, the Government's White Paper and the new legislation that subsequently followed it. Bill Harper and Fred Long will talk about the actual financial restructuring of the Ontario Hydro Services Company from its predecessor, Ontario Hydro, and the whole context of that. And Bill will talk a little bit about how the rate freeze, the Government's rate freeze policy fits in as a context-giver in which these rate applications find their way, and then I will say a few words or a few minutes about the nature of the Ontario Hydro Service Company itself. So first, a few words about the White Paper, the direction given by the White Paper and the new legislation. Just to review what the major objectives of the White Paper were in setting forth the restructuring of the industry which sort of had two major prongs in it: One was the introduction of competition into some parts of the OHSC Presentation 15 (M. Gillespie) industry, and the second being the introduction of regulation which our particular applications are addressing. It's important, I think, when we look at the major thrusts of the Government's objectives around, first of all, generally the context of this whole restructuring, creating and supporting developments in the industry which would support new investments and jobs in a restructured, more efficient and dynamic industry and choice for consumers which is, of course, which is really the main plank of competition. Specifically referenced are safety, reliability and environmental protection as specific things that must be preserved and enhanced in this new industry structure, more efficient distribution certainly, and a way of using both competition and regulation to effect that, fair rules for all industry participants and financial soundness. And I think it's important to underscore that fair rules is not something that just applies to the competitive sector of the industry where you certainly have rules of competition and market rules which are currently under development by Market Design Committee, but also that this would apply to the regulated as well as the unregulated participants of the industry; and, that is, that there must be, in a sense, a level playing field for regulated entities as well as for those that are competing in the marketplace. Efficiency; I want to underscore that. More OHSC Presentation 16 (M. Gillespie) efficient distribution is certainly a main element and a main goal in the setting up and the direction for Ontario Hydro Services Company both in the transmission and distribution side. And financial soundness - we will see later when Fred Long will talk to that - is certainly signaled very much in the White Paper, and he'll talk a little bit about how that plays out in the capitalization of new companies. The implementation of those directions in the White Paper take the form of the Energy Competition Act, 1998 which, in effect, puts the restructuring into effect. There are two parts to that Act: The Electricity Act and the Ontario Energy Board Act, and the Energy Competition Act achieved royal assent on October 30th of this year. The market rules falls under the general development of the independent market operator and the Market Design Committee has been working, as many of you would be aware, over the past better part of this year in issuing quarterly reports and they're still, in fact, determining a lot of the elements of the market rules. Regulation is yet to be determined and still very much a part of the implementation include such things as treatment of overall rate assistance and the treatment of taxation. Just a couple of examples. It's tempting and it's certainly very natural to fall back into language of speaking about Ontario Hydro because it has been so long OHSC Presentation 17 (M. Gillespie) with us, some 92 years, but we are really talking now about Ontario Hydro Services Company and other successors of the old former -- of the old Ontario Hydro. In a sense, Ontario Hydro I guess continues to exist, in a sense, as an Ontario Hydro Finance Corporation. It's becoming really the shell company for managing the debt and paying back the debt held by Ontario Hydro. The independent market operator becomes both the operator of the marketplace and also has a role with respect to directing some operations of transmission on an integrating fashion. The electrical safety authority will be established as an independent entity and that really leaves as two commercial successors to Ontario Hydro, the generation company and the Ontario Hydro Services Company. And those are really the two commercial entities that are, in a sense, the kind of successors that the White Paper talked to in terms of establishing as commercial entities. A couple of key points about the legislative framework for Ontario Hydro Services Company -- actually Ontario Hydro Services Company Inc. as it now is. (a) that it should be established under the Ontario Business Corporations Act as a commercial entity. A very key component, a very key aspect for the direction of the company. And this, of course, is a new aspect that did not apply under the former structure. There is also a clear obligation for the OHSC Presentation 18 (M. Gillespie) distribution part of that company to carry out default supply, to basically be the supplier of last resort or of first resort, actually, for customers who do not choose to buy their electricity from another suppliers. This is spelled out in the legislation, and it's an obligation that is actually owned by the distribution company, although the distribution company may, in the case of other distributors, assign that responsibility or at least may have that responsibility carried out by other entities. In the case of Ontario Hydro Services Company, that obligation to have the obligation carried out actually has to fall with a separate subsidiary to carry that out. The legislation allows transmission and distribution to be carried out in one or more subsidiaries. Again, these second and third bullets, in a sense, are carryovers in a way with some refinements from the obligations that used to be held by Ontario Hydro and the structural aspect as well in the third bullet. What is new certainly for the legislation is that operating licences and rate orders are required, and reference was made by Randy Pugh to that. There will also be requirement for the transmission operating agreement with the independent market operator; that is, for the transmission network that I referred to earlier in the establishment of the OHSC Presentation 19 (M. Gillespie) independent market operator and directing the operations of the transmission system, and David Curtis will speak a little bit about that this afternoon. There's also an explicit requirement for rural and remote rate assistance and that is again - although with some refinements - a carryover from the obligations that used to be held by Ontario Hydro. What is certainly new is that Ontario Hydro Services Company will be self-sustaining and will be able to borrow in its own right and that it, along with other players in the industry, will pay property taxes, certainly a new development, and a sense of both commercializing the industry and establishing a level playing field. This takes us into some of the elements of the financial restructuring, and I'm going to ask Fred Long to take you through that and he'll be followed by Bill Harper. MR. HARDY: Let's see if there are any questions before we get into that. If there are any questions at this point -- by the way, the slides will be available as part of the transcript. Are there any questions? Could you come up to the mike, please. We're a bit unwieldy here, so we do have to come up to the mikes to ask questions, so... MR. WHITE: Roger White, ECMI, representing OHSC Presentation 20 Gravenhurst. The comments that you're going to be passing off the financial redistribution to the other parties, does that mean you're prepared to talk to the operational decisions regarding the categories that are established for transmission as discrete from distribution? MR. GILLESPIE: We'll be talking in both the transmission and distribution rate order overviews about the assets and what the operations -- the nature of each of those businesses are. MR. WHITE: Does that mean that decision is frozen in stone at this point? MR. GILLESPIE: The decision as to...? MR. WHITE: Which goes where? MR. GILLESPIE: I don't know about frozen in stone. That's certainly the way the Ontario Hydro Services Company is proceeding at this basis, but I also -- certainly some structural aspects of Ontario Hydro Services Company are yet to be determined. But certainly the strategic thrust of the company is to try to maximize efficiency, and one of those is synergy and providing for some shared services that can be carried out by both in a way that we see as being supportive of efficiency. MR. WHITE: I would hope that the OEB will consider the functionality of the distribution of the assets as well. Thank you. OHSC Presentation 21 MR. HARDY: Other questions? MR. RODGER: Mark Rodger appearing as counsel for Toronto Hydro. Just one general context question and maybe it could be put to the OEB Staff. We'll see when we get through the SERVCO transmission and distribution applications that you've proposed essentially your own regime of performance-based regulation, a target rate of return and broad objectives about the credit rating you would like to achieve out of this process. Just in terms of other transmission and distribution providers in the province, can they take this application as a model which they could also look to advancing their own tariff orders, for example, putting forward their own PBR, their own target rate of return and so on? MR. HARDY: Would somebody from Board Staff like to address that? I think you'll have to come up. MR. PUGH: We do have a separate process that is going on for distribution. Ontario Hydro originally had -- when they were discussing their filing a few months ago, they had talked about putting in a distribution PBR. It was actually consciously left out of this application as a proposal because of the consultative process that is going on with PBR right now. They are interested in the transmission component OHSC Presentation 22 of advancing a PBR and having it in this application. And we've said that we'll look at the information that's available and see if there is enough information that we can go ahead with a PBR. MR. RODGER: So just in terms of the overall context, I guess my question more was: Is this going to be the standard approach for all transmission and distribution providers in the province, or does the SERVCO application represent a somewhat different approach? MR. PUGH: I think for the distribution, I think I can summarize my answer by saying no; and for transmission, I think that it could be a standard -- I wouldn't say a standard, but it's certainly something that you can refer to in proposing your transmission-based proposals and we ultimately would like some type of standard approach to transmission. MR. RODGER: Just one specific question for Michael. You mentioned remote rate assistance. Is that the same as rural rate assistance or is it a new subsidy? MR. GILLESPIE: No, it's not exactly the same although the current legislation I think describes it, if I recall, Bill, in the same part or section of the legislation. But it's different in a sense, of course, it's not connected to the grid and has other parameters that go into it, but it's similar conceptually in that it's an explicit subsidy for which financial arrangements have to OHSC Presentation 23 be made and Bill will be talking a little bit about that. MR. POCH: Michael, just before you leave, I don't know if this is for you or for Bill or if it's on the agenda, David Poch for the GEC again. I'm a little uncertain in what way what you're proposing is a rate application, sort of the bigger regulatory question here. In the sense that, as I understand it, you're asking the Board to approve your revenue requirement, but we already know what the rates are for the interim period and they're being delivered in a blended fashion and I'm wondering if today we're going to get to... MR. GILLESPIE: How they fit together? MR. POCH: How it fits together in the sense of really how is this a rate application since it doesn't affect rates? MR. GILLESPIE: Actually Bill is going to talk explicitly about that. MR. POCH: All right. MR. GILLESPIE: So if you can hold that question and -- MR. HARDY: Any other questions on the general opening remarks and context that Michael presented? Okay. Why don't we move on then? PRESENTATION BY MR. LONG: I'm Fred Long from Corporate Finance at Ontario Hydro. I'll speak just for a short while about the financial restructuring and how what's being applied for OHSC Presentation 24 (F. Long) here fits in with the context of the rate freeze. The financial restructuring of Ontario Hydro and, in particular, the financial structures for the successor entities is something that the government has announced progressively since the White Paper a year ago, the legislation earlier this year, and in October the Ministry of Finance provided some preliminary figures around the financial structure of the successor entities. Going to begin by reminding you of some of the principles that the Ministry of Finance enunciated in October. I don't intend to go through all the details of the financial restructuring, I think that, as I said, is available in the White Paper and legislation and so on, but I thought it was instructive just to cover off a few of these things. The key principles that the Ministry of Finance spoke to were achieving the financial restructuring of Ontario Hydro and the creation of the successor entities in a manner that would not increase electricity rates. They wanted to maintain the maximum value in the electricity sector until the stranded debt is dealt with and, in fact, they require that the residual stranded debt - if you recall that definition from the material that the Ministry of Finance delivered in October - they require the residual stranded debt to be recovered from the electricity sector and not through taxation, not from the taxpayers. And I think most importantly, from the point of OHSC Presentation 25 (F. Long) view of the subject here, they wanted to put the new companies on a sound financial footing, and that includes having investment grade credit ratings so that they are able to gain the access to capital that they need to go forward. They also recognize this slide from the material that the Ministry of Finance delivered in October. While it's labeled 'Valuation Considerations,' this gives pictorially a sense of all the various considerations that they dealt with and considered in establishing the financial structure of the successor entities, particularly the services company and the generation company. They include business forecasts, the business plans for the new entities, what sort of criteria and financial performance is required to achieve particular credit ratings, the selection of a target credit rating which would include a rating that gives sufficient access to the capital markets to meet the needs of the new companies. Economic and financial market assumptions. You have to make assumptions about the future, interest rates, inflation, load growth and so on. What type of structures and financial performance comparable companies achieve. And discounted cashflow analysis. This is less relevant for the services company, more relevant for the generation company. And, in the end, these considerations have led OHSC Presentation 26 (F. Long) the Ministry of Finance to land on a preliminary evaluation and capital structures for the new companies, including the amount of capital debt and equity that the new companies can support. In October, as I mentioned, the Ministry of Finance provided a preliminary picture of what they thought the financial structure of the successor companies would be. This has been refined somewhat since that time and what's shown on this slide, in summary fashion, is the financial structure that the Ministry of Finance, the province, has agreed upon at this stage. For the services company, the regulated assets are being put into the new company at book value; i.e., there is no revaluation of those assets. The capital structure that is being proposed is 40 per cent equity and 60 per cent debt, and this is for the regulated businesses. For the unregulated businesses, there will be a less leverage capital structure. But I think for the purposes of these proceedings, it's the capital structure for the regulated businesses that's most important. The target credit rating that's been selected is a single A, both in Canada and the U.S. The initial debt portfolio that's been allocated to the services company shown here is the initial cost of debt is at 7.8 per cent. That is somewhat above current market rates. And the target cost of equity that went into the OHSC Presentation 27 (F. Long) analysis and the considerations that I referred to in the previous slide is based on 10 per cent. Again, that's for the regulated business. And the total debt that's been allocated to the services company, which is predominantly associated with the regulated businesses, is a shade under $5.2-billion. MR. POCH: Do you want questions in the middle or at the end just on specifics? MR. HARDY: Fred, how many slides do you have? MR. LONG: I've just got one more and then I'm going to hand it over to Bill. So that's fine. Somewhat of a change of subject and this is how the, I guess, results of these proceedings will fit in within the context of the rate freeze. During the transition period, up until open access, the revenues that come in to the various Ontario Hydro successor entities from the three traditional customer groups are at current rates, so that the revenues coming down, I think as was mentioned earlier, are essentially fixed. The revenue coming in from the retail customers will go into the services company and the distribution business within that company will receive revenues based on the approved revenue requirements coming out of this process, and the balance will flow into a revenue pool which, I think, during the transition period, will be managed by the generating company. Also flowing into that revenue pool will be the OHSC Presentation 28 (F. Long) revenues from the municipal electric utilities and Hydro's current direct industrial customers. Out of that pool then will be an allocation made to the IMO based on their established revenue requirement. Revenue will also flow to the transmission business within the services company, again, based on the OEB-approved revenue requirements. The generating company will get an allocation of revenue too based on a yet-to-be-defined energy rate and revenue for things such as ancillary services. I expect that the Ministry of Finance will make some declaration in that regard in the not too distant future. This will then leave a residual in the revenue pool and that will flow to the Ontario Hydro Finance Corporation, together with a number of funds flow from the successor entities which will include taxes, dividends, et cetera. Again, these things have been detailed in previous publications. That's all I was going to say on those two subjects. And, before I hand it over to Bill, if there are any questions...? MR. HARDY: Okay. MR. POCH: Just going back a slide, you've given in a sense -- I take it that what you're saying is, these are -- you've taken these assumptions, which came from finance for the most part, as givens, in structuring your applications? OHSC Presentation 29 (F. Long) MR. LONG: That's correct. MR. POCH: And just in terms of understanding those givens, you note, for example, the 7.8 per cent which is above market rates at present. I take it that came out of some allocation of the existing actual debt instruments outstanding of the overall corporation between the different entities? MR. LONG: Yeah. Again, it's something that was decided upon by the Ministry of Finance, but I think one of the considerations was the existing Ontario Hydro debt portfolio. MR. POCH: Yeah. I guess what I'm getting at is: To what extent -- I mean, given on its face it's above the market cost of debt, to what extent are you simply saying, you know, accept what finance says, Ontario Energy Board and participants, and don't go behind that, or to what extent are you -- can you give us the rationale to support that? MR. LONG: Well, I believe that the details behind this debt portfolio do find their basis in Hydro's existing debt portfolio and that's something that I think the Ministry of Finance essentially allocated to the services company as part of their overall management of the -- you know, of that debt portfolio and stranded debt, et cetera. MR. POCH: Well, I guess I'm asking a -- I'm stepping back and I was giving you that as an example more than getting into specifics. Here we are with, you know, OHSC Presentation 30 (F. Long) a couple of days today and a few days next month. Do I perceive that the stance that the companies are taking is that: We're not here to discuss these things, these things are givens beyond touch, if you will, and we're not asking the Board to approve these assumptions, we're just -- in a sense, we're only asking the Board to approve the single notion that these are givens and they're not to be evaluated and weighed as to their appropriateness? MR. LONG: I think from the services company's point of view they have been taken as givens, but I think that the Board, in looking at the application and the flow-through of the interest associated with that, would be free to make comment. MR. GILLESPIE: May I just comment on that? I think it would be presumptuous of us to instruct this process as to that. I mean, they are givens and I think Fred is quite right, we've in a sense been given them. We do intend to indicate that they are reasonable assumptions as well and those issues can certainly come up in January. MR. HARDY: Any other questions? MR. RODGER: Mark Rodger, Toronto Hydro. Fred, is the target 10 per cent rate of return, is that before the payment in lieu of taxes or before-tax rate of return? MR. LONG: No, that's an after-tax rate of return. OHSC Presentation 31 (F. Long) MR. RODGER: An after-tax rate of return? MR. LONG: Yes. MR. RODGER: So a pre-tax is about 8 to 20 per cent? MR. LONG: I haven't -- I'm not sure that that number has been calculated. It's traditional to quote returns on equity after taxes, so.... MR. RODGER: Thanks. MR. HARDY: This is the opportunity to ask questions. We are proceeding through this application on, I guess, an informal basis to have an overview. I take it there are no questions, we will move on, but I will allow enough time. If you have a question to ask, just please come forward and ask it. Go ahead. MR. STEPHENSON: Richard Stephenson, counsel for Power Workers Union. Just in terms of this slide with the financial structure, that total debt estimate, is that -- is there any new debt included in that projected or is that simply an allocation of existing debt? MR. LONG: It doesn't include any -- let me back up. If you recall the type of construction that the Ministry of Finance has talked about, what would actually happen is that on or about April 1st the services company OHSC Presentation 32 (F. Long) will issue some debt and some equity to the financial corporation and that initial debt will be in the amount of 5. -- just as I said, just under $5.2-billion. So it's new in the sense that it's not an allocation strictly speaking of the old debt. So the financial corporation will hold Hydro's existing debt as a liability. It will also hold a number of assets. One of those assets will be the initial debt that's issued by the services company. MR. STEPHENSON: Yeah. But none of that is debt that the services company had gone out into the market and got as it will do in the future? MR. LONG: No, that's right. This is the day 1 debt and eventually new debt will be sought in the marketplace, some of which will be used to retire some of this debt. MR. STEPHENSON: I appreciate that. And my next question is that, that estimate number, that 5.2, that is for the whole of the services company: Transmission, distribution, regulated, unregulated? MR. LONG: That's correct, although most of it is associated with the regulated business because that's where most of the assets are -- the fixed assets. MR. STEPHENSON: Right. And that was actually going to be my next question. Somewhere in the material, has that been broken out further in terms of the split between regulated and unregulated? OHSC Presentation 33 (F. Long) MR. HARPER: No, the material in the submission breaks it out in terms of what portion of the debt is assigned to the regulated transmission business versus the regulated distribution business. But since the material is just talking about the regulated businesses, that doesn't go into it at all, what the financing is for the unregulated part of the business. MR. STEPHENSON: The transmission business, I take it, doesn't undertake any unregulated business, or am I wrong about that? MR. GILLESPIE: Go ahead, David. MR. CURTIS: The transmission business is primarily a regulated business, but it does have some component of work that it does for other companies, but all of that revenue flows back into the regulated base, so it offsets the costs that are incurred. MR. HARDY: Go ahead. MR. POCH: Well, this is a forward-looking rate application and we've heard that there's -- 7.8 per cent is what the services company is going to pay to the financial holding company - that's been deemed from on high, let's just say, for the purposes of this discussion - but you've just indicated that that's at day 1 and it's reasonable to assume the company will, with its grade A target credit rating - assuming it gets it in the marketplace - will go out and refinance and shave some -- you know, shave a percentage off the 7.8 let's say. To what extent has that been forecast and is that OHSC Presentation 34 (W. Harper) in your application to reduce the revenue requirement, or is this, you know, not part of -- you see this as somehow not part of this application? MR. LONG: I think implicit in the rate order application is a financial forecast and that does include some refinancing over the next couple of years of a part of that 5.2. MR. HARDY: Other questions, issues? (No response) For the record, I'm not seeing any, so we'll move on then. Bill, are you going to now present the next ..? PRESENTATION BY MR. HARPER: I think, David, to your last point, I think you will find in the materials there is some discussion about what the cost of financing new debt is and a discussion on that in the cost of capital sections for both the transmission and the distribution, and I think the cost of new debt is 6. something or other. I can't recall exactly what the percentage is. As Fred noted, both these applications primarily cover the transition period up until the point of time of open access. And, as a result, they both fall within the timeframe of the government's rate freeze policy. Now, if you recall, the rate freeze policy was first introduced back in 1995 and was actually then reaffirmed in the White Paper effectively to try and facilitate the move from monopoly to a competitive OHSC Presentation 35 (W. Harper) environment and was really a rate freeze at the wholesale price level which, relatively speaking, captures the generation, the IMO and the transmission parts of the business. And so that's something that we basically had to factor in to the development of both the transmission and the distribution rate order applications. The other thing we had to factor in was since the period of time was really prior to open access, there was really no need to unbundle the rates that we had in terms of a specific piece of the rate for generation and a piece for transmission and a piece for distribution since each end use customer in the province was going to continue to be supplied by their local distribution company, be it a municipal utility, a private distributor or Ontario Hydro's -- excuse me, I've made a slip, too -- Ontario Hydro's services company's distribution business. And so really, effectively, since there was a monopoly supply, all that was needed was a bundled tariff. As a result, and I think what David made note to earlier and what Fred said is, our plans are: 1) not to unbundle the tariff prior to open access for our retail sales; and, 2) to maintain the rates at their current -- at what are the existing retail rates for those end use customers. In terms of the actual rate order applications, in the sense of for the transmission application, what the application therefore does is look for an approval of the OHSC Presentation 36 (W. Harper) forecast revenue requirement and the rates that were presented for 1999. As Fred explained, that forecast revenue requirement that's approved by the Board will be used in the revenue allocation scheme. The second thing the application looks for is basically an approval for a performance-based regulatory or a PBR mechanism for the year 2000, and basically approval for the year 2000 transmission rates based on the application of that PBR scheme. Now, as I said before, the unbundled rates that are presented in the application for transmission will not be applied to domestic customers in the province up and to the period of open access, but they could be used during the year 2000 if and when open access is introduced during that point in time. And, also, those transmission rates are sort of a form of fundamental building block in terms of what will eventually have to be worked through a process of establishing what are the types of rates that will be used on the transmission system for exports out of the province. On the distribution side, what the rate order application is looking for is approval of the revenue requirements forecasted and presented there for both 1999 and the year 2000, and basically an approval to continue to distribute power to our existing retail customers in accordance with the existing bundled rate. OHSC Presentation 37 (W. Harper) The other thing the application does is basically identify specifically the remote rate protection and compensation that will be required, assuming that the government regulations, which are yet to be issued around remote rate protection, will basically keep the existing rates in place through the point in time of open access. And maybe to address the question that, Mark, I think you raised earlier, typically this -- and the reason I wanted to flag this, was this remote rate protection is really over and above what the existing rural rate assistance is and is something that, to a large extent, was financed by the rural distribution itself in the past. But, under the legislation, it's something that the Board has to consider when it's looking at rates for remote communities in terms of what level of rate protection and what level of compensation is required. And, again, as Michael said, that's one of the government regulations yet to be issued. That will address exactly what the requirements are there. That was really all I had as an overview for what the applications were. If anybody has got any quick questions on that... MR. POCH: Bill, how are you proposing to deal with this? You just indicated there's uncertainty created by the fact the government hasn't spoken yet. MR. HARPER: Well, I think our expectation is, is that that particular regulation will actually be forthcoming during this process and, therefore, the Board OHSC Presentation 38 (W. Harper) will have the benefit of knowing what that regulation is before they have to make that recommendation to the Minister. MR. POCH: Thanks. MR. HARPER: Other questions? MR. SNELSON: Ken Snelson representing AMPCO. My question really revolves around what needs to be approved in this process, and what appears to be necessary is that for 1999 you appear to need your approval of revenue requirement. I think you would like to have approval for the PBR scheme for the year 2000, and you're also asking approval of rates. Now, there's very little in this document about that that is specific and justifies the specifics of transmission rates. And, as I understand it, they only apply in the year 2000 after the market opens, if the market opens during the year 2000, as we hope it does. Is that correct? MR. HARPER: Well, I just want to make sure because there is a distinction in terms of what the applications are looking for on the transmission side versus the distribution side. MR. SNELSON: Yes, I know. I'm talking initially about transmission. MR. HARPER: I just wanted to make sure that your comments were reflective of the transmission application. MR. SNELSON: That's correct. MR. HARPER: And what we're looking for, you're OHSC Presentation 39 (W. Harper) right, was an approval for the revenue requirement for 1999. MR. SNELSON: And that seems to be vital to get your business up and running and with a credit rating in April, 1999. MR. HARPER: And I think equally important in our mind is an approval of the PBR scheme and the resulting revenue requirement that would come out of that for the year 2000, simply to provide some broader or longer term regulatory certainty. If we're up and running April 1, that doesn't leave much of the 1999 year left, and it would be nice to be able to demonstrate some longer term continuity. And also, to the extent that open access does come some time during the year 2000, then obviously those transmission rates will form one more building block in terms of how customers are charged after the point of open access. So we're looking for an approval of those rates as well. MR. SNELSON: Well, the reason I'm raising this issue is that I believe there are many detailed points that perhaps should be considered in the design and application of transmission rates, and I'm just wondering to the extent to which they have to be addressed at this time and the extent to which they can be left to some later process. And on the same vein, but with respect to OHSC Presentation 40 (W. Harper) distribution, then it appears that you are not seeking a rate -- specific distribution, unbundled distribution rates in this process. MR. HARPER: That's correct. MR. SNELSON: And that sort of leads to perhaps the view that if you don't need it for distribution, then why do you need it for transmission. I can perhaps just leave that as an issue. MR. HARDY: Other questions, issues? Please come up. MR. WHITE: Roger White, ECMI, Gravenhurst. And maybe it goes back to Mr. Gillespie in his earlier comments that it would be a residual that would be passed on to the Ontario Hydro Financial Corporation. Conceptually, if it were strictly a residual, does that not transfer any risk for bad forecasting or failure to perform to Debtco as opposed to sharing it with SERVCO? MR. HARPER: No, I don't think so. To the extent that we have a revenue requirement that's established, say, either for the transmission or distribution business through this process here, our revenues are set. We are then basically having to live within that revenue requirement and absorb any of the risks associated with cost change throughout 1999 and 2000 that would come out of that. So there is definitely risk for both the OHSC Presentation 41 (W. Harper) distribution and transmission business. MR. HARDY: Go ahead. MR. RODGER: Mark Rodger. Bill, I think this might be a revenue requirement issue. Under the Market Design Committee's recommendations, which I understand have been approved by the Minister, as part of the power mitigation agreement there's a direction that SERVCO undertake increased capacity on the inter-tie network, and I gather this is to be commenced in the reasonably near future. And I'm just wondering, what is the impact on the revenue requirement on tariffs of carrying out that work? MR. HARPER: Actually, I think I'd like to drop that question and leave it to David this afternoon. MR. RODGER: That's fine, yes. MR. HARDY: Other questions, issues? Go ahead. MR. BUDD: Peter Budd from Bennett, Jones. Just to clarify that with Mark, too, that to my understanding the government has only approved the market mitigation chapter in the third quarter report and not the other aspects of that particular report. MR. HARDY: Do you want to answer? MR. HARPER: No. MR. WHITE: Roger White again. Is it the intention of the financial corporation of Ontario Hydro to make comment on this application as to whether it's being treated equitably? OHSC Presentation 42 (W. Harper) MR. HARPER: I wouldn't be able to answer your question. MR. HARDY: Sir, can you elaborate on that? MR. HARPER: Maybe I can just elaborate myself a little bit, Roger. I think to the extent, that as Fred was indicating, a lot of this is being developed really under the auspices of the Ministry of Finance and they, too, will -- they will obviously have an opportunity to put input in at the development stage. MR. HARDY: Okay. Other questions? We plan for most of the morning to be able to ask questions and clarify issues on the context of the rate order application. Again, if we have completed our understanding of it and our questions, that would be fine. What I intend to do -- MR. HARPER: Mike was -- MR. HARDY: Have you got more? MR. GILLESPIE: Yes. MR. HARDY: Okay, good. What I will do is, Michael, do you have about 10, 15 minutes? MR. GILLESPIE: Yes. MR. HARDY: Okay. And then we'll maybe have a break and then that will allow some more time for thinking. MR. GILLESPIE: Okay, good. Thanks. OHSC Presentation 43 (M. Gillespie) PRESENTATION BY MR. GILLESPIE: This is really the sort of third part of the context. I said I would have a few thoughts about the nature of the Ontario Hydro Services Company Inc. and its direction as a sort of context setter before we get into the transmission and distribution businesses. Broadly speaking, in the value chain Ontario Hydro Services Company looks after the wires, delivery functions and the downstream supply and services as represented in retail; both the energy component, the actual commodity and other services such as energy management and distributed generation, those of course not being seen as regulated components, but rather competitive aspects of Ontario Hydro Services Company's business enterprises. It talks about governance of the Ontario Hydro Services Company. It does now have its own Board of Directors, it has a single shareholder under the Ontario Business Corporations Act which is the Government of Ontario, and it includes businesses regulated by the Ontario Energy Board. And, as has come up in questions earlier, there are some competitive aspects that will be carried out by non-regulated parts, units in the company. And, as David Curtis alluded to, there will also be a small amount initially at least of competitive activities that may be carried out by the regulated units, OHSC Presentation 44 (M. Gillespie) and those would be separately identified in terms of their cost streams and revenues, as well. So, broadly speaking, we're looking at business areas of regulated business being transmission, distribution, the carrying out of the default supply operation which, during the transition period to open access, might be more properly called the monopoly supply operation, administration, and the remote communities as a separate obligation not connected with the grid itself. Non-regulated activities would be competitive retail merchant functions and services in other new businesses such as international and out of Ontario and even within Ontario, businesses that are not -- such as telecom and other possible ventures. On the status of the Ontario Hydro Services Company Inc., it was incorporated on December 1st of this year - so if we keep slipping back into the language of Ontario Hydro, we really are new. Chairman and nine directors appointed November 11th. The first board meeting was held on December 8th, and three of the officers of the corporation have been appointed President, CEO, chief financial officer, and the general counsel and secretary. The key date we're looking at in terms of this process and leading up to some of the other processes for operations are the plan to have Ontario Hydro Services Incorporated operating on April 1st, 1999. This requires a number of things: For example, transfer orders which OHSC Presentation 45 (M. Gillespie) are 'work on' which is developing to culminate in completion by April 1st. This is the allocation of the old Ontario Hydro assets and liabilities to the successor companies, including Ontario Hydro Services Company. The approval of rate orders - that's this process - and licences which have been out for -- which the Ontario Energy Board has issued in draft form, has received commentary on, and will be dealt with I believe in January, and the agreement with the independent market operator which has to be in place and is ongoing and likely to -- and will have to be in place, of course, for the overall formation of the obligations that Ontario Hydro Services Company has to take on. As a company, a few words about the direction. I want to emphasize a number of things which I'll speak to in turn. SERVCO is a new company. It is committed to a number of things, efficient regulation. It is reorganizing its business and we'll be doing likely some structural change too. It's got an asset base which needs some attention and that's reflected in these applications, and it's also having to give some attention to other things such as service standards. And I'll speak to each of those very briefly. All of this, of course, is a new company that has to prepare for an industry itself and electricity, a world which is changing partly as a result of the restructuring OHSC Presentation 46 (M. Gillespie) by government, partly as sort of natural developments that are occurring anyway. The demand for competition, which isn't just about competitive entities, it's also about regulated ones as well and has an impact on their -- not only on the needs and requirements of the wires and delivery function to be able to respond to changes in the competitive end of things, but also even within the regulated aspects themselves. There are probably growing aspects in the regulated business itself which could be and would be evolved into a competitive one as we see it. Evolving technology as well and a number of fronts and certainly the convergence with gas, telecom and other sort of fixed link services. And the definition and direction of the Ontario Hydro Services Company has to be able to deal with that kind of world. The newness of the Ontario Hydro Services Company, I think it's certainly a fact that we start off as having inherited, in a sense, a lot from Ontario Hydro, the wires, the stations, the liabilities, some of the systems, but that it will be having to strike out its own course as a commercial company in quite distinct fashion from the way that Ontario Hydro operated. This involves a number of things: the paying of dividends, the focus on growth, focus on efficiency for commercial operations, focus on flexibility, risk management, customer orientation. Really not surprising OHSC Presentation 47 (M. Gillespie) kind of directions. These are really all the things you would think of for a commercial operation, but they certainly have to be there in our way of managing our future direction. Adaptation to a new regulatory environment and there is a new regulatory environment, because the new Ontario Energy Board Act is part of that new legislation. It's certainly going to put emphasis on requirements for reporting, for control, for monitoring systems which will be needed for both business reasons and for regulatory ones. And the support systems, the work processes certainly need to be developed. We're starting. They're not all in place by any means, but that's the direction we have to pursue. We have a commitment to efficient regulation. Part of that -- one of the main signals of that is our proposal to implement a performance-based regulation for transmission, and David Curtis will we talking a bit more about that. It's basically an opportunity in this context to develop a model and see its application in Ontario context and direction that will lighten regulatory burden and also provide incentives for the company to operate effectively and efficiently. And working toward regulation also in developing appropriate management controls, codes of conducts, things that will be needed for both the regulatory world and can facilitate the business development as well. OHSC Presentation 48 (M. Gillespie) Organizing for commercial business efficiency. We're looking, as Fred Long mentioned, at a commercial capital structure. Dividends will have to be paid. We need a structure that will reflect that kind of a requirement. You also need to ensure for this company now that it's borrowing on its own, it has continued access to competitive financing. On the sort of business management side, the re-engineering of processes and practices to improve performance. There's a dedicated performance management group been established. Some of the processes from Ontario Hydro will certainly survive, but many others will be superseded. And we're looking at information-based changes, work practices, management systems. In the pursuit of operational excellence, we need to consolidate work centres and redesign many of our processes. That can be somewhat time consuming and require some investment, but is certainly required for pay off in the long run. One of the key aspects of the commercial business efficiency is implementing an asset management model and that's basically where you separate the assets themselves, the asset base from the provision of services for those assets. You create a smart buyer, which is the asset manager, and efficient supplier relationship, that's the service provider. And the purpose of this is to provide a OHSC Presentation 49 (M. Gillespie) transparency in costs and an incentive to get costs down to work more efficiently through a consolidated supplier would serve both the transmission and distribution businesses effectively. It involves some sharpening of contractual relationships and certainly a cultural shift for our business in terms of timeliness, efficient development of resources and an arm's length kind of relationship between services supplier and the smart buyer of the business. I mentioned that their assets themselves need some attention and certainly the condition of them is something that needs to be better defined and work implemented to sustain and, in some cases, restore and develop as part of the direction. Performance measures, the basis of the performance measurement in Ontario Hydro will not be sufficient for the new world of competition and new world of regulation. The priority is to identify appropriate measures and targets. It's important to get those measures right, the ones that best address customer satisfaction and provide for reliability and the kinds of services that the competitive environment will expect. Finally, let me just give you a little bit of -- this table, or this figure may need a little bit of commentary. When we set up -- sort of initially set up, when Ontario Hydro Services was sort of part of Ontario Hydro, OHSC Presentation 50 (M. Gillespie) was revolved or set up around an asset management model which basically gathered transmission and distribution asset managers - in the left hand column, transmission and distribution - as the smart buyers of services that were provided by network services and other wire support purchases as well. What we want to show is that - and it's certainly the applications that you have before you - you can trace and you can extrapolate really the definition of a transmission business by putting together all of the elements and costs that go to support that business by looking across the functional ways that the Ontario Hydro Services was established; that is, through not having a separate transmission and distribution company but by having a transmission asset manager and a distribution asset manager and a separate network services supplier. But the transmission business actually got services -- or gets service from - if you read across the chart from the various elements - first of all, is the asset manager itself. There's wire support and network services provider and there's also support functions and services that come from OHSC's corporate support in terms of services that are provided to both transmission and distribution such as legal services, regulatory, finance. And those are referenced in the report. We are going to be looking at some structural changes for sure, one of which, of course, will be that -- and the Ontario Hydro Services Company will have to OHSC Presentation 51 (M. Gillespie) structure itself, it's just been incorporated. There will be a requirement, for example, to have the wires companies in a separate business from the other non-wires as specified in the legislation. So there will be some structural changes that will look down that road. In the meantime, we're looking at the application and determining the costs to support a transmission business and the costs to support a distribution business. We've gathered those costs through looking at the functions as they were in existence during the time that the application and the budgets were developed and done allocations, for example, from corporate services to the network services which then were targeted to either distribution or to the transmission businesses individually. The same thing from corporate services that went to the network asset manager. Those were then assigned to transmission and distribution. It's perhaps a little more - just in terms of where we've been - a little more complicated to understand, but certainly you can trace the cost of those if you look at it that way. MR. RODGER: Could I ask you one question on that slide? Mark Rodger. MR. GILLESPIE: Yes. MR. RODGER: I believe you said that the monopoly default supply, that service will be provided by a OHSC Presentation 52 (M. Gillespie) separate subsidiary corporation; is that right? I think that's what the Act requires, right? MR. GILLESPIE: Yeah. MR. RODGER: And in terms of the competitive services, whether they're competitive commodity-based or other services, will they also be provided in that default supply corporation, or where will those other competitive be... MR. GILLESPIE: That's not been determined yet. MR. RODGER: Hasn't been determined yet. Okay, thanks. MR. HARDY: Why don't you continue and finish. Then I'll call a break and we'll have more questions after the break. Have you finished? MR. GILLESPIE: Yes, I have. MR. HARDY: I wonder if we can just call a break and we'll have time for questions after the break. Please sign in, if you haven't signed in. And there is coffee available. We'll break for about 20 minutes. ---Recessed at 10:25 a.m. ---On resuming at 10:42 a.m. MR. HARDY: Let's get going. And just to bring everybody up to speed, we've been through the presentations on the context of the rate order applications. We have lots of opportunity now to pose any questions, identify any preliminary issues. OHSC Presentation 53 (M. Gillespie) If we have the time before lunch, we'll begin part of the afternoon session. Okay? It's our opportunity now to ask any additional questions, any clarification, flag any issues that need to be addressed on preliminary business and there's lots of time to do that. Why don't we go ahead. Identify yourself, please. MR. STEPHENSON: Richard Stephenson from the PWU. My question starts with this organizational structure issue. I certainly understood how there's not going to be a separate subsidiary corporation for transmission versus distribution. I take it that's right. But, aside from that, there's not going -- from your presentation, I understood that there's not going to be a separate, shall we say, operating division for transmission versus distribution; that you're not going to -- your corporate organization is not going to be aligned on a divisional basis between transmission and distribution with a separate group of employees in each area. Am I right about that? MR. GILLESPIE: Well, David, can you talk to that. MR. CURTIS: There is a certain degree of allocation as far as staff is concerned between transmission and distribution. By and large, though, you're still talking about OHSC Presentation 54 (M. Gillespie) a network services group that's providing most of the services to the transmission and the distribution asset management areas, so there is that division. MR. STEPHENSON: I guess simply, in the materials somewhere is there an org chart that shows us where the vice-presidents are, where the general managers are that are responsible for transmission issues, distribution issues, network services issues and so forth, you know, the allocation of employees, how many lines people, how many administrative people, et cetera, et cetera, et cetera, that kind of thing? MR. GILLESPIE: No, there's no org chart that does that. MR. STEPHENSON: Are we going to get one? MR. GILLESPIE: I guess the issue is, that the services company is under -- as I noted, will be under structural change as it restructures. It certainly could provide the kind of base on which the application was made in terms of numbers of staff, et cetera. MR. STEPHENSON: I guess -- I mean, I think it will be useful for everybody insofar as that can be divided up. However you're going to slice and dice this organization and identify where people are, I think that would be of enormous assistance. Coming back to this issue about how services are going to be provided on essentially a functional basis, the network services and some of those other categories. In the application, do you define what the OHSC Presentation 55 (M. Gillespie) distinction between wire support and network services and those sorts of things are? I confess I haven't read the application in detail yet. Is that all in there? And, if not, are you going to do that for us? MR. HARPER: I think -- I'm trying to recall. I believe in both the transmission and the distribution applications there's an OM&A program basically called 'support' which are those support services. The network services function itself is effectively people are actually out there doing the work on the lines, constructing and maintaining them, and basically their costs are worked through all of the OM&A programs, whether it be tree trimming, whether it be sort of live wire maintenance, whatever, whereas I think the specific O&M program dealing with customer support -- I believe it's probably the last OM&A program in each of the applications deals specifically with what are those support functions. MR. STEPHENSON: I take it that -- I mean, for the Board to do its job, it's going to have to track your costs and revenues and distinguish them as between transmission and distribution, and you've indicated that you will do that. MR. HARPER: Yes. MR. STEPHENSON: I take it you've got some kind of transfer pricing scheme figured out that you're going to track all the costs and revenues that flow out of these OHSC Presentation 56 (M. Gillespie) various support functions? MR. GILLESPIE: These are all tracked in, yes. MR. STEPHENSON: Is it in here? MR. GILLESPIE: Yes. MR. STEPHENSON: Okay. And we'll come back to that later, I guess is the answer. And at some point we're going to have a -- it may be in the discussion this afternoon, we're going to hear a little bit more about how you're going to segregate and account for the costs separately as between transmission and distribution? MR. GILLESPIE: That, I think, will come out of the discussions about the distinctions between the transmission business and the distribution business. MR. STEPHENSON: I had some other questions later, but... MR. HARDY: We'll get back to you, okay. Ken? MR. SNELSON: Yes, you've talked about -- it's Ken Snelson representing AMPCO. You've talked about the distinction between asset management and asset services, network services. MR. GILLESPIE: Network services. MR. SNELSON: And my question is: Is the asset manager, who is supposed to be the smart buyer, allowed to buy his network services from people other than the Ontario Hydro SERVCO network services group; and, if so, how are they constrained by existing agreements on OHSC Presentation 57 (M. Gillespie) contracting out with Ontario Hydro's union? MR. GILLESPIE: The idea is to eventually move the model to the way that they could be contestable but, in fact, there are constraints with labour agreements across many areas. Details about that I don't have at hand now, but the answer to your question is, yes, there are constraints. MR. SNELSON: And, therefore, that -- in my mind anyway, that significantly limits the ability of the asset manager to be the smart buyer. MR. GILLESPIE: That's a comment or a question? MR. SNELSON: A comment. MR. GILLESPIE: No. I think there is -- actually, as you move eventually toward contestability, I wouldn't -- I think our view is that there is some internal discipline in terms of the process and requirements and setting things up as a contract that is of value in moving that kind of model, even before you have perhaps the freedom to pursue it externally to the degree that in the long term we might be looking for. MR. HARDY: Go ahead. MR. BRYAN: My name is Keith Bryan, Union Gas. I guess my first question flows from the last one in a sense. Have you -- you talk about the fact that you envision some time in the future there being competitive aspects of the business. OHSC Presentation 58 (M. Gillespie) And have you decided whether at some point in the future you would move those into an unregulated affiliate, or is it your intention to keep them within the regulated entity? And further from that, have you any information available as to what you envision those competitive aspects to be; have you identified them yet? MR. GILLESPIE: Well, the answer to the first question is, in the near term that the services would be part of the regulated entity is actually part of the service provider internally to the wires -- transmission and distribution wires company. I think, and although this is again up to the direction of our new board and management to put its stamp - but some of the early thinking we had was, what was a long-term vision that perhaps would see that go unregulated? But, again, I want to emphasize that the sort of structural aspects like this will likely have to be addressed by -- or will have to be addressed by our board of directors. And I don't know if we can say that there might be some degree of progress and line of thinking by January. MR. BRYAN: Then I take it -- MR. GILLESPIE: Now, that's the answer to part of your question. Do you want to rephrase the sort of second part OHSC Presentation 59 (M. Gillespie) again, I just want to... MR. BRYAN: Well, it's quite simple. It's just a matter of interest as to whether or not you've identified what aspects of the business you think can become competitive. If you haven't given it enough thought, that's fine. MR. GILLESPIE: We've done some preliminary thinking on that, certainly. Let me just take that as an area of interest and determine the degree to which we can provide information on that from there. MR. BRYAN: And I take it from that then that you probably haven't developed a great deal in terms of a potential code of conduct to govern the relationship between yourself and your competitive affiliates once others come into the market? MR. GILLESPIE: We have done some work and are developing work on codes of conduct, yes. MR. BRYAN: Thank you. MR. HARDY: Any more questions? (No response) MR. POCH: Just while I've got you all here, before we split into transmission and distribution, does demand side management come on to either entity's radar screen? MR. CURTIS: Yes, it does, certainly on the transmission side. One of the -- I think when we start talking about OHSC Presentation 60 (M. Gillespie) the PBR formula that we brought forward, the recommendation that we're bringing forward is for a revenue cap, and one of the elements in terms of choosing a revenue cap is that it would tend to support demand side management as solutions to the transmission issues or transmission problems. MR. POCH: Thanks. MR. HARDY: Okay. Are there any other questions or issues that you wish to be raised, areas of clarification? MR. STEPHENSON: Richard Stephenson again. In terms of your performance measurements, customer satisfaction and, I take it, reliability indices and those sorts of things, in this proceeding what kind of detail are we going to get about those kinds of things? I mean, do you have at this stage of the game -- you said you were going to -- what Ontario Hydro had would not be sufficient for -- on a go-forward basis. By the time the Board is in a position to approve its application, what are you going to be able to provide them in terms of detail on that front? MR. GILLESPIE: Well, we have provided some direction for measures for the transmission services in the application. And recognizing that there's still a lot of developmental work to do, and we certainly would be prepared to talk about that, and on the distribution side the developmental work is even more extensive and we OHSC Presentation 61 (M. Gillespie) can -- we've not actually provided measures on the distribution services side at this point in time, basically because we think it would be premature to do that. We really need some -- the process of going back and trying to understand what the basis of measurement and the appropriate measurements are, is not ready yet on the distribution side certainly. MR. STEPHENSON: Thank you. MR. SNELSON: This is a general question which I think we will get into more detail on this afternoon, but I thought perhaps we should ask the general question first; and, that is, that when we come to the detailed cost allocations to functions, I see estimates for 1999 and I see estimates for 2000. I don't see any comparable information on what has been spent on those cost categories in 1998 and prior years. I do see that for the performance indicators in terms of transmission outage rates and so on, but I don't see it on the costs side. And my question really is: How can you expect the Ontario Energy Board to judge whether or not these are reasonable cost allocations without at least being able to put it into the perspective of how much has been spent on these areas in the past? MR. GILLESPIE: One of the difficulties, of course, as I was emphasizing, is that we are basing the business somewhat differently than what it was in the old OHSC Presentation 62 (M. Gillespie) Ontario Hydro structure, so that it's difficult to get the apples and apples from the old Ontario Hydro system to the current one lined up. But, even so, I understand the desire to look back and see what the 1998 equivalents might be in some cases, and we are trying to undertaking to try to provide, where we can, that information and we'll provide that as supplemental information to all the parties. Now, in every case, it may not be down to a line-by-line allocation, but to the degree that we can try to do that we will provide supplementary information. MR. SNELSON: Thank you. MR. HARDY: Go ahead. MR. WHITE: Roger White, ECMI, for Gravenhurst again. Question: Is the contract between SERVCO and the independent market operator with respect to performance indices going to be part of what's available as part of the considerations we have as part of this review? The second question is: Seeing how 200 of the municipal utilities are being supplied not through transmission facilities, is a priority of response and reliability code of conduct part of what SERVCO is intending to put forward at this time? MR. CURTIS: The answer to your first question about the agreement between IMO and SERVCO, it's currently being negotiated. I don't believe it will be available in its final form as far as these proceedings are concerned. OHSC Presentation 63 (M. Gillespie) And I guess in response to your second question, there is contained within the transmission and the distribution rate order applications a commitment to maintaining existing levels of reliability of service to its customers. MR. HARDY: David? MR. POCH: Michael, if we can just go back to Ken's, I guess, request or your offer a moment ago that you'll provide some reconciliation, I guess is how it would likely be, between the pre-existing costs and revenue of what was Ontario Hydro in this Brave New World. Would you be providing us with a -- starting with the full basket and show how it was split in the past between a reconciliation of the total revenue requirement of the overall corporation, including generation and so on, down to transmission and then how that compares to the new T&D? First of all, I'll ask you to consider if you could do that so we could understand how it all fits together. MR. GILLESPIE: Can you just go back over that again? MR. POCH: Well, what I think Ken was saying, is to understand the reasonableness of the revenue requirement request that we have before us now -- MR. GILLESPIE: Are you looking for transmission equivalents in '98 under the old structure? MR. POCH: And distribution. OHSC Presentation 64 (M. Gillespie) MR. GILLESPIE: And distribution equivalents in '98? MR. POCH: Right. MR. GILLESPIE: And that's what we're trying to-- MR. POCH: Yes. MR. GILLESPIE: --to construct. MR. POCH: Okay. I'm just wondering, if in presenting that you could show it carved out from the whole; that is, not just free-standing, but with the whole and show how it reconciles with the total revenue of the overall operation including generation and everything else. MR. GILLESPIE: You mean where you see the tables, for example, in existing, whether you could, as much as possible, put one for '98 as well as '99 and 2000? MR. POCH: Well, it's really for pre-existing, not forward-looking more. I'm just trying to understand. I think the Board needs to satisfy itself -- the Board needs to satisfy itself that if it's looking backwards to check on the acceptability or the basis for the forward-looking transmission and distribution costs, it needs to look back and say: Okay, the portion that you're saying was comparable in the past, in fact, includes the various items and doesn't include other items. I think we need some, not highly detailed, but some broader context for how the overall, you know, 8-billion or whatever it is was split and then flows OHSC Presentation 65 (M. Gillespie) through. I think that would be helpful. And I guess the other question I had for you to think about -- MR. HARPER: Just -- to be quite frank, the work we were doing was trying to take basically the transmission and distribution businesses as we operate -- in the millennium, based on the structure we had then and work up comparable financial values linking to the 1999. We have not any intent to go back and then layer on the generation on top of that. To be quite honest with you, we're the Ontario Hydro Services Company here and really aren't in a position to speak to generation... MR. POCH: All right. You've indicated that we don't expect to have a contract yet with -- at least a finalized contract with the IMO in the timeframe we're talking about here. I assume that you have costs that are not insignificant that will be for services you're buying or being charged for by the IMO. And, similarly, there are functions that the entity now is -- your entity now is providing that will be at least notionally provided by IMO in future as they take over the real-time management of the transmission system, for example. And I'm wondering how you -- again, this seems to me again to be... MR. GILLESPIE: Well, let me speak broadly about OHSC Presentation 66 (M. Gillespie) some of those aspects and then maybe David can speak a little about the IMO specifically. Very clearly, there are things still ongoing and underway that could be certainly material to some of the aspects of this application. The IMO contract being one; this further work in the Market Design Committee, for example, that will clearly have some impacts; further government policies perhaps on the specifics of how they treat some of the subsidies, for example; there's work on the final form of licences which the Ontario Energy Board is working on, and all these can certainly -- has an impact on this or that aspect of the application. I think we have to recognize that these will have to be integrated into it. David, maybe you can speak specifically about the IMO. MR. CURTIS: Yes. I think that already there has been fairly clear designation between what the IMO is going to be accountable for and what SERVCO is going to be accountable for in light of what has come out with the legislation and in terms of the discussions that have already gone on within the MDC. If you're talking about specific costs, for example, the Clarkson facilities which do manage the day-to-day operation of the bulk transmission system are clearly the IMO's, and the costs for those facilities and the operation of those facilities is within the IMO's OHSC Presentation 67 (M. Gillespie) budget. There isn't any of that that would be contained within the transmission business, within SERVCO's budget. MR. POCH: So when we get that reconciliation then between the pre-existing and the forward-looking, will there be -- will it illustrate how certain costs for certain items have been carved off and are allocated to the IMO or presumed to be picked up by the IMO? MR. GILLESPIE: We will certainly try to address that. MR. POCH: Thanks. MR. HARDY: Other questions, comments? ---(No verbal response) MR. HARDY: For the record then, I'm not seeing any additional questions or comments coming forward. On that basis then, for SERVCO, can you proceed then with your next presentation which is, I believe, transmission business and strategy? PRESENTATION BY MR. CURTIS: Good morning. My name is David Curtis and I'm the Manager for Transmission Regulation for Ontario Hydro Services Company, and I'm here this morning to provide you with an overview of the contents of the transmission rate order application that we've made with the Ontario Energy Board on December the 7th. Our rate order application was filed with the Ontario Energy Board on December the 7th. It covers, for the transmission company, a period 1999 through 2000. OHSC Presentation 68 (D. Curtis) It's an application for approval for the rates and the revenue requirements for 1999. It's also an application for approval of the performance-based regulatory or PBR framework for the year 2000 and the associated rates and revenue requirements coming out of that. This is to span the period through the creation of the successor companies to Ontario Hydro that Michael talked about earlier on through the interim period to open access that is projected to occur some time in the year 2000, and also that period in 2000 post-declaration of open access. And I think the point has been made several times already this morning that throughout this period there would be no change in the customers' bundled bill within Ontario. What I would like to do this morning is to go through these five areas that are really the content of the rate order application that we have made. And what I would like to do is pause at the end of each one of these sections and invite your questions. The first area, as you can see, is to talk about the transmission business and its overall strategy, then to talk about the regulatory framework that we're bringing forward in our application. I would like then to talk about the assets and the capital programs specifically within this application, the revenue requirements including the operation, OHSC Presentation 69 (D. Curtis) maintenance and administration costs, which is a prime focus in that area, and to conclude with the allocation of that revenue requirement and the rate formulation. So to begin with what is the transmission business? This is a map of Ontario and the transmission business spans the entire province. It's made up of some 29,000 circuit kilometres of lines and stations. The transmission is based on three levels, basically. There is transmission at the 500,000 volt or 500 kilovolt range, and that's designated by the red lines that you see on the map. The next level down is the 230 system, and that's designated by the blue lines. And then it also goes down to the 115 kilovolt or 115,000 volt level, which is the black lines -- the thin black lines on this map. Certainly to outline how this system works, the system starts off with suppliers or generators. These could be the nuclear stations, the various fossil-fired, fossil-fueled stations, and the hydroelectric stations within Ontario. These typically are connected into a step-up transformer which increases the level of voltage up to one of the 500, 230 or 115 kV levels that I just spoke about. It is then transported through an interconnected network, and this is one of the important concepts about the transmission system is that it's divided between network services and connection services. The network's system is this interconnected OHSC Presentation 70 (D. Curtis) linkage where you couldn't specify specific customers that were getting the benefits of those services. The connection services, on the other hand, are identifiable to specific customers or specific groups of customers. And, at the end of the connection facilities, there would be a step-down transformer, again, to decrease the voltage level from the high levels that were part of the network or the connection system delivery down to more usable levels and to the end point customers or the load customers. Just to talk a little bit about our customer base, we service 75 municipal electric utilities directly, private distributors, plus the Ontario Hydro Services Distribution Company. We have 105 directly connected customers and, at the supply end, we're hooked into 79 generators. And the interconnection facilities that we have set up connect us with Minnesota, Michigan and New York, three states in the United States, and Manitoba and Quebec, two provinces in Canada. I would like to move on and talk a little bit about the transmission business' strategy. As Michael said, Ontario Hydro Services Company is a new company. Our prime objective is to manage the company's transmission assets, to ensure reliable and cost-effective transmission service delivery and its availability to Ontario's electricity market participants while earning appropriate rate of return for its primary OHSC Presentation 71 (D. Curtis) shareholder, the province. The long-term strategy is to be a major participant in the competitive marketplace for network expansion, and also to compete with other suppliers in the competitive area in terms of providing for new connection services. Coming from these objectives, there are eight specific business strategies and I wanted to talk a little bit about each of these. The first one, the asset-management strategy, is discussed in Section 4.2.3 in the application. Ontario Hydro Services Company is organizing for commercial business efficiency. And what it's aiming to do in terms of the asset management philosophy is to get the most from Ontario Hydro's assets for its customers and its shareholders. Some of the examples of activities that we'll be engaged in as far as the asset management execution are re-engineering processes and practices, development of best practice applications, development and implementation of additional information management systems and the collection and analysis of comprehensive asset condition data. The second strategy is around sustaining the assets. Ontario Hydro Services Company wants to invest in the future of its assets and in terms of continuing as far as meeting system security and reliability standards. There's a commitment on the part of the OHSC Presentation 72 (D. Curtis) transmission business to maintaining existing levels of delivery reliability to its customers, and part of that is through the implementation of reliability centred maintenance. The third strategy is around expansion and enhancement. And this is part of the assistance, or the aid in terms of transforming the electricity industry within Ontario of this delivery. This is freeing up access to the transmission wires and providing customers with access, both on the supply side and the demand side. Examples of this - I think they've been alluded to earlier in some of the questions - are the interconnection facility's augmentations with respect to Quebec and Michigan. We can talk a little bit more about that within the context of the capital programs. The next area is around competitive business, and this is in the area of connecting new customers and selling new transmission services and providing overall choice to customers. The next strategy is around operations and it's improving the real-time management and use of the transmission system. One of the initiatives around that is the Transmission Operations Management Centre or the TOMC centre and its establishment in terms of dealing with issues around forced outages, planned outages, outage reconciliation, equipment capability and also the administration of the contracts that we'll have, for example, with the IMO and customers. OHSC Presentation 73 (D. Curtis) Another core strategy coming out of our overall objectives is around customer value, and that is in terms of developing a commercial relationship with our customers. The aim for that is to establish a connection and operating agreements with all of our customers, both new and existing. We also have an objective around stewardship, recognizing health and safety and environmental concerns. We're pledged to eliminate safety hazards wherever possible and to make sure that the residual risks as far as safety are concerned are controlled or managed. In the area of environment we have a number of initiatives, one of which is around implementing an environmental management system to make us consistent with ISO 14001 standards. And the final one is Ontario Hydro Services Company is organizing for commercial business efficiency and improvement of productivity. We want to develop the value of transmission business, and this would be done through re-engineering key work programs and processes, improving on the packaging of work and the scheduling of work, reducing costs through repeatable design applications and reducing working capital and progress where possible. This then is an overview I think of the transmission business' strategy as well as the customer base that it serves. And I think I'd invite questions now at this OHSC Presentation 74 (D. Curtis) point in this area. MR. POCH: I hope I'm not monopolizing, I feel like I am. I have a series of questions. Let me start with the most general. Can you just elaborate on this distinction, we went back to it, the table which showed your first four business strategies. There was asset management as opposed to - I forget how you phrased the second one - sustaining the assets. I take it one's more of a physical kind of matter and the other is more of a financial business kind. Can you just elaborate on that? MR. CURTIS: Sure. Yeah, the first one, asset management, is a philosophy around managing the overall infrastructure, so it's a management-based strategy that we're talking about and the fundamental idea in that is to separate the provision of services from the management of the assets. I think we talked about that a little bit earlier in terms of making the asset manager the smart buyer of services. And I guess it can't be changed or developed overnight, but this would be the first step is, first of all, to separate the service function from the actual management of those assets. So that's what we're talking about around asset management. The second one in terms of sustaining the assets is an overall philosophy or strategy in terms of dealing with the physical assets that the transmission company OHSC Presentation 75 (D. Curtis) manages. And it's based on the fact that there is an existing infrastructure. It provides a certain level of customer reliability, and in order for it to continue to do so, there has to be investment made on those assets to sustain that level of service to customers. MR.m POCH: Just to make sure I understand then, so sustaining the assets is actually the activity of figuring out what needs to get done so the plant doesn't deteriorate? MR. CURTIS: Yes. MR. POCH: And the asset management is the -- what you're styling asset management then is the technique you're using for sourcing, or have I got that right? MR. CURTIS: Well, it's a basic management philosophy in terms of talking about asset management. So I'd describe it as more than just a technique. MR. GILLESPIE: It's a model for carrying out the business. MR. POCH: The business model as opposed to the actual substantive decisions which -- MR. GILLESPIE: Defining the work that has to be done. MR. POCH: Maybe we'll get to this later in revenue requirement and feel free to put it off if you like. Where does this whole question of DSM come in and, somewhat related, tell me who is regulating environmental performance of the company? OHSC Presentation 76 (D. Curtis) MR. CURTIS: Who is regulating within the company? MR. POCH: No, not within the company. Is the company regulated in environmental performance? To what extent is it regulated, and to what extent is its environmental performance something that you view as being regulated by -- indirectly simply by this Board accepting revenue requirement and so on and so forth? MR. CURTIS: Well, Ontario Hydro Services Company still falls under all the rules and regulations under the Environmental Assessment Act and that Board. So I think we view that that's going to be the primary agency, if you will, in terms of regulating us in that area. MR. POCH: The original question there was the DSM? MR. CURTIS: Yes. MR. POCH: Is that under one of these business strategies? Is it isolated as a revenue requirement element that we'll deal with later or... MR. CURTIS: It's covered in terms of the expansion and enhancement area. I guess we're looking at different alternatives in terms of expanding the transmission system. DSM would be one of the options, and I think I talked a little bit earlier in terms of the PBR formula that we're coming forward with is one of the avenues where OHSC Presentation 77 (D. Curtis) we've tried to make it a balanced playing field as far as the DSM option is concerned. MR. POCH: Okay. So I guess implicit in your answer is you're looking at DSM then from the company perspective; that is, as an alternative to expansion of the transmission system. MR. CURTIS: Yes. MR. POCH: Is the transmission company then taking any ownership of DSM which is justified -- which needs to be justified for it to be cost-effective on savings apart from transmission savings, so from let's say an end use customer's perspective, is that part of the transmission company or is that part of the distribution company, or do you view that as a retail competitive business? MR. CURTIS: Within the transmission business, DSM would only be looked at in terms of its economic comparability with other options. But I think downstream there's certainly the opportunity there for negotiations, if you will, to go forward to developing a DSM option in conjunction with other parties that -- I guess basically what you end up getting here is that there's a certain amount of value for the transmission company to look at the DSM options. There would be a certain amount of value for other proponents of DSM options to bring them forward. And what we're talking about in terms of going into future expansion of the system is to getting into a OHSC Presentation 78 (D. Curtis) negotiated business arrangement as far as these are concerned. So that would be possible. MR. POCH: And DSM would also -- the other value for the transmission company I guess would be in the line loss area-- MR. CURTIS: Yes. MR. POCH: --as a direct offset? MR. CURTIS: Yes. MR. POCH: So just in terms of this application, this is the problem I'm facing, it seems to me DSM has value for transmission, it will have other value for distribution. It obviously has value for the end use customer in terms of avoiding commodity cost. MR. CURTIS: Yes. MR. POCH: Who is the proponent? Where does the budget get set? How does this Board get a handle on regulating that or incenting it or however it chooses to approach it? You know, maybe this is more a question for Michael I guess in terms of the architecture of the whole entity. MR. GILLESPIE: I mean you could find -- I suppose you could find a certain portion of a DSM initiative would have a certain value for transmission, another portion of value for distribution, another portion for perhaps as a retail service and maybe each portion by itself may not be enough to drive something, but put all three together -- is that sort of -- what I think you're OHSC Presentation 79 (D. Curtis) getting at. And I think certainly there's some potential to address some overview, but by and large I mean the transmission company will look at its own particular role or value for that as well as distribution and other services. We don't have identified in the structure sort of an overall entity to take care of that, but I think that's something, as David has suggested, we may look at some sort of synergies that might move that along. MR. HARDY: Maybe we could move on. MR. CLARK: Al Clark, Waterloo North Hydro. David, you talked about a contract between, I guess it was the transmission company and the customer, and I guess I'm curious about kind of who the customer is. Like, I tend to think of the utility as a customer, but is the distribution part of SERVCO a customer as well? MR. CURTIS: Yes. MR. CLARK: Now, the contract that you would have, say, for those utilities, the 200 utilities that are served at subtransmission voltage or whatever, your contract would not be with those 200 utilities; it would be with the distribution SERVCO? MR. CURTIS: Yes. MR. CLARK: And then would they in turn have a contract with the utilities that they serve, or is there a passthrough type of contract? OHSC Presentation 80 (D. Curtis) MR. CURTIS: I believe that would be the end model. MR. CLARK: What about where you have large use customers that take power say at 115 or 230; is your contract with the utility, or is it with the utility's customer that takes power at say 115 or 230? How do you see that? MR. CURTIS: No, for our direct customers, those customers that are connected to the transmission system currently and have dealings with the transmission system, those are the contracts that I was talking about. I think what you're referring to is that there would be also contracts with the municipal utilities, and the municipal utilities may in turn have contracts with any of the large customers that are within their service territory or that they're linked up with. MR. CLARK: But I was curious about your contract. It was basically between the transmission and distribution company of SERVCO? There would be some form of a relationship there? MR. CURTIS: There would be a relationship between the transmission business and the distribution business within Ontario Hydro Services Company, yes. MR. HARDY: Thank you. MR. WHITE: Roger White, and maybe it's the demand/supply question again. If decisions are made to defer the construction of a transformer station or other similar class assets in OHSC Presentation 81 (D. Curtis) favour of what Ontario Hydro might call a high voltage distribution station or subtransmission lines, how is the impact on the distributor in question going to be mitigated from a cost perspective and how should the OEB look to the transmission company for an equitable distribution for distributors and end use customers? MR. CURTIS: I think what we're seeing in terms of the going forward situation is that these would be done on a negotiated basis. If you're talking, again, about new facilities and what the alternatives are, there would be a series of negotiations that would be conducted among all the affected parties to arrive at what would be an agreeable solution. MR. HARDY: Any follow-up? Ken? MR. SNELSON: Yes, I've got questions in two separate areas. The first is a follow-up on Al Clark's question about who the customer is, and I wanted to just clarify there are large industrial customers who are currently customers of municipal utilities although they are directly connected to the 115 or 230 kV system and I see no reason why they should not be allowed to contract directly with the transmission company if they choose to do so in the new regime. Perhaps you could comment on that. MR. CURTIS: I think I would agree with customer OHSC Presentation 82 (D. Curtis) choice, Ken, yes. MR. HARPER: I think that would be an interesting question to be dealt with in the licensing of the municipal utilities and their "franchise." MR. SNELSON: It should be recorded I believe as an issue to be addressed. The other one is -- and maybe you don't need to go back to the slide, but you had a slide of network facilities and connection facilities and you only identified connection facilities for loads. And I believe at least conceptually and in practice there are connection facilities for generation. MR. CURTIS: Conceptually there are, yes. MR. CLARK: At the moment the non-utility generators are effectively paying for their connection facilities and that future generators, new generators or changes, additions to connection facilities for generators would be charged to the generators if the recommendations of the MDC third quarter report are carried through. And so I'm just suggesting that we maintain, as a category in our thinking, connection facilities for generation as a category that needs to be considered in these kinds of processes, even though at the moment most of those facilities are going to be charged to loads through a general rolled-in rate rather than being charged back to the generator. MR. CURTIS: I think it's fair to consider that category, yeah. OHSC Presentation 83 (D. Curtis) MS. BIRENBAUM: I'm Joanna Birenbaum from Iler, Campbell, Klippenstein for Pollution Probe. And I don't know if this question should be asked now or whether you're going to go into this in a little bit more detail later, but with respect to expansion and enhancement we had a number of questions specifically on the increase or the recommended increase in interconnection capacity by 2000 megawatts and specifically we're hoping that you'll be able to provide a list of all of the activities that will be required in order to achieve this increase. MR. CURTIS: Yeah, they're contained within this rate order application. MS. BIRENBAUM: I suppose we were hoping for more detail than was contained in the existing application. MR. CURTIS: Okay. In section 7 it talks about the various capital programs and there's a table 7-25 that talks specifically about interconnections and contained within that are the description of the specific interconnection projects. There are two primary ones: There's the interconnection with Hydro Quebec or with Hydro Quebec's system that's proposed to go in service in 2001 and it's for a little over 1,200 megawatts of the 2,000 megawatt total that we're looking at; and then the second project which I believe goes in service in 2000, if my memory is correct on that, that's basically a set of phase shifters serving access to the Michigan market, and that would OHSC Presentation 84 (D. Curtis) account for virtually the rest of that 2,000 megawatt goal I think that was set for us as far as the MDC considerations are concerned. There's some minor work around Niagara too in terms of increasing the interconnection capability with New York State. So the projects are listed there. I don't know, I guess, in terms of what your expectations were around detail on it. MS. BIRENBAUM: Well, to be frank, one of the concerns that we have is that an increase in interconnection or an increase in transmission capacity could include an increase in coal-fired electricity, so if it would be possible to give a breakdown of the sources or whether or not this could result in an increase in that kind of electricity. MR. CURTIS: Well, I think you probably have the answer there. Increasing the interconnection capability with Quebec, what you're talking about is giving more access to the hydroelectric capability coming out of the Province of Quebec. I don't think you're talking very much in terms of increasing fossil generation coming into the Ontario marketplace through that. The interconnection with Michigan perhaps is another issue. At least from my recollection, there is a high degree of coal-fired generation in the Midwest and OHSC Presentation 85 (D. Curtis) that perhaps could indicate an increase in terms of generation coming in but, again, it would be at the customer's choice. MS. BIRENBAUM: We'd also like some detail, if it isn't sufficiently provided - I mean, I haven't gone through this line by line either - but with respect to the regulatory steps that would accompany the increases in transmission capacity; so, for example, whether or not it's customer choice what environmental hearings or assessment hearings or board hearings would be involved. MR. CURTIS: Okay. I guess the first hearing is with our own board of directors ensuring that they would approve the project. There is some process associated with the Environmental Assessment Board, particularly if there's any new access that's required. I don't know apart from that if there's any other formal hearing associated with these. Certainly it's contained within our rate order application, and so we are asking for the Board's approval for the capital expenditure for these projects. MS. BIRENBAUM: And my last question on this topic is budgets. I don't think that was provided, the breakdown of what the budget is for each of these increases in the different jurisdictions. MR. CURTIS: I know the total is... MR. HARDY: You mean budgets for additional transmission capacity? OHSC Presentation 86 (D. Curtis) MS. BIRENBAUM: Yeah. MR. HARDY: Okay. Sorry, as well as interconnections? MS. BIRENBAUM: As well as interconnections. MR. CURTIS: It was the interconnections that you were talking about specifically? I mean, all of the capital projects are provided in detail in that section 7.5 and there is the one on the interconnections. I know the total is there for the interconnections and there was some element of the breakdown that could be provided. There are basically just the two projects that are there though. MS. BIRENBAUM: Okay, thank you. MR. HARDY: Thank you. Is there a follow-up there? MR. GILLESPIE: I was just wondering if the -- `just probably a little bit, the level of detail on the capital that you were asking about. MR. HARDY: Well, the question is: How much detail are you looking for in terms of the budgets and the level of capital? MS. BIRENBAUM: I think we were curious about each of the various jurisdictions, the interconnections for each of the various jurisdictions. MR. HARDY: Okay, so broken down geographically and so on by jurisdictions. Thank you. Go ahead, sir. OHSC Presentation 87 (D. Curtis) MR. WU: Lawrence Wu, Hydro Mississauga. I just have a couple of questions regarding this increase of interconnection capacity. Who is going to pay for the cost? Would that be mainly paid by the generators or exporters, or would it be paid by the customer in Ontario? MR. CURTIS: The interconnections that we're talking about would be part of the network and, hence, it would be the Ontario load customers that would be paying for it. As part of this application, it's the load customers that pay the network charges. MR. WU: Okay, thank you. I have another question, it's regarding the export rate and wheeling-through rate. I think it's mentioned in section 12.4, that for exports and wheeling-through the generators or exporters, they do not need to pay for the network charges, they do not need to pay for the connection charges. But, on the other hand, in section 12.3, for importers we have to pay for the wheeling-through charges of network and connection. I just wonder, say for example, from a customer point of view, if we want to purchase power from Michigan, do we need to pay for transmission charges from the transmission owner in Michigan or do we have this reciprocity? MR. CURTIS: If you want to buy power from OHSC Presentation 88 (D. Curtis) Michigan into your area? MR. WU: Right. MR. CURTIS: What we're talking about in terms of this rate order application is that you'd have to pay for the transmission costs within Ontario to get your power from the Michigan border. MR. WU: And on top of that, I assume I have to pay for the transmission charges in Michigan as well, right? MR. CURTIS: I don't know the answer to that one. MR. WU: Well, the reason I ask for that is, if there is a customer in Michigan who wants to purchase power from Ontario, they do not need to pay for transmission charges in Ontario; and whereas a customer in Ontario, if we want to purchase power from Michigan, we have to pay for both transmission charges in Michigan as well as Ontario. In doing that there is a cost implication that, in the transmission portion, a customer in Ontario would be paying more than a customer in Michigan who want to purchase power from Ontario. It seems that it is not a level playing field and limiting the choices of the customer in Ontario in selecting a supplier of electricity. MR. CURTIS: Well, as far as the purchaser of power is concerned, they're all treated the same way within Ontario. You're talking about the other case where you're OHSC Presentation 89 (D. Curtis) exporting power out of Ontario to other customers and because of the way the market is being structured, the export situation would be under the control of the IMO and so it will be the IMO that will be establishing what those export tariffs would be. MR. HARDY: Ask that question again. MR. POCH: Sorry, the question was, just as a supplemental, do you have revenue showing in your application coming via the IMO or, in effect, are we subsidizing exports and the theory is, we may or may not be getting a reciprocal subsidy when we import. And you're not clear on that, I take it? MR. CURTIS: Okay. Certainly there is no revenue stream that's in our application coming from export transactions. My understanding - and this is all within the context of the MDC - is that the IMO will be the agency or the organization, if you will, in Ontario that controls the export transactions that will take place. They will be the ones that will be -- that will be the agency that will be collecting the revenues from those export transactions and it will be the IMO then that would stream back to Ontario's customers any of the benefits that are left over, if you will, from those export transactions. MR. POCH: So it could show up as an offset to the IMO charges to your revenue requirement? MR. CURTIS: Yes. OHSC Presentation 90 (D. Curtis) MR. POCH: But there's no forecast of that? MR. CURTIS: Well, it won't be in our revenue forecast because we don't have any control over that. It will be the IMO that would bring that forward. MR. HARDY: Could I come back to -- go ahead. MR. WU: So what I see is, the customer in Ontario actually is subsidizing exporters as well as people using Ontario's transmission system; say, for example, Hydro Quebec, if they want to wheel through Ontario's transmission system to Michigan they don't have to pay for the network charges, they don't have to pay for the connection charges, and the customer in Ontario actually is bearing the cost of it and, as a result, the price of electricity in Ontario is going to be higher and I'm not sure whether this is an equity approach. MR. CURTIS: Well, I guess the problem that I'm having is that I can only talk about -- I can't talk about the transactions that you want to talk about because it's not under the Ontario Hydro Services Company to manage those. The conversation that I think you want to have is with the independent market operator because it will be the IMO that will be controlling those transactions in terms of wheeling through the province and wheeling out of the province, and it will be the IMO that determines what the appropriate charges are for those transactions. And, you know, I don't want to say whether or not there will be a transmission system component in those OHSC Presentation 91 (D. Curtis) charges, but it will be the IMO that will determine that. And any benefits that arise from those wheeling-through or wheeling-out transactions, any residual benefits, the IMO would have to stream those back to customers through some route as well. So I can only talk about sort of one half of this transaction, if you will; I can only talk about the transactions where power supply is coming into the province. MR. WU: I just want to mention that as a concern because it seems that in this rate order application it is SERVCO who recommend that the wheeling-through and export charges would not include this network and connection charges and it seems that by doing that, actually the burden is passed on to the customer in Ontario to subsidize exporters. MR. CURTIS: Okay. I wouldn't want to have our rate order construed as supporting that. MR. HARDY: Just stay there for a second. Peter, you had a comment..? MR. BUDD: Peter Budd from Bennett Jones. I don't know if it helps you, Lawrence, on this, but I suspect in the fourth quarter report you may see some of these issues addressed through the market rules. I think the points you've made probably are quite fair and there may be some good grounds for reciprosity-type arrangements. That's as far as I can go now, but we hear you. OHSC Presentation 92 (D. Curtis) MR. HARDY: Do you have any supplementary questions? MR. WU: No, that's all. Thank you. MR. WHITE: Roger White, supplementary on that particular point. I think that the transmission portion of SERVCO at the very least should make some kind of commitment that whatever revenue stream flowed back into SERVCO would flow to the benefit of the cost pool that provides the resources to do that; i.e., the transmission resources. The split on that becomes important from a subsidy perspective. MR. CURTIS: Yeah, and I think you'll see that in terms of our rate order application, that any revenue that we're allowed to collect in terms of the costs for these interconnection facilities are for the benefit of the transmission customers within the province, within Ontario. MR. HARDY: Any questions, clarifications? Go ahead. MR. STEPHENSON: Richard Stephenson. I don't understand this point I confess. I mean, I don't understand why you're saying it's the revenues you're allowed to collect on this issue, in the sense that the IMO is going to tell what they're going to give you with some kind of largess. You're incurring costs on all this stuff. Why don't you have a direct recovery mechanism from the IMO? OHSC Presentation 93 (D. Curtis) Why isn't that in your contract with the IMO, that insofar as you have to recover -- that you incur costs on these transactions, that you get compensated for it? And if the IMO isn't charging enough on these exports, then it's their risk and not yours. Why are the transmission customers footing the bill for this -- these costs, because you're incurring costs on these transactions, I take it? MR. CURTIS: Well, in terms of the actual capital costs in terms of constructing them, yes, the company... MR. STEPHENSON: Well, not only that but, I mean, for every megawatt you export there's a notional cost being incurred just as there is in every other megawatt that's moved on the bulk system. MR. CURTIS: Probably not to the extent that you might think. MR. STEPHENSON: Well, there's, I understand, incremental costs and marginal costs and all that stuff. MR. CURTIS: That's what we're really discussing here. MR. STEPHENSON: I understand that, but I take it the issue is, is whether or not these transactions are going to be treated the same as domestic transactions in terms of the cost recovery mechanism. MR. CURTIS: Okay. First of all, we are here talking about incremental cost, and I think we all understand that, and what we are talking about here is a OHSC Presentation 94 (D. Curtis) spectrum. At one end of the spectrum, the additional cost of such transactions would be virtually zero. As long as you're operating equipment within its rated requirements, rated levels, as long as you're not stressing the equipment, there's virtually no cost associated with it. If you're pushing through higher volumes and you do start stressing the equipment, then costs are incurred and significant costs could be incurred. MR. STEPHENSON: Well, I mean, with all respect, every megawatt is the same, with all due respect, every megawatt puts exactly the same stress on it. You can't -- these are all fungible. MR. CURTIS: No, no, that's not right. No. The transmission equipment is designed to carry certain levels. MR. STEPHENSON: I understand that engineering issue. MR. CURTIS: Right. MR. STEPHENSON: But the point is, is whether or not you're treating these -- why would you treat these as incremental costs and treat everybody else as a blended cost? MR. CURTIS: Okay. Now that, to me, is an issue that you would want to raise before the MDC because it is being determined as part of the market rule structure. MR. POCH: Just -- I interjected there, but -- MR. STEPHENSON: Do you guys ever put your oar in OHSC Presentation 95 (D. Curtis) the water on that issue at the MDC? MR. CURTIS: We have had our oar in the water at the MDC, yes. MR. POCH: Don't you have an implication from losses? You've got a -- as I understand the physics, the line losses go up with the square of how much power is going through those lines. So when you, say, double the loading on a line to wheel some power or export you're quadrupling the line losses. MR. CURTIS: Right. MR. POCH: So how are you rationalizing all that? Does all the added line loss get allocated to that and how are you dealing with that? MR. CURTIS: Well, I guess there's a number of components to that issue. First of all, there's the agreement between the IMO and the Services Company, and within that agreement there will be a set of operating codes in terms of what the equipment is designed for and what the operation levels are. So there would be an agreement with the IMO that the IMO could only operate the interconnection facilities to certain levels. So that's one aspect of it. Another aspect that we're bringing forward in terms of this rate order application is a transmission performance incentive scheme, and that is around managing incremental losses on the system. One component of that OHSC Presentation 96 (D. Curtis) would be with regards to the interconnection facilities. Now, at the moment, in this particular application, we don't have any specific incentives to put in place. What we're applying for is covering the, kind of the normal loss level as far as incremental use of the transmission system. But going forward in future specific incentives could be put in place on the transmission company to manage those facilities within certain levels of tolerance, if you will. MR. HARDY: I'm going to try to start -- Roger, is it? Same -- MR. WHITE: Yes, similar point. MR. HARDY: I just wonder, if there are other-- we're going to break in about five minutes - if there are other questions that need to be asked before the break, please come forward. Go ahead. MR. WHITE: Roger White again. It seems to me that if you're putting in phase shifters, they're going to have ongoing depreciation, that's going to affect the after-tax return on the transco. So it seems to me that this incremental cost becomes a real cost that somebody is going to have to bear. And I would suggest that if those phase shifters are primarily installed for an interconnection concept, then the cost should flow in one direction or the other, OHSC Presentation 97 (D. Curtis) depending upon which way the flow of power is occurring through that phase shifter. Conceptually am I wrong? MR. CURTIS: I think probably conceptually you're correct. What we are talking about here, though, is that these facilities are put in place for the benefit of the customers within Ontario. I think the whole thrust of increasing the interconnection capability that the MDC came out with in terms of its recommendation was to allow customers within Ontario, once open access is declared, to have additional capability to buy their power from sources other than the generation successor company to Ontario Hydro. So if you take that as your premise, that these facilities are being installed for the benefit of Ontario's customers, then I think one could conclude that the majority of the cost recovery should come from those same customers. This other issue that we are talking about in terms of sales going out of the province, incremental sales going out of the province, is an issue that is being discussed before the Market Design Committee and is going to be an area of control that will be exercised by the independent market operator, the IMO. And I think those are the issues that you would want to bring forward in that forum. MR. POCH: Dave, could you just note the issue? OHSC Presentation 98 (D. Curtis) I don't think it's really a question. It seems to me that there's this -- the issue then is: Why is incremental investment in interconnection being treated differently than incremental connection to a new generator in Ontario which also benefits customers by giving us more competitive options, et cetera, et cetera? In the latter case it's being segregated, charged to that generator as a customer-specific generator, customer-specific charge. MR. CURTIS: Yes, it would be associated with the generator, yes. MR. POCH: And in the former case, even though this is an incremental investment now we're talking about, we're not -- we're allocating it to the pool. MR. CURTIS: All right. Well, I think -- MR. POCH: Maybe that's the issue. MR. CURTIS: It may be the issue. There is an answer to that one, though. The interconnection facilities that we're talking about today, you know, the ones with New York and that sort, the ones with Hydro Quebec and the phase shifters going into Michigan are being installed and put in place during this transition period to open access, and it admittedly is an awkward situation, what happens as far as assets being put in place during this interim period. The Ontario Hydro Services Company has come down with a position that those costs would go into the existing pools, the network pool or the connection pool. OHSC Presentation 99 (D. Curtis) Going forward, once open access is declared, the position also is stated in this application that any new interconnection facilities would have to be paid for by the generators or by parties that presumably would get the benefit from it. So, in a situation like that, it might end up being a negotiation between the transmission business, between various generators within the province and potentially various supply sources, generators south of the border. MR. HARDY: To capture the point, I think there are two perspectives here. I have got the point down. I just wonder, are there any, before -- we'll leave the transmission business and strategy as we go towards our break. Do you have any other questions that are on different areas that we need to cover before we break? MR. STEPHENSON: It's Richard Stephenson. Just a last one. You've got, in terms of your capital plan-- MR. CURTIS: Yes. MR. STEPHENSON: --figures in here for '99 and 2000, and I think this comes back, the issue was raised earlier. I didn't see figures for '98. There has been a capital plan in existence in the transmission company of Ontario Hydro for some time and I think it would be very useful for people to understand where this is going. Is it increasing, decreasing and so forth. So some historical perspective on those items. OHSC Presentation 100 (D. Curtis) And I guess a corollary to that is whether or not what we see in here as the capital plan is simply the same capital plan that Ontario Hydro had in place two years ago, projecting out to 1999, or whether the new company has, as a result of its new philosophy and business strategy, et cetera, changed the pre-existing Ontario Hydro capital plan in terms of its transmission; gone up, down, sideways. MR. CURTIS: All right. I think -- to answer your first question, I think Michael talked about our efforts right now in terms of trying to provide some '98 numbers. So I think it's within that vein that we would be doing so. And I think, as you read through our application, you see that there have been significant changes in terms of our investment philosophy from what it was when we were a part of Ontario Hydro. We spent quite a little bit of time here discussing providing additional interconnection capability that was certainly something that, as part of the old Ontario Hydro we were actually mandated we couldn't do, so that's one area of change. Also, it talks about here our work in terms of monitoring the condition of our assets. And coming out of those studies, there has been a shift as far as the investment strategy is concerned with the new company around sustaining those assets. So I think for those two points, the capital OHSC Presentation 101 (D. Curtis) plans that you'd see in this rate order application would be different than what they would have been under, I guess, an older regime when we were part of Ontario Hydro. MR. HARDY: Okay. Why don't we stop there. If there are any questions that come up over lunch, I'll start off the afternoon with any other questions related to transmission business and then we will move on. We'll break for an hour, come back at about five after one. ---Luncheon recess at 12:05 p.m. ---On resuming at 1:05 p.m. MR. HARDY: Welcome back. I hope nobody objects to starting on time. That means we can begin and perhaps hopefully end in relatively good time. If anybody is new, just to bring you up to speed. We're working through the transmission rate order application. We finished, I guess, most of the business strategy and transmission business. We've certainly been over that. Because we've had a chance to talk over lunch, I'll take any additional questions about the transmission business and strategy. A couple of things. Again, this is an informal session, so we don't need to use the terminology of the Board in terms of supplementary questions and so on. Just ask the questions and we'll be as informal as possible. I did get one question over the break that I'll OHSC Presentation 102 (D. Curtis) forward to you guys, and it's that further explanation of export cost recovery, where that's found in the document. So I'll just flag that for you. Again, we'll work through the remainder of the topics. If we end early, that's fine. If we have to go right to the end of the day, that's fine too. And so why don't we begin to see if there's any questions that came up related to transmission business and strategy; and, if there are none, then we'll move on. Were there any questions? Go ahead. MS. SIMMONS: My name is Susan Simmons and I'm from Reed Consulting Group. I'm here on behalf of the OEB Staff. I wanted to clarify a statement you made at the end of the meeting. One of the other stakeholders had indicated they were interested in trying to find out whether reviewing the capital plans of Ontario Hydro as it existed in the prior years with respect to the transmission and distribution facilities would be meaningful. And you made a statement that somehow it wasn't and things have changed, and I wanted you to just kind of -- you said something with respect to sustaining assets and how that was done in the past is different today, and I just wanted to kind of understand a little bit more as to why that wouldn't be meaningful and what has changed in terms of how you're operating and developing capital plans OHSC Presentation 103 (D. Curtis) as a separate company now? MR. CURTIS: Okay. I think the question was largely - at least the context that I took it in - was whether or not comparing the programs as they existed several years ago with the programs that we're bringing forward in this rate order could be done. Were there any changes as far as the company's philosophy and strategy is concerned? And my answer in that respect was along the lines of what the new elements are in terms of the company's strategy. And, as a result, there have been changes in terms of where we feel that the money should be invested. And I was trying to get at that in terms of the overall strategy discussion that I started off with in terms of my presentation. There were, for example, in the area of asset sustainment, it's been within the last couple of years that we've had the opportunity to do a significant review in terms of the condition of our assets and have found that there is going to be a requirement for investment in terms of maintaining those assets to ensure the continued level of reliability service delivered to our customers. So that would have been one of the changes that would have happened between the former integrated utility structure of Ontario Hydro and our structure as a going-forward business, as a new company, the service corporation. MS. SIMMONS: Now, is that simply because you've OHSC Presentation 104 (D. Curtis) designed a different business philosophy, or is this simply that we're at the age where a lot of assets that came on-line a long time ago need to be replaced or refurbished simply because they were -- I mean, on what basis -- you know, we're trying to determine whether the reasonableness of the starting cost levels and you're saying that there's a lot of changes being made, and so I understand it's hard to judge the reasonableness, but it would help if you provided some context as to why this is being done because it needs to be done for improved reliability, or it needs to be done because they weren't properly maintained in the past, or they weren't maintained at the levels that your company feels is prudent to maintain them as a separate wires company? MR. CURTIS: Okay. I think you're actually giving the answer. I would suggest that it's a combination of the two factors. One, the assets are reaching an age when reinvestment is going to be required in order to maintain them at appropriate operating levels. And, secondly, going forward we are committed to maintaining historical levels of reliability in terms of the performance of our assets and in order to do that, given the age, given the condition, given former investment in terms of maintenance and refurbishment, that we'll have to go forward with new investments in those areas to maintain reliability. So it is a combination actually of both. OHSC Presentation 105 (D. Curtis) MS. SIMMONS: Maybe when we go through the individual capital programs or however you plan to do No. 3 on there, if you could point to this in terms of how it is relative to before and I think that would help a lot for us to be able to understand how things have changed and how you're going to be different going forward. MR. CURTIS: Okay. I hope that's what will come forward when I talk about the capital and the OM&A programs. MS. SIMMONS: Thank you. MR. HARDY: Any other further questions on the morning... MR. CURTIS: I just wondered, Dave, you said that there was that question that was submitted around... MR. HARDY: Yes, exact cost recovery, the question was where is the information on that in the filing. MR. CURTIS: Okay. This was around again the export facilities I believe. MR. HARDY: I'm not sure who asked me that question? Do you want to explain that, please? ---(Reporter appeals) MR. MULLINS: It's Kevin Mullins, I'm with the Ministry of Energy. Your reference was to exports and transmission cost recovery. Where is that in the application? MR. CURTIS: Okay. The capital program for the OHSC Presentation 106 (D. Curtis) interconnection facilities that we're talking about is table 7-25 in the transmission rate order application. And I'm going to go into a discussion around that, but when those facilities go into service the interest and depreciation expenses coming out of those assets would be rolled into a part of the transmission network charge and that's how they would be recovered from the customers in Ontario. MR. GILLESPIE: Just one correction for the record. Apparently when I was talking about transfer orders for SERVCO this morning I mentioned a date of October 1st. I think the overhead said April 1st. I meant April 1st, so just a slip of the tongue. So for your records if you took it down as October 1st, that should be April. MR. MIA: Hi, Ziyaad Mia, I'm here for IPPSO. I just had a question about new connection costs. We discussed about new generators connecting on to the system, they'll bear the cost of that because they have the benefit of that. You said that there would be negotiation as to the costs. I just wanted to know what format that would take, what would be considered and what sort of appeal process there may be if a generator isn't happy with what's decided? MR. CURTIS: Okay. First of all, we're talking about post-open access, post-declaration of open access, so you have to keep that in mind. OHSC Presentation 107 (D. Curtis) The view is that there would be negotiations that would be carried on between the transmission company and the generating company. They would be conducted based on an established connection code that would be part of the licensing arrangement for a transmission owner within Ontario. So it would be around specific pieces of equipment and specific processes and procedures that would have to be in place and that would form the basis then for the negotiations. I'm not sure that I know too much forward in terms of what sort of appeal processes would be in place as far as that's concerned. I believe that because the licensing arrangements would be also approved by the Ontario Energy Board, that ultimately that would be the court of last appeal, if you will. SECOND PORTION OF THE PRESENTATION BY MR. CURTIS: The second part of the transmission rate order that I would like to talk about is the regulatory framework and we've I think discussed several times already this morning that for the transmission rate order we're talking about two periods, we're talking about the year 1999 and the year 2000. In the year 1999, we're proposing to go with a cost of service framework for the transmission rate order and approval for the revenue requirements coming out of that. This is a schematic of a traditional cost of service type regulatory framework and in this the OHSC Presentation 108 (D. Curtis) Applicant, the utility would go before the Board asking for approval of its various cost components that go into making up its overall revenue requirement. And specifically they would be the operations maintenance and administration expenses, the OM&A line, the depreciation costs on the assets that form the rate base, interest that was caused -- incurred, rather, to finance those assets and also perhaps operating expenditures, income and other taxes, and finally a just and reasonable return on investment. So this is the overall scheme for 1999. Then moving forward into 2000 we're proposing in our application a performance-based regulatory framework or PBR as it's known. We're, I think, working in conjunction with the Ontario Energy Board's initiative around PBR and distribution. This is the proposal for transmission. We think that it's in line congruent with what the Ontario Energy Board is carrying forward around distribution. Ontario Hydro Services Company is committed to the efficient operation and efficient regulation of the transmission area. And, as a result, in terms of coming up with this framework, we started from a number of different principles. First of all, we felt that we needed to meet all of the regulatory and legislative requirements in terms of whatever scheme we brought forward. It should protect customers and, by protecting customers, it should be OHSC Presentation 109 (D. Curtis) through the provision of just and reasonable rates. It should discourage any internal cross-subsidization. It should encourage economic efficiency. It should permit the utility to earn a just and reasonable return on its investment. The framework should be as simple as possible. It should allocate benefits of the efficiency gains between the customers and the shareholder, and the framework should be flexible going forward. And, finally, the framework should facilitate the use of efficient processes. We considered a number of different going-forward frameworks. We considered, for example, cost of service with specific incentives and we considered price cap PBR and we considered revenue cap PBR and the one we're bringing forward in this application is a revenue cap PBR. Now, the specific revenue cap PBR that we're bringing forward is specified by this formula and it talks about the total revenue that the utility is allowed to collect from its customers in year 'T', is equal to the revenue that it collected in the previous year and it could be at some initial starting year multiplied by one plus a factor that's determined by a number of different indices. And the first indice in that is the inflation factor, the overall inflation that the utility is subjected to, the 'X' factor, or the productivity factor, and this is the efficiency that the utility would achieve OHSC Presentation 110 (D. Curtis) through the regulatory period that would go directly back to customers, plus a growth adjustment factor, a factor adjusting for growth in the utility's services. And then there is an exogenous variable factor at the end called the 'Z' factor, and this covers those factors that are generally considered to be outside of management's control that would influence the company's operation. And I plan to talk a little bit more about each one of these as I go along. We've touched on this a little bit earlier today in terms of why would we want to bring forward a PBR formula, a performance-based regulatory formula for transmission. This is a list of some of the reasons that we see. It provides for better operational control and efficiency gains than, for example, cost of service, minimizing costs and improving productivity. There is an opportunity to share the benefits of these efficiency gains with customers. It discourages over investment in assets; i.e., it encourages the right sizing for investments. It provides incentives to the utility to take reasonable business risks, and it reduces administrative costs and administrative complexities such as the costs for regulation. And why we would pursue PBR now? Well, the first driver in this is the White Paper that came out. It talked about efficient regulation of the electric utility. The second driver for this is in OHSC Presentation 111 (D. Curtis) terms of gaining experience. This is a perfect opportunity, this interim period to open access, to apply it. The next item talks about limited risk. We all know that we're under a rate freeze and we've talked about that several times, that the customers in Ontario are not going to be paying anything more than they have paid historically. So, again, it's an opportunity to apply PBR during this time period, basically a no-risk situation as far as customers are concerned. This PBR framework that we're proposing carries service standards, and I'm going to talk a little bit more about those later on. And these, of course, are a key feature in a PBR formulation in terms of assuring that customers are going to get appropriate levels of service as far as the utility's activities going forward. And, finally, it serves as a commercial driver in terms of making the company, OHSC, more efficient in terms of its operation and in terms of its application and development of processes. Now, there's three components to this PBR formula framework that I'd like to talk about: The first is around the indexing of revenues; the special adjustments or the 'Z' factors would be the second one; and then I'd like to conclude with the quality safeguards. Now, I showed you the PBR formula and I talked about the inflation factor and the growth factor, the GAF OHSC Presentation 112 (D. Curtis) factor, and the productivity improvement factor 'X'. For each of these in terms of setting what these values should be going forward, you can take the perspective of looking for some external index that is objectively determined or you can look for developing an internally-based index that's relevant to the company. And what we've done in this particular application, as far as the inflation index is concerned, is we've looked externally and we're proposing that we would use CPI as the basis for that index. For the growth index, again, there are various external indices that might be available, but we thought that that would be a fairly complex determination. And so for the argument of simplicity, we're putting forward that we use the load growth forecast for OHSC as the basis for how the business would grow over the term or the PBR. And, finally, as far as the 'X' factor is concerned or the productivity improvement factor is concerned, again, there could be a number of different external indices that could be developed to provide an 'X' factor. The route that we've taken in this application is an internal index that's basically an overlay of cost of service. We've taken what the revenue requirement is for 1999, we've forecasted what the revenue requirement is for 2000 and we've calculated or imputed what the value of 'X' would be as a result between those two years. Now, the final factor is the 'Z' factors covering OHSC Presentation 113 (D. Curtis) those variables that are beyond management's control and these tend to get -- these would be categorized into two areas, one being unforeseen exogenous events and the second being special one-time events. The unforeseen exogenous events would be such things as adjustments to tax rates, regulatory or legislative changes or certain catastrophic events. If and when any of these occurred, OHSC would go back before the Ontario Energy Board and ask for these costs to be applied to the revenue requirement. Special one-time events are one-time or non-recurring events that would be incorporated, such as costs for industry restructuring, that process. These forecasts would generally be incorporated into the revenue requirement at the time of application to the Board. And the final piece that I'd like to talk about in terms of the PBR overview is the quality safeguards. OHSC will have -- will evolve these quality assurance mechanisms to maintain quality of service to its customers and to maintain the quality of service levels which the transmission customers have come to expect. What we are proposing in this application is to track and report on a specific set of performance measures. Four of these measures are on the quality of service delivered to customers and one of them is on the quality of service as far as maintaining the availability of the transmission system to customers. The first one is on frequency of delivery point OHSC Presentation 114 (D. Curtis) interruptions, and this is the total number of interruptions on all delivery points divided by the total number of delivery points. The second one is the system minutes of unsupplied energy, that's the duration of interruptions measure and it is equal to the energy that's not delivered to customers due to sustained delivery point interruptions divided by the annual system peak to normalize it. The next one is the one-hour restoration time and it's the percentage of sustained delivery point interruptions that are restored within one hour. And, similarly, the 24-hour restoration commitment is the percentage of sustained interruptions that are restored within 24 hours. And then the final measure is around the market efficiency, maintaining the availability of the transmission system for the marketplace, and it is the transmission system unavailability which is equal to the total annual circuit hours not available divided by the total possible number of circuit hours. And we feel going forward with these measures as they evolve and as they develop will represent a firm commitment for OHSC in terms of maintaining the quality of service of its delivery to customers. Now, this has been an overview of the -- I believe it's section 4 in the application, and I'd invite questions, I guess, at this point. MR. RODGER: David, Mark Rodger. OHSC Presentation 115 (D. Curtis) I just want to understand the term of the applications that are coming before the Board. Your main submission says that the applications are being filed pursuant to section 129 of the Ontario Energy Board Act. I gather the goal is to have these tariff orders in effect as of April 1st, 1999; that's correct? MR. CURTIS: Yes. MR. RODGER: And that this interim tariff orders would expire the end of December, 2000? MR. CURTIS: For the transmission one, not the distribution one. For the transmission one, the end of December, 2000. MR. RODGER: And how long would the distribution tariff...? MR. CURTIS: Until open access is declared in 2000 -- or the end of 2000, whichever comes first. MR. RODGER: I just wanted to underscore that under the section 129 there's a maximum of a 24-month period? MR. CURTIS: Yes. MR. RODGER: So, potentially, the distribution order could be in effect until March, 2001? MR. CURTIS: That's right, if open access didn't occur before then, yes. MR. RODGER: Now, is it anticipated that the PBR model that you have just described would also expire whenever the final date is of this interim order? OHSC Presentation 116 (D. Curtis) Would there be a new PBR model on a go-forward basis after this first interim order has expired? MR. CURTIS: I guess, with our next application, there could potentially be a new PBR model. And what we're looking at is trying to put this PBR framework in place to give us guidance and give the Board guidance and give the industry guidance in terms of what the going-forward PBR scheme should look like. MR. RODGER: So it may or may not be a similar model? MR. CURTIS: That's right. MR. RODGER: Just finally, under Section 129 an interim rate order cannot be issued without the prior approval of the Minister. And I just wonder, has the Minister already given that prior approval on these applications? MR. CURTIS: No. MR. RODGER: Okay, thank you. MR. HARDY: Okay, thank you. Microphone, please. MR. HARRIS: Hello. I'm Mike Harris with Reed Consulting Group. I just have a few questions about the PBR program and maybe-- MR. CURTIS: Sure. MR. HARRIS: --on the last topic that you were discussing about quality safeguards. In the application, do you discuss what some of the consequences to the company would be if those OHSC Presentation 117 (D. Curtis) safeguards aren't met, or is it just -- are those objectives that you strive to meet, or is there a consequence, financial to the company if they're not met? MR. CURTIS: Well, I think we're fairly clear in this, is that going forward we want to evolve the set of performance measures and quality safeguards. And so what we've put forward for the term of this rate order application is to try and put something in place and have it worked on. As a result, there aren't any specific penalties or benefits to the company, that happen to the company or come to OHSC as a result of over- or under-performance as a result of these measures. What we have committed to, though, in the application is to report back to the Board and to explain if we're not meeting any of the targets, why we're not meeting the targets. So there is the commitment in terms of reporting back to the Board. MR. HARRIS: Okay. Also, I believe you stated that meeting the elements of the PBR program should be based on external factors to the extent possible, I suppose. But, in your PBR program, most of the factors in your model are internal, such as last year's revenue, your productivity factor, your growth factor. In your decision to choose those as internal factors, was it solely because of the lack of external OHSC Presentation 118 (D. Curtis) information, or was there anything else; and, if so, is that anywhere in the application? MR. CURTIS: I guess to your first point, I think what I said is that you really have that option in terms of whether you want to base it on external factors or internal factors. And often it's a choice one way or another which is going to be more representative as far as the business is concerned. The other aspect of it, though, is if you -- particularly if you're going to rely on external factors - I think this is our sense - is that there's a fair amount of debate that goes on in terms of what the appropriate combination of those external factors are in terms of deriving what your overall productivity or your growth factor or your inflation index should be. And given the fact that this is a new industry, given the fact that we are under a fairly constrained time in terms of developing this rate order, I think -- and also given the fact that we wanted to strive for some level of simplicity at this stage, that those were kind of the drivers that led us to the indices and the method that we've picked. MR. HARRIS: Okay. Would that hold the same for your choice of a revenue target as opposed to a targeted incentive; that is, the need for simplicity and the interim nature of the rate order? I mean, was there anything else? OHSC Presentation 119 (D. Curtis) You do discuss your choice of the revenue requirement over two other alternatives in the application. Is that discussion sort of the sum total of your reasoning behind choosing the revenue cap or some of these other issues as well? MR. CURTIS: No. I think there is a fairly comprehensive summary contained within the document and also within one of the appendices in terms of the choices amongst the different PBR formulas and, you know, different ways of going about this. I don't know, to perhaps do a quick summary here, cost of service with specific incentives, I think we basically rejected that because those specific incentives tend to result in resource investment within organizations that might be interpreted as cross-subsidization. There would be specific effort that would go on in the areas that are incented and a tendency to try and transfer costs in those areas out to other areas that aren't incented because it isn't a comprehensive program. So then that led us to looking at either a revenue cap or a price cap performance-based regulation scheme which would be all-inclusive as far as all of the business's activities. And we looked at price cap versus revenue cap and I think one of the main drivers for us in terms of choosing a revenue cap is around the area of incenting load growth, if you will. OHSC Presentation 120 (D. Curtis) If you're under a price cap, the company can make more money by increasing demand and I think, following our stewardship and our environmental goals, we felt that that's really not what the companies should be doing at this stage anyway. And so that moved us, I think, to a revenue cap as our conclusion. Now, that's a very simple sort of top-level assessment. It is, I think, explained in much greater detail within our application and within the appendix. MR. HARRIS: Okay. Just one last question and it again goes back to the quality safeguard issue. It's not clear to me what the outcome will be of your discussions with the OEB after it has been determined that you have or have not met any particular safeguard. Can you either comment on that or tell me where I might find a discussion of what the outcome of those meetings would be? I mean, is it simply to report back and ascertain whether something has or has not been met, or is it to ascertain what has or has not been met and what will follow as a result of that? MR. CURTIS: It's the latter. It's reporting back to the Ontario Energy Board in terms of how well we are meeting the targets that we are proposing be set for these performance measures and also to explain, in terms of areas where we haven't met the target, what we will be doing in a going-forward basis in terms of trying to meet OHSC Presentation 121 (D. Curtis) those targets. MR. HARRIS: Thank you. MR. HARDY: Any other questions? David. MR. POCH: Just on this SQIs, these performance factors, you do quite clearly explain how they are measured and so on and how they compared historically in your materials. I'm just wondering, is there an underlying analysis that has been done at this point to justify the level; sort of a cost/benefit analysis? MR. CURTIS: I don't -- I wouldn't believe that in the sense that you're talking about that it has been. What has been done is -- I guess what we have been struggling with is, first of all, identifying what the appropriate measures would be for a transmission company. And I think in terms of the rigor around what the cost/benefit analysis has been, it's been in terms of our commitment to maintain historical levels of performance and the investment requirements for maintaining that historical level of requirements are what we're coming forward with in terms of our rate order application. It may become an issue about whether or not those are the optimal levels, so I wouldn't want to say that we have done that sort of analysis, to come out and say that the number that we have come up with is precisely the economically optimal level that that should be. OHSC Presentation 122 (D. Curtis) It has really been predicated on maintaining the historical or the existing levels of performance. MR. HARDY: Ken? MR. SNELSON: Yes. I have got a number of areas with respect to performance-based regulation. The first one is with respect to the inflation index. MR. CURTIS: Yes. MR. SNELSON: I noticed that it sort of -- it seems to be a 1 per cent increase in revenue requirement for 1 per cent inflation. MR. CURTIS: No, CPI index is, I think, 1.4 per cent, if I remember correctly. MR. SNELSON: Yes. But my point is that the figure that appears in the formula is the CPI-- MR. CURTIS: Yes. MR. SNELSON: --not some fraction of the CPI. MR. CURTIS: That's right. MR. SNELSON: And my comment and the question is -- well, first of all, the comment is that not all of your costs are subject to inflation. So, for instance, depreciation on past investment is not subject to inflation. Interest, given that your current portfolio of bonds are at above-market rates and should come down in cost as they become mature and become renegotiated at market rates, I'm just saying that an issue that we should look at - and I'm wondering to what degree you have considered it - is that maybe the inflation adjustment should be less than a full adjustment OHSC Presentation 123 (D. Curtis) for all of inflation; it should be just for a proportion of the inflation rate? MR. CURTIS: I think that's possible. I believe what we have done in terms of our benchmarking studies, though, is come out and shown that in other jurisdictions where an external measure like CPI has been adopted as the inflation index, it's been applied on a, to use your terminology, a one-for-one basis within the PBR formula. So we were building on what the external -- what is happening in other jurisdictions and it's also, I think, an argument as far as simplicity is concerned. MR. SNELSON: And I have another comment and question that relates to service standards, and that you have provided a nice historical record of service standards over about a 10-year period. And I look at that and I don't see any evidence of a gradually deteriorating performance of the transmission system. And I put that together with the request for increased capital spending to reverse a decline in the condition or an unsatisfactory condition of existing assets. And, again, when going back to sort of previous processes and so on, I believe that the transmission business of Ontario Hydro has kind of a history of a bow wave effect in transmission, forecasts of transmission capital requirements and that for about 10 years the transmission business has been making the case that the OHSC Presentation 124 (D. Curtis) assets are declining and that more spending is required. And my question really is: What evidence is there that would convince the OEB that increased capital spending is required in transmission, given that you couldn't convince your own Ontario Hydro Board when it was the Ontario Hydro Board that increased capital spending was required? MR. CURTIS: Okay. I think if you look at the appendices - I'll have to look them up myself - I think it's D, E, F and G, they talk in detailed terms about the follow-on to the asset condition assessment work. And in that you will see - I guess to raise the point that you were talking about - the bow wave effect associated with the age of the assets, and that's one of the primary drivers, the review of the condition of assets, plus the situation as far as the aging of the assets that's I think brought forward this need to reinvest in that, in the transmission system. I think you were talking in terms of the integrated utility and its decision as far as investment is concerned. And I guess I don't know whether I can really comment in terms of how they went forward to make their decisions, but they obviously felt that there were other priorities at the time. MR. SNELSON: Okay. And the last question is really one as to the process of determining the productivity factor. MR. CURTIS: Mm-hmm. OHSC Presentation 125 (D. Curtis) MR. SNELSON: And it seems as though a process which essentially says this is what my budget is going to be for next year compared to this year and that's the -- determining that as the productivity factor to be targeted, then it seems like a rather low standard of pressure for increased productivity. And I wonder if you'd like to comment on that. MR. CURTIS: Well, I think a lot of the programs that we're putting forward are driving for an increase in efficiency within the organization and, you know, we're trying to capture it through that. One of the other elements I think in this decision is the overall term. If you look in other jurisdictions, PBR formulas are applied between a three-year period and a seven-year period with the recognition that it would take the utility about that period of time, about three years anyway, to start realizing the gains of any efficiency improvements. So I think it was talked about earlier whether or not we would be bringing forward in the next application the same sort of a PBR formulation, and this might be one of the areas where we would differ in future. What I think we're talking about here is what is the efficiency improvement that realistically could be achievable by OHSC in the time period of this particular rate order. MR. SNELSON: I wonder if you have looked at the levels of productivity improvement that have been achieved OHSC Presentation 126 (D. Curtis) in other jurisdictions with the introduction of a more commercial transmission type of organization with PBR, for instance, in the U. K. and in Australia? MR. CURTIS: Well, we have done I guess -- certainly looking at some of those benchmarks that have been achieved and certainly some of them were higher than the efficiency improvement factor that we're talking about in this order. But, again, the period over which they had that applied was a number of years. We're only going to be able to have this for the one year, for 2000. And you're also looking at somewhat different commercial structures than what we will have over the next year or so too. So I think there are certain efficiency improvements that they could achieve which we probably wouldn't have access to. MR. PYE: Adrian Pye, Enbridge Consumers Gas. I'm wondering about the growth adjustment factor and what's this going to be based on? Is it going to be based on historic information and when will it be available? MR. CURTIS: No, it's based on the forecast load growth for the Province of Ontario and I think it's Appendix C that talks about the forecast used through the business planning process and -- sorry, I've got the wrong appendix -- Appendix I. MR. HARDY: Do you need some time to look at that? MR. PYE: Just a moment, please. OHSC Presentation 127 (D. Curtis) MR. HARDY: Any questions while we're waiting? Go ahead. MR. STEPHENSON: It's Richard Stephenson. So far as I understand PBR schemes, one of the hallmarks of them is to incent efficiency and cost cutting on the part of the utility because, insofar as they're able to achieve that, they get to maintain all or part of the benefit of doing so in terms of a higher rate of return themselves. I'm basically right about that; am I? Is that consistent with what your theory is? MR. CURTIS: Well, it's certainly to drive efficiency within the organization that it's applied to, yes. I would go... MR. STEPHENSON: And the reason it's a driver is because you get all or part of the benefits of that efficiency gain? MR. CURTIS: Yes. MR. STEPHENSON: And the PBR proposal that you make for 2000 contains that element; does it, that incentive for you in the sense of, under your revenue cap scheme if you drive more costs out than your efficiency target that's built in dictates, then you get a higher rate of return than on its face. MR. CURTIS: The PBR scheme for 2000, first of all, gives the customer 2.4 per cent off the top as far as the productivity improvement factor. MR. STEPHENSON: I understand all that. How much OHSC Presentation 128 (D. Curtis) do you get? MR. CURTIS: Well, efficiencies over and above that would go to the company. MR. STEPHENSON: Right. And so that incentive is built in, so there is the efficiency incentive. You get to keep some portion of all that. MR. CURTIS: Mm-hmm. MR. STEPHENSON: Bearing that in mind, why don't you have financial penalties on your performance targets? Since you get the upside of driving costs out of the system, why aren't you prepared to take the risk on the downside if you cut too much out and you fall down on your performance indicators? MR. CURTIS: Well, implicitly it's included in there if costs are incurred. Because this is a revenue cap, we're not allowed to collect any more money than is allowed by the revenue cap, so if our performance requires us to incur additional costs the company has to eat those costs. I realize they're not directly linked to the specific performance measures that we're bringing forward. MR. STEPHENSON: And that's my concern. I mean, in PBR schemes the performance measures and the penalties attached to performance measures are the safeguard against excessive cost cutting which is the incentive otherwise built into the system. And you seem to have taken the incentive side without taking the monetary penalty side that is the OHSC Presentation 129 (D. Curtis) safeguard that's usually attached to PBR schemes. MR. CURTIS: Well, I guess what I would suggest is that we're bringing forward here proposals as far as what those performance measures should be. There isn't, I think, uniform agreement across the industry in terms of what those performance measures should be and what the appropriate targets are. So this is a development exercise through the PBR period that we're talking about. And, secondly, in terms of not meeting our targets, we've committed in our rate order to going before the Board to explain why we haven't met any targets if that actually turns out to be the case. I think you -- I would hope anyway that you would realize that we really don't want to have to do that, that it is a penalty in and of itself to have to go back to the Board to explain why you haven't lived up to expectations that you promised. MR. STEPHENSON: I know Hydro was always quite bashful about that. MR. HARDY: Why don't we shift on here. MR. PYE: I looked at Appendix I and it says look at the November, 1998 primary sales forecast issue. Do you happen to know the numbers? MR. CURTIS: Let me have a look at it. MR. HARDY: What was the appendix again? MR. PYE: Appendix I, it's only one page. It's quite short. OHSC Presentation 130 (D. Curtis) MR. CURTIS: We'll have to provide that then. MR. PYE: So you're saying the number is calculated already? MR. CURTIS: Yes, the forecast already exists, yes. MR. HARDY: Maybe you could connect after the session and get that information. Why don't we move on to the next part of the presentation, and if there's any other questions coming up after this next presentation pertaining to the current one, we'll take those as well, but just to keep things rolling along. MR. CURTIS: This next part covers section 7 and 8 in the application, and this talks about the transmission assets and the balance sheet. And I'd like to start off with, again, the description of what the transmission service company assets are. And I guess I'd like to point out a mistake in my overhead. There's always one. The $5.2-billion in assets is a mid-year for 1998. The year end number is 5.4. It services the Province of Ontario through 29,000 circuit kilometres of lines. There are 256 transformer stations in the system. It's a three-tier voltage system, the 500,000 volt line or 500 kV lines, the 230 kV lines and the 115 kV lines. And the infrastructure components include not only the lines and the stations but also vehicles, construction equipment, computers and other OHSC Presentation 131 (D. Curtis) such components. Again, in section 7.0, this is the summary of the asset base. It's made up of major and minor fixed assets, less the accumulated depreciation brings you to the net fixed assets that are the basis for this rate order application. We include in it, of course, construction and progress. The capital -- the details on the fixed assets are discussed in section 7.2 and the capital planning process is discussed in section 7.3. And the specific details on the various capital programs that make up this rate order application are presented in section 7.4. And I guess talking about the specific transmission work order programs, there are four categories of them: sustaining, development, operations and support. The sustaining capital programs are there to maintain existing infrastructure and facilities and have them operate at continued historical levels of reliability. Development work programs are to provide facilities' capability or capacity in addition to what's already available for connection network or interconnection and, again, to maintain levels of reliability. The work programs in the operations area are there to provide incremental efficiency gains for the business. OHSC Presentation 132 (D. Curtis) Transmission support activities are basically business support functions, for example, the performance enhancement project, the infrastructure implementation project and pay and human resources, the engineering. Now, section 8 will provide you with the balance sheet and it talks about, again, the fixed and current assets, long-term debt, current liabilities and equity. And I was thinking at this point to, again, have it open for discussion around the assets. MR. HARDY: I take it you'll have the opportunity in January to go through some of those figures line by line? MR. CURTIS: That's right. MR. HARDY: Questions again to this point? Sue? MS. SIMMONS: Susan Simmons from Reed on behalf of the OEB Staff. I'm wondering if you can just kind of clarify -- you just showed us your transmission asset base. Can you just clarify that you only have -- are the facilities up to 115 kV only in transmission? Are subtransmission facilities included in that asset base? I looked at your filing and I also looked Appendix I and it was unclear to me where subtransmission fell in and whether past -- and I understand it's very difficult to make that delineation, but certainly there's different factors you can make in delineating that and we're trying to understand how to check back to the asset OHSC Presentation 133 (D. Curtis) bases, and even if you can give us some sort of qualitative assessment as to how you determine which assets lie in transmission and which assets lie in distribution. MR. CURTIS: Okay. I guess the first answer is that there's no clean cut. I don't think there's a clean cut in any jurisdiction. MS. SIMMONS: I agree. MR. CURTIS: So I was talking in terms of 115, 230, 500 kV systems. Those assets are part of transmission. But having said that, there is a small component of 115 that's in the distribution system. There is also a small component of subtransmission that's in the transmission category as well. Largely this has been dictated - dictated may not be the right word - but this is largely as a result of the historical development of the system where investment has had to be made by either historically what would be considered the transmission part of the business or historically what would be considered the distribution part of the business. There is a very detailed and elaborate accounting that has gone on in terms of the assets however, so the assets are known and are accounted for but, unfortunately, there isn't a very simple straightforward way of saying these are transmission assets and these are distribution assets, apart from what I've said. OHSC Presentation 134 (D. Curtis) MS. SIMMONS: Well, as you went through the detailed accounting data, were there specific factors that you used or criteria by which you assigned particular assets within that questionable group to transmission or distribution? For example, I'm looking at FERC in Order '88 put forth, you know, seven factors by which utilities... MR. CURTIS: Yes. MS. SIMMONS: Did you follow those seven factors? And if you could kind of just explain the process in a bit more detail. I mean, was there a big book by which someone was looking at assets in a specific area and assigning them? We really need to get a handle on the process you followed and just overall how -- who made those determinations, was it by a committee, was it one individual? MR. CURTIS: Oh, it wasn't made by one individual, it was made by the management that worked, more or less, in the transmission area and worked, more or less, in the distribution area. I guess the starting point was the historical allocation of those assets in the area where there, I guess, was some question about where these assets fell. We did try and use criteria like the ones that FERC has laid out in terms of defining what's a distribution asset, but it was an internal process and it was conducted by the management within OHSC or will become OHSC. OHSC Presentation 135 (D. Curtis) MR. HARDY: Is that clear on the criteria or do you want more...? MS. SIMMONS: To the extent -- I mean, when you had the management from the two areas making those decisions, you know, you said you used something like that the FERC 7 factors or you considered some of those. Are there other internal Ontario Hydro criteria or factors that...? For example, in the historical allocations, was there guidelines in your historical allocation process that you just kind of carried over and looked at more closely with respect to individual assets? MR. CURTIS: Well, I guess fundamentally it's, I guess, what area of business those assets primarily served. I think you realize in terms of the evolution of systems you can start building assets that serve primarily a distribution function, that in time could serve a transmission function or, probably more often what happens is, you invest in assets that serve a transmission function that later evolve to just serving a distribution function. And that's primarily the way the processes worked within Ontario Hydro is, you know, what function does the asset primarily service at this particular point in time? MR. HARDY: Is there another question? MR. SNELSON: I have a follow-up to that question which is a very specific one which probably has a 'yes' or OHSC Presentation 136 (D. Curtis) 'no' answer I hope; and, that is: You've said that some subtransmission assets are included in the transmission asset base? And in your previous allocation of assets and costs for the OEB hearings, OEB purposes, there was a category called shared low voltage lines which are largely the 44 kV lines that feed embedded MEUs. MR. CURTIS: Yes. MR. SNELSON: Are those shared LV lines allocated to transmission or to distribution? MR. CURTIS: They are allocated, but please don't ask me to whom because I'm not sure I know the answer. I think they're allocated, by and large, to distribution. MR. SNELSON: I think that's an important question to get an answer to. MR. CURTIS: Sure. MR. HARDY: Any other questions? (No response) Okay. Then can you move on to your next presentation? I'll be taking a break at about 2:15. That will allow David to finish his presentation, or whenever he does we'll take a break and take questions then and then we'll wrap up after the break. MR. CURTIS: Okay. THIRD PORTION OF THE PRESENTATION BY MR. CURTIS: The next area of discussion is the revenue requirement, and that's section 9 in terms of the application. OHSC Presentation 137 (D. Curtis) First of all, I'd like to provide an overview of it. This is a schematic pie chart that's been set up in terms of our application and I hope you can see it. The glare seems to be causing some problems here. As you can see, I've just talked about the asset base and the balance sheet and the primary contributors to the revenue requirement for that would be through depreciation and interest and taxes. The slice for net income -- sorry, the other primary slice that people are interested in are the operation and maintenance and administration costs, the OM&A costs. TPI stands for the transmission productivity incentives that I've talked about earlier that are related to the management of incremental losses on the transmission system by and large. And the final slice is around net income, being the appropriate level of return for the company. And I'd like to talk about each one of these components in part and then open it up for discussion. Okay. I'd like to start off with the OM&A slice. This is about a third of the overall revenue requirement. I talked in terms of the capital programs around sustaining development, operations and transmission support programs, and they follow the same definition in OM&A as they did in capital. In addition, there is the work program around recoverable work, and this is the effort that the OHSC Presentation 138 (D. Curtis) transmission business would do in terms of business outside of the immediate transmission business. Going forward for '99 and 2000, a large part of this is in relationship to work done on the switchyards for the generation company. This is the -- all of this money is recovered and, in addition, there is a margin that's recovered and it's to the order of $67-million for each of the two years. The line talking about grants in lieu and rights are the various external obligations that Ontario Hydro Services Company would have to pay for in order to maintain its transmission infrastructure. These would be, for example, the payments of costs for having rights-of-way or easements for the transmission lines. There are certain First Nation obligations that we have as well that require payment, and there are some local tax payments that are included in this category as well. One of the other slices that's connected with the assets is depreciation and amortization and you can see the values on the overhead for '99 and 2000, 210-million and 216-million respectively. This is basically for the recovery of the fixed costs associated with the transmission assets that are in service. These costs -- these levels were determined by the Depreciation Review Committee. It is discussed, I think, further in Appendix K if you want to review what our depreciation policies are, and this area also includes OHSC Presentation 139 (D. Curtis) some recovery as far as post-employment benefits. Michael talked earlier in terms of OHSC's capital structure and this is just a summary of what has come out from discussions and decisions within the government. OHSC is certainly aiming to be a commercially incented organization and, as a result, requires a commercial grade capital structure and the new companies have been structured on a commercially competitive basis. There's a 60/40 debt equity ratio as far as the regulated businesses and the capital structure that we're going forward with, we feel, is compatible with achieving an A level credit rating. So, based on that capital structure, the expectation of interest charges or financing charges are $263-million for '99 and $270- for 2000. MR. POCH: I'm sorry, I just wanted -- before you left this slide, I thought I heard you earlier say it wasn't 7.8 after the starting point. You were forecasting a debt turnover? MR. CURTIS: Yeah, there would be a debt turnover, but in terms of -- this is a debt turnover that takes place over a number of years. It isn't going to be turned over instantly in 2000. I'm afraid I don't remember the number offhand, but certainly on day 1 it's the 7.8 and there would be a gradual lowering of it, yeah. MR. POCH: I think I just misunderstood what day 1 is. OHSC Presentation 140 (D. Curtis) I take it then that day 1 is market opening as opposed to today? MR. CURTIS: Yeah, it's in '99, yeah. Okay? The next area is around taxes and the assumption is that these taxes would flow through, at least in the interim period while the government is still our owner, through to the retirement of stranded debt in the finance company. And so, as a result, these are term payments in lieu of tax. And we're basing our tax structure as if we were a commercial organization and, as a result, we will talk about having deferred taxes on our books. And the tax levels, as you can see for 1999, are 223-million and 225-million for 2000. And the last slice -- actually, I guess this is the second-last slice is the net income slice. This is based on a 10 per cent return before tax -- sorry, after-tax set by the province. And for 1999, it's 234-million and for 2000, it's 238-million. The final slice in terms of that pie was the transmission performance incentive and, at the moment, it's put forward as a place holder for future incentive schemes tied with the transmission company's ability to improve the performance around incremental transmission system losses. And when you put all of those pieces together, you come up with the proposal as far as the revenue OHSC Presentation 141 (D. Curtis) requirement for the company is concerned. This is section 9.0. All of these components together mean that we are requesting approval for revenue requirement of 1.327-billion in 1999 and 1.291-billion in 2000 as part of this rate order application, and that concludes the revenue requirement portion of it. MR. HARDY: Okay. We'll take a break for 15 minutes and when we come back, we'll have some questions on the revenue requirements and OM&A, and then we'll hear the final part of the presentation. So come back at just after 2:30. ---Recessed at 2:17 p.m. ---On resuming at 2:35 p.m. MR. HARDY: Okay. Why don't we begin. Okay. We left off then in terms of the, I guess revenue requirements and O&M. MR. CURTIS: Right. MR. HARDY: So questions? Sue. MS. SIMMONS: I have questions in a couple of different areas, but I have one overall general question that I don't know -- I don't believe it was addressed directly in the filing, and maybe can you tell me if it was addressed indirectly. You have mentioned that the capital programs and O&M programs are changing as a result of SERVCO being a separate entity from the former Ontario Hydro consolidated OHSC Presentation 142 (D. Curtis) company and the levels of programs have changed and whatnot. How has this impacted your staffing? It seems that there's a higher level of programs or higher level of capital programs being done. Have you staffed up for this or is this all being done within the context of the existing utility staff? MR. CURTIS: It's been done within the context of the existing utility staff. MS. SIMMONS: And given that you're expecting efficiencies along the line, do you have plans to change the staffing levels as you achieve these efficiencies and don't need to continue the programs at the same level over the next five to 10 years? MR. CURTIS: Oh, you're talking about the longer term. I think in the longer term, yeah, there's the -- I think there's the view that there could be some efficiencies gained in terms of staffing. You're talking, though, like a five- to 10-year period? MS. SIMMONS: Mm-hmm. MR. CURTIS: Yes. MS. SIMMONS: And then another question of staffing with respect to the recoverable work. I saw there's a line item somewhere there that you had costs for recoverable work, and then I see you have a revenue line which exceeds the costs. MR. CURTIS: Right. OHSC Presentation 143 (D. Curtis) MS. SIMMONS: Are those costs fixed? I mean, are there people dedicated to performing recoverable work? And how are assignments between these recoverable or, you know, third-party activities that you perform in your existing O&M and capital programs that need to be performed; how do you make the tradeoffs between that? MR. CURTIS: Okay. As I said, most of this recoverable work is around switchyard work with respect to the generation company, Genco, and so there -- I wouldn't want to say that there are specific people dedicated to that work. It's part of the overall work program in that area, so in terms of transformer work, if you will. And so there's an effort there to try and coordinate that within the context of the overall demands for the transmission system in terms of servicing its transformer stations. So there isn't -- there isn't kind of a -- there isn't a group that's set up specifically to do recoverable work, it's done within the context of the other work programs. MS. SIMMONS: Could you just elaborate a little bit more about the nature of this work? Is it pursuant to a contract you have, call-on services; is it whenever they need services, and to the extent you're experiencing something within the transmission and distribution business that demands; i.e., you know, a storm repair or - I don't know - a program that you suddenly determine that needs to be expedited, do OHSC Presentation 144 (D. Curtis) those contracts have call on these people that they need to go work on Genco switchyards prior to distribution storm restoration? MR. CURTIS: I think you're getting a little bit beyond my capability to answer-- MS. SIMMONS: Okay. MR. CURTIS: And that's probably something that you would want to pursue in the January sessions. MS. SIMMONS: Okay. MR. CURTIS: But I think, by and large, those contracts wouldn't specify that they would have first call on transmission personnel in order to do that work. That, you know, for example an ice storm requirement or some emergency requirements would supersede whatever would be in those arrangements. MS. SIMMONS: All right. And my last set of questions relate to the transmission performance incentive. I read the descriptions and I understand that as it's submitted in your 1999 and 2000 revenue requirements, it's a figure that represents costs of average incremental losses. My first question was: I was unclear from the reading and I haven't followed up with the Market Design Committee reports, what is the plan for recovering losses? Is that the IMO's responsibility? Is that your responsibility? And if there's an average loss charge or an OHSC Presentation 145 (D. Curtis) incremental loss charge to third parties that utilize the grid, what are the costs doing there, or am I not understanding structurally how this is going to work out? MR. CURTIS: Okay. Well, I guess there are elements of complication in this because we are talking about the interim period between now and open access plus going into open access. So in terms of how actual monies would flow, it becomes a little bit -- it becomes quite complicated, I feel anyway. But I guess to address the issue, our understanding is that coming out of the Market Design Committee work, that the so-called average system losses would be part of an IMO uplift charge recovered from customers. And so the average losses across the transmission system which really can't be affected by any operational consideration would be funded through that route. And what we're talking about is the sort of the 4 to 7 per cent losses -- well, component that can be managed, maybe up to 10 per cent losses that could be managed in terms of system operation, that the transmission business would exercise control or manageability over. Now, during this interim period all of those costs would be recovered as part of the pool of recovery that is being set up. And implicitly through this period that we are OHSC Presentation 146 (D. Curtis) talking about during, from now until open access at least, the money would be transferred from the pool to the transmission business for TPI, and then would be immediately paid back to the pool as part of the recovery of the pool for the loss in energy that happened, if you will. So that's why we are putting this forward as a place holder. It comes into the company and then it goes back out at this point. In future years what we're advocating is that specific incentives be structured around this in terms of improving our operational control. MS. SIMMONS: You know, I'm still a little bit confused about this. You are telling me there's going to be some sort of average loss charge. Aren't the losses that are -- the cost of losses that are in there also in the average loss charge? I mean, that average loss charge would be derived based on some level of historical losses experienced on the system or some flow studies that were performed based on system characteristics and historical information? I mean, I'm not certain if there is or isn't a double counting or potential for double counting and maybe there's a document you can point me to that would help me understand this a little bit more clearly. MR. CURTIS: I don't know whether there's any document that I could point you to. The overall average system losses are something OHSC Presentation 147 (D. Curtis) in the order of $140-million, and we're talking about $30-million as far as the incremental portion of that. I guess I'm at a loss in terms of trying to say you could go and look at this particular document that would tell you what it is. MS. SIMMONS: Well, maybe for the technical session, maybe we could just go through this. MR. CURTIS: Sure. MS. SIMMONS: You know, I understand that you didn't come prepared for this, but understanding how you start off with the total system losses, then come down to this, and how that is. And I guess I'm also concerned about, while you could change your schedules of maintenance and things like that to achieve a different level of system losses pursuant to your transmission performance incentive, doesn't the IMO also have some sort of control over when you -- or won't they have certain control over when you can schedule certain activities on your transmission system just for overall, maintaining certain levels of capability for the market to operate? MR. CURTIS: Well, our -- MS. SIMMONS: And is this a realistic sort of incentive, given that the IMO has that responsibility? And I understand the IMO isn't up and running and those sorts of responsibilities are there, but if you could just comment on those sort of... MR. CURTIS: Okay. Our expectation is that the OHSC Presentation 148 (D. Curtis) IMO agreement will contain certain conditions around the scheduling of transmission outages and certain rules. Now, the IMO agreement hasn't been concluded yet, so we don't know explicitly what those would be. And this is certainly one element why we're proposing this to be a place holder at this particular time until, you know, that agreement is negotiated and we know what the terms and conditions are. However, within that overall context, we believe that we will still have certain degrees of freedom around the scheduling of maintenance outages that would allow us to enhance the performance of the system around this area of incremental losses. So that's why we believe that it's still an appropriate incentive to leave with the transmission business. MR. HARDY: I wonder if we could move on. Why don't we move on? MS. SIMMONS: Thank you. MR. HARDY: Other questions? Ken? MR. SNELSON: Yes, Ken Snelson for Ampco. First of all, I'd like to compliment you David, on your endurance. And I have a question which probably should more properly go to Fred Long but he isn't here so I can't give you a rest. But maybe you want to take the question under advisement. And it relates to page 139 of the filing OHSC Presentation 149 (D. Curtis) where we talk about recovering through this -- through your OM&A charges for the costs that were written off against net income in 1997. It's page 139, starts at line 14 and continues to line 23. MR. CURTIS: Yes. MR. SNELSON: And it appears as though -- well, what the paragraphs say is that you're intending to recover through this proceeding and this revenue requirement costs that have already been written off against 1997 net income. And I suspect this is an accounting question and maybe it should be addressed when we come to the sessions in January but perhaps you should know that people are still looking at that. MR. CURTIS: Sure. It certainly is an accounting question and I don't think I could do justice to it, Ken. I think what happened was that -- no, I don't think I'd better venture into this area since I'm not the accountant. MR. SNELSON: Okay. I have one other question which is partly to do with the capital program and partly to do with the revenue streams and that is that the MDC third quarter report requires that new connections be paid for by the connecting party. MR. CURTIS: Yes. MR. SNELSON: And I'm wondering to what extent has SERVCO reduced its capital requirements because OHSC Presentation 150 (D. Curtis) connecting parties will pay for these connections or to what extent has SERVCO recognized additional revenue streams that are going to be paid for over time by the connecting party? I don't know whether you have the answer to that now or whether that's something to be addressed in January? MR. CURTIS: I think the general answer to that, Ken, is that during -- that the period that we're talking about for this rate order application is largely this interim period to open access. I think we're projecting that open access would happen sometime in the middle of 2000 and up to that particular period of time the connection work is -- I think as you would see in terms of reading through the submission is included in the asset base and the growing asset base through this particular point in time. In other words, it would be money that would be recovered from customers. Now, having said that though, all of these assets are being negotiated on an individual basis with customers and the objective is to save the pool harmless in these negotiations. In other words, the pool -- the rates at which these new connection assets would be funded would be no greater than the average pool price that's already in existence. And that in many instances would require customer contributions in order to make these happen. So it's perhaps a bit of an awkward period OHSC Presentation 151 (D. Curtis) because clearly once open access occurs, it would be done on an individual negotiation basis. MR. HARDY: Any other questions? I want to start to move us on to the final presentation. Any other questions on this revenue and OM&A? MR. RODGER: Just a couple of brief questions. Dave, you talked about restructuring costs. Where do they find themselves in that overall list of various costs and expenses, the costs incurred as a response to the restructuring of Ontario Hydro as they pertain to SERVCO? MR. CURTIS: There aren't any specific ones. These are -- I think I was talking about these in terms of the exogenous factor, the 'Z' factor and those are in terms of what we're bringing forward for this particular application. You'll see later on that they're spelled out. I'm trying to actually find the location of it for you. It's in section 10.1.3. I have page 170. It depends on what edition of our rate order that... And the 'Z' factors that we're bringing forward at this time are around staff provision costs. It is in that sense an element of the restructuring that's gone on within the industry over the past -- within the company rather within the past few years. MR. RODGER: Okay. I'll check that as well afterwards. Secondly, do the current NUG contracts that OHSC Presentation 152 (D. Curtis) Ontario Hydro has, do they have any relevance whatsoever to SERVCO or your revenue requirement? The only thing we've heard is that Genco will not be managing those contracts but do you have any indication of what's happening to all those agreements or their impact? MR. CURTIS: I was thinking that perhaps Bill would have been in a better position to answer that than I am. I guess we're the managers of the contracts. MR. HARPER: Right now in terms of before basically the team version of Ontario Hydro, the management of those NUG contracts falls within the SERVCO part of the Ontario Hydro organization. I don't think it's precisely clear to us either exactly where they're going to end up after the fact. Our expectation is that -- there's really two aspects of it. There's paying for the energy that's bought under those contracts and then there's the physical cost just of administering the contracts. We would expect that the costs of paying for the energy are part of what's sort of calculated in the overall establishment of the pool price of energy and that I would think if we for some reason ended up having to be responsible for it in the long term there would have to be some recognition from the pool somehow or other to cover off the administration costs associated with those contracts. But it does not in any way come back to impact on OHSC Presentation 153 (D. Curtis) either transmission rates or the distribution. MR. RODGER: Finally, the work recoverable, you describe part of those as work recoverable from Genco. Just so I understand it, are those services being charged by Genco at full market rates? MR. CURTIS: Yes. MR. RODGER: Thank you. MR. STEPHENSON: Just briefly on the revenue requirement - Richard Stephenson - I know that you prepared the filing on the basis that there's a bundled end rate for energy as in the past and some of the rate cap and all that but did you go through the exercise of figuring out what your revenue requirement translates into in terms of the unbundled transmission charge if you're providing that and where does it appear? MR. CURTIS: That's precisely what this application is. This application has been put together to reflect what the cost is of the transmission business. MR. STEPHENSON: I appreciate that. What I meant I guess was in the dollars and cents, in a cents per unit charge? Where's that? MR. CURTIS: That comes in the final phase of my presentation when I talk about -- MR. STEPHENSON: I can't wait to get there. MR. HARDY: Are there other questions before we get into that? Okay. Again if there are other questions that are more appropriate to this and you remember them, we'll OHSC Presentation 154 (D. Curtis) entertain them after David finishes his presentation. Why don't you go ahead, David. MR. CURTIS: Okay. FINAL PORTION OF THE PRESENTATION BY MR. CURTIS: We've reached the stage now in terms of the application where we've identified what the revenue requirement is for the transmission business to carry out its business through 1999 and 2000. The final area of the application is around allocating that revenue requirement down to specific customer groups and then what does that translate into in terms of specific rates that would be charged once open access has occurred to customers. The allocation methodology is I think conceptually simple but there are many, many details that are embedded within it and I don't know whether I'll be able to cover all of them to the satisfaction of you people today but certainly they could be carried forward to the technical sessions. Basically what the scheme is is to take the total revenue requirement of the transmission business and allocate it to network customers and connection customers and that would be the basis of recovery. Now, the principles in terms of arriving at this scheme are outlined in the document in section 11 and 12, 11 primarily. And the first one is to unbundle costs to reflect causality and that's one of the drivers in terms of separating it into network and connection. OHSC Presentation 155 (D. Curtis) The second one is around mitigating rate impacts to customers. There's a general concern that rate customers once open access has occurred don't see large shifts in terms of what their transmission costs are. There's the driver around facilitating efficiency in terms of day-to-day operation of the system. That means not making this so complex that it's difficult, totally difficult and unmanageable in terms of calculations and ability to understand and also to provide some level of locational signaling in terms of where investment may be required on the system. The final one that we had was to be politically acceptable and that's kind of a catch-all in terms of an overall driver. Now, what we've done here as point of illustration is to show you that in 1999 the revenue requirement is $1.327-billion and of that $1.032-billion is allocated to the network and the remainder $295-million is allocated down to the connection services. Similarly for 2000 the numbers are $1.291-billion as far as the total revenue requirement. $1.004-billion as far as network is concerned and the remaining $287-million for connection. Now, what makes up each one of these pools? Again, there's a considerable amount of debate about which of the transmission services should fall into the network area and which should fall into the connection area and a lot of this discussion has gone on and I'm sure will OHSC Presentation 156 (D. Curtis) continue to go on within the MDC. As far as our proposal is concerned, we're suggesting that supplier lines and connections should go into network, load customer connections should go into network, existing interconnections should go into network and existing network should go into network. On the connection side, what we are proposing is that the load customer transformation facilities be the basis for the connection charges. Now, there was an examination of a number of different approaches in terms of coming up with a specific scheme and they're described in Appendix P of the application. I guess the fundamental different approaches were pooling, different pooling approaches, or postage stamp type processes, nodal based processes or megawatt mile or megawatt mile application. And what we've come up with in terms of our application is a pooling based process or postage stamp process. Now, in terms of establishing what the actual rates are that are derived from that, again, we established a number principles to drive this work. The first one was in terms of again being able to signal a need for new additions within the system. We wanted to have a set of rates that were simple and transparent. We also wanted to have a set of rates that would be compatible with neighbouring jurisdictions and we also, again falling out of the MDC's recommendation, wanted to design a set of rates that would minimize or, in a sense, OHSC Presentation 157 (D. Curtis) be non-bypassable as far as customers were concerned. And the concern around that, of course, is that it shifts the burden of existing facilities to the remaining customers. Now, we've ended up then with a dual rate design, the one at a wholesale level, that once open access is declared would be applied to the local distribution companies in order for them to collect as well as any direct customers. The next level is a retail level and that would be applied in conjunction with the distribution rates, again, for the local distribution companies or LDCs to collect. And Appendix R will provide you with further details in terms of the considerations around that. What we've ended up with then is for the network rate for both '99 and 2000 is a postage stamp pool-based. It's based on a non-coincident peak, again one of the considerations that I believe is coming out of the MDC discussions. It is basically the network revenue requirement divided by the average monthly network peak and it comes out to $4.04 per megawatt per -- or sorry, dollars per kilowatt per month in 1999 and $3.89 per kilowatt per month in 2000. And similarly, for the connection, this rate again is calculated based on non-coincident peak and it is again a pooled rate. And for 1999, it's $1.19 per kilowatt per month for 1999 and it goes to $1.16 per kilowatt per month in the year 2000. And these areas, I think, are further expanded and explained in sections 11 and 12 within the rate order OHSC Presentation 158 (D. Curtis) application and the various appendices that I referred to. So I think that concludes that. MR. HARDY: Questions? MR. CURTIS: Ken? MR. SNELSON: I don't want to monopolize this process, but there don't seem to be any other questions and I have a few. I come back to where I started this morning - Ken Snelson, AMPCO, for the record - I come back to where I started from this morning as to whether we need to approve rates through this process and also whether there is a sufficient degree of consensus and understanding among all the parties to the current rate proposal and that the OEB has a full assessment of the various options for rate design in front of it to be able to make a determination at this time. Some of the issues that are discussed in the appendices but I don't think fully resolved are issues about cost shifting that is implied by the current proposal for an apparently simple rate of using monthly, non-coincident peak for all transmission participants and some examples where cost shifting will likely occur are with respect to the loss of diversity benefits that certain large industrial customers currently receive because they really do have peaks that do not occur at the same time. And so by assessing them individually on their non-coincident peak as opposed to the existing rate methodology that assesses them on their constant peak as a group for cost allocation purposes implies a cost OHSC Presentation 159 (D. Curtis) shifting. There's issues such as the treatment of the costs of shared low voltage lines that we haven't seen addressed in this documents but will have to be addressed as to -- in either this or the distribution or both. There's issues such as the transmission rate for certain special classes of service that currently exist. We are expecting that new embedded generation will be charged on a gross basis for transmission service, but that existing embedded generation will be charged on a net basis. Existing embedded generators currently have services for backup. There's an issue as to whether or not there should be a separate backup transmission service, not to provide the energy to replace the lost generation, but to provide access to the energy market for an embedded generator to by his replacement energy. There's also classes of customer who have been on the system and have not caused investment in the system because of the very conditions of there being supplied, such as these replacement power customers - I forget what they're called - surplus power customers. Surplus power customers are on the system explicitly on the basis that they will not have any transmission investment incurred on their behalf. So there's all sorts of different classes of transmission service that are implied within the current rate structure and I think that if we do go forward with a OHSC Presentation 160 (D. Curtis) specific rate proposal from this process, then there are many more issues that need to be addressed than are currently addressed in the documents. MR. CURTIS: Okay. I don't know what more I could say. MR. HARDY: Other questions? Go ahead. MR. O'DONNELL: Bob O'Donnell for the Electrical Contractors Association of Ontario. Throughout the day, it's been stated and implied that any efforts by Ontario Hydro Services to go after contestable work will be done within the regulated entities as opposed to a separate subsidiary as in Bill 35 down the road. What kind of assurances are within the application to ensure that efforts for contestable work is not going to be subsidized by the rates? MR. CURTIS: I'm sorry, can you repeat that - that it's not going to be subsidized ...? MR. O'DONNELL: How can we be assured that it's not going to be subsidized by the rates; what mechanisms do you have in place? MR. CURTIS: Well, there will be specific codes of conduct that will be put in place. There will be accounting separation in terms of how this work is handled from the perspective of being costed out and the monies that come back into the company. I've talked several times about the fact that the recoverable work that is in this application, the money comes back into the regulated business, so it comes back into benefit the customers of OHSC Presentation 161 (D. Curtis) Ontario, you know, from that perspective. MR. O'DONNELL: How about if you lose money? MR. CURTIS: If we lose money? I think we eat it because again, the application is a revenue cap and it doesn't provide mechanisms that, you know, to recover on business that we shouldn't have engaged in from that perspective. MR. O'DONNELL: But the risk is passed on to the ratepayers? MR. CURTIS: I don't think I would agree with that in terms of -- because it would be recovered against equity at least to the level that we have. I think what you're talking about is if we got into a situation where we lost an incredible amount of money, for whatever reason, and there's nothing in terms of our going-forward strategy that would, I feel anyway, get us into that sort of situation. But any losses that we're talking about in terms of this recoverable work would be absorbed by the company under its revenue cap. MR. O'DONNELL: Would there be disclosure of those accounting practices? MR. CURTIS: I believe so, yes. MR. HARDY: Bob, did I get your point right? MR. O'DONNELL: Yes. MR. HARDY: Okay. Thanks. MR. O'DONNELL: That's contestable work, not non-contestable work, open market private work. MR. HARDY: I got a double negative here I'm OHSC Presentation 162 (D. Curtis) trying to play with. All right. Yeah. Got it. Other questions? Susan? MS. SIMMONS: It's Susan Simmons from Reed Consulting Group on behalf of OEB staff. I have a feeling some of my questions you might not might not be able to answer, but I'm hoping that you can provide some of this information in the technical sessions in January. Specifically, you started out explaining how you broke costs between network and connection and in Appendix Q you go into much greater detail, although still with some holes, I believe, in how you ended up splitting costs, your interest expense, your net income between network and connection as well as your depreciation. And specifically with respect to, you know, depreciation, on one basis you assign net income and interest expenses on the basis of some asset data base and then we have 200-and-some-million of depreciation which you can't split using that data base and there's about 70-million residual which you split on the basis of net book value or something like that and then you go through O&M and you do the same thing. And I'm just wondering, is net book value a reasonable basis on which to assign O&M between network and connection? Based on your plans for SERVCO, do those transformation connection assets have the same amount of planned maintenance and operating costs as other types of assets and -- so thereby justifying the use of net book value as a reasonable allocation and then this OHSC Presentation 163 (D. Curtis) depreciation residual which is, to me, 70-million out of 200-and-some-million? I'd like some better explanation as to why the data base doesn't result in that; and if the data base doesn't result, why are we using that as an allocation for net income and interest expense? And if you can respond to any of these issues today; if not, I would like you to see what you can do to be able to respond to them in the technical sessions because these are the types of questions we have. And to the extent you can prepare for it or provide some supporting data, it would certainly help us get a better sense of the use of net book value, the depreciation residual and things like that. MR. CURTIS: Okay. I don't think I'd like to advance explanation on a lot of those points today, but certainly that information is available and we'd be prepared to respond to that in the January sessions. MS. SIMMONS: Well, thank you. MR. CURTIS: Okay. MR. HARDY: David? MR. POCH: David Poch for GEC. A more general -- I guess it's a request. I think you heard some -- a lot of questions and concerns arise today about uncertainties that remain, things that need to crystallize further before we can gain comfort, the lack of data or track record, for example, for the development of the service quality indicators and so on. So I'm wondering if it would be -- I think I OHSC Presentation 164 (D. Curtis) would find it valuable and may be valuable to the Board if you were to try to indicate what needs to be, in your view, approved and, therefore, tested for purposes of the first year's rates, what for the second, what is optional. I mean, I understand you're after some guidance, for example, on PBR-- MR. CURTIS: Right. MR. POCH: --and whether you should be headed there and how fast, but it seems to me that's what that is. You're asking the Board to give you guidance and we don't need to know that for the first year's rates. I think what I'm really saying is, I'm concerned that you're asking for more than your application fully supports right now, at least in some areas, and maybe the resolution to that, rather than try to run around and hurry it up, is to say, for certain elements, all we're really asking for is general guidance and we'll be back. So that's really more a suggestion for you to think about between now and January because I think there's a number of problem areas here where we just don't have the kind of depth that I think the Board would feel it needs to support a rate order. MR. CURTIS: Okay. MR. HARPER: Within a PBR framework, you're almost suggesting these would be, base the terminology, additional Z-factors that when they become known, you would actually put them forward, if I understand what you're saying. OHSC Presentation 165 (D. Curtis) MR. POCH: Well, yes. I'm just saying, for example, just give the example that I have before, which is justifying the service quality levels, the fact that you're proposing service quality indicators without yet having a proposal, although you acknowledge it would probably be good in the longer term to have a mechanism to incent you around those, achieving or over-achieving or not under-achieving those targets and so on. So, you know, it gives people some concern in what is clearly a quick and expedited process today and next month, to be setting in place things which may come back to haunt us, you know. And I'm wondering to the extent that we don't need, that nothing much turns on that approval in the next, in the interim period in that rates are what they are, you know, and you're not proposing any consequence for those SQIs anyway, I'm wondering to what extent they need to be enshrined in a rate order as opposed to what I think is helpful, which is you coming forward and saying, 'This is what we're thinking,' and getting some feedback. And maybe it would be worth distinguishing between those two because there's a different level of evidence that needs to be brought forward, it seems to me, to support one rather than the other. MR. HARDY: I don't know if that needs a response. MR. POCH: Yeah. I'm not necessarily seeking a response this minute. It's really just floating an idea. OHSC Presentation 166 (D. Curtis) MR. CLARK: Al Clark, Waterloo North Hydro. On the rates for the connection and network, like, you have one-nineteen for a connection rate and one-sixteen. I assume those rates refer primarily to transformer station costs or rates? MR. CURTIS: That's right. It's the transformation at the connection end. It's in that pool. MR. CLARK: Are there, or is there going to be any further breakout of that rate, because you've got utilities like Toronto and Ottawa that owns the secondary switch gear on transformer stations. Ontario Hydro owns the high voltage side. MR. CURTIS: Right. MR. CLARK: So they really shouldn't pay this full rate. I don't know just how it's done at the moment. It's percentage discount of some form. But are you going to be further breaking that rate out, so that they would only be charged a portion of it? MR. CURTIS: Well, the current proposal isn't to do that and it's aimed at, I guess, the argument for simplicity; however, the costs that go into that pool are only the Service Company side of the costs. MR. CLARK: So would you propose to charge Toronto Hydro this full rate? MR. CURTIS: I believe so, yes, but I think probably what I would have to do is check on that. MR. CLARK: Yeah. You might want to check on that because I think they would be arguing they would be OHSC Presentation 167 (D. Curtis) paying twice for the same service. [Laughter] MR. CURTIS: Yes. For the same services, yeah. MR. HARDY: Other questions? I don't see any other hands up. I'm going to ask -- oh, Ken. MR. SNELSON: Yes. MR. HARDY: Go ahead. MR. SNELSON: Okay. Just a couple of additional questions. One is with respect to the non-coincident peak. MR. CURTIS: Yes. MR. SNELSON: Some of you may know, I tend to support coincident peak methodologies, but can you tell us what you will reckon is the non-coincident peak of a load distribution company that has more than one service point? Is it the coincident peak of the three service points added together in real time or is it the non-coincident peak of each wholesale meter added together? MR. CURTIS: You're beyond the level of detail that I know at the moment, Ken. MR. SNELSON: Okay. Well, can you take that under advisement? MR. CURTIS: Yes, yes. MR. SNELSON: And the secondary question to that is that SERVCO Distribution Company will be a local distribution company in the new scheme of things. MR. CURTIS: Mm-hmm. MR. SNELSON: And if you do that for a municipal OHSC Presentation 168 (D. Curtis) utility which is in one small area of the Province, all right, then the logical thing to do is to do it for all of the supply points to SERVCO-- MR. CURTIS: Yes. MR. SNELSON: --even though they're widely distributed across the Province and likely to have very different impacts on the transmission system of going to where they're located. MR. CURTIS: Yes. MR. SNELSON: And so when you answer that question, I think you have to answer the secondary question, as well. And actually perhaps now in my mind, it's one of the factors that calls into question the non-coincident peak types of methods. MR. CURTIS: Yes. I think the answer to the second one is whatever is applied to distributors, local distribution companies, would be applied to all. MR. HARDY: Other issues? Questions? ---(No verbal response) PROCEDURAL MATTERS: MR. HARDY: I want to end off today by determining whether there are any other issues related to transmission, so that we can start tomorrow with a clean, I guess, session on distribution. So if there are any other issues today, bring them forward. Also, get a sense from you if there's anything else that you need to see related to the application that would assist you. Procedural Matters 169 Are there any questions that, you know, need to be -- any other issues that need to be brought forward tomorrow for the distribution session? MR. STEPHENSON: Maybe I could ask this. You have been diligently writing things down on your sheet over there and I'm not quite sure what happens to that sheet and what its purpose is and whether or not there may be some value in reviewing what is on that sheet in order for people to know whether or not there should be other things added to the sheet or not. I'm not sure what its purpose is exactly. MR. HARDY: Well, mainly its purpose was to allow me to make running notes of some of the items that were discussed to provide some sense from my perspective of some of the broad issues that were brought forward. I would be pleased to take any instructions I guess also from the Board Staff as to any other future use. The intention was mainly just to help me and not be part of any record, but I will take any instructions I get from particularly from the Board Staff, but from yourselves, as well. Okay. Just for the record then, I don't see any other questions coming up. Is there anybody that hasn't had an opportunity to ask a question, to get any clarification, to suggest other items that should be part of the application? ---(No verbal response) Closing Remarks 170 (R. Pugh) MR. HARDY: Okay. I don't see that, for the record, as well. Then I am going to ask, Randy, if you can just provide some closing remarks and introduce us to the agenda for tomorrow. MR. PUGH: Sure. Thanks. Well, the purpose of today was to provide you with an opportunity to ask some questions and get an understanding of the application. So it sounds like you have had a good opportunity to do that and we're quite encouraged. We have heard some good questions today and started to identify some issues, so that's very encouraging from our standpoint. What I would like to do is leave you with an agenda. This is for tomorrow's meeting. It basically deals with distribution rates. The front part of the agenda, we weren't too sure how it would go when this agenda was the crafted yesterday. You will notice, when you review it, that there's three different segments on here; an introduction, perspective and basically an overview. I suspect that's going to be compressed -- oh, sorry. I didn't realize that was up. That will probably be compressed greatly. I suspect most of that will happen in the first half an hour because I think, I'm under the view that most of the people who would be here tomorrow have been here today. So there will be very few other attendees. Closing Remarks 171 (R. Pugh) So transcripts; they're going to be, since it's a full-day session, they're going to be available in about two to three hours. You will be able to pick up copies, if you choose. We will have the disk available tomorrow morning and we will be loading it up on our web site first thing in the morning. It should be available if you wanted to go look at it about noon tomorrow. And if you want to pick a copy of the agenda, I'm just going to leave it on the side. I hope to see you tomorrow. Thank you. MR. HARPER: There are hard copies of Michael's morning presentation and Brian will put some hard copies of the afternoon transmission application on the side, as well. ---Whereupon, proceedings were adjourned at 3:25 p.m., to be reconvened on Tuesday, December 15, 1998, at 9:00 a.m. 172 I N D E X O F P R O C E E D I N G S Page No. Opening Remarks: Facilitator 3-8 R. Pugh 8-13 OHSC Presentation: M. Gillespie 13-23 F. Long 23-34 W. Harper 34-42 M. Gillespie 43-67 D. Curtis (1) Overview 67-107 ---Luncheon [12:05 p.m.-1:05 p.m.] 101 (2) Regulatory Framework 107-136 (3) Revenue Requirement 136-154 (4) Allocating Revenue 154-168 Procedural Matters 168-169 Closing Remarks: R. Pugh 169-171 Parties who questioned: Joanna Birenbaum......Pollution Probe 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 David Poch............Green Energy Coalition Adrian Pye............Enbridge Consumers Gas Mark Rodger...........Toronto Hydro Kenneth Snelson.......AMPCO Richard Stephenson....Power Workers' Union Roger White...........ECMI Gravenhurst Lawrence Wu...........Hydro Mississauga JB/LJ/BV [FARR (c) copyright 1985].